A lot has been said about the financial crisis. No doubt bankers have not acted responsibly; they have been too greedy and shown surprisingly little insight. Essentially, banks have lent too much money without appropriate credit checks. Nevertheless, what comes across to me is bankers have been made scapegoats for deeper underlying economic issues with Western economies.
One of the biggest issues I see is property. Ironically, it is seen as wealth creation. Everybody is happy when the value of their property increases. This is understandable, but short sighted.
Generalized access to property is seen as positive and an economic advancement. This again is a false perception.
Countries with populations that have a lower property ownership ratio are economically more successful than those with a high ratio. Switzerland and Germany have done better than Spain. This can be explained by higher workforce mobility as it is much easier to change home if you rent than if you own. Also, this enables more purchase of consumer goods, as people do not have to repay their mortgages. This creates demand allowing supply to grow and in effect leading to economic growth. You might state that landlords also spend on goods. However, these landlords on the whole are instinctively mean and reluctant to spend, except to increase their portfolio of properties. They would probably not be landlords otherwise.
Now, I would like to look at property in purely abstract terms. Mr X buys a house for a lump sum A. After a lapse of time, the value of this house has increased in terms of the original value A. Now, it is to be noted that the house itself has not grown in size or improved in any way unless repairs have been made. Quite the contrary, it has aged and if anything, you might expect value to decrease slightly.
Nevertheless, some of this increase is perfectly legitimate: there is inflation and wages have increased. Notwithstanding this, I see other reasons for increases in property values. Some of these reasons are sustainable, others not so.
The value of goods, such as washing machines, televisions, dishwashers, computers, even cars have very significantly decreased over time. Not only have these goods got cheaper, they have also got vastly better in quality. It is also to be noted that communications and transport have also greatly improved compared to say 30 years ago. This means people need to spend far less on these goods and services than in the past. Therefore, it is perfectly logical people have more money to spend and part of this extra money gets sunk into property. Now, I have said that the house Mr X bought has not improved in quality or got any cheaper to maintain. If you include the goods inside the house or the reduced amount of money required to purchase these goods, it could be argued that yes it has, to some extent.
Another reason for price increase is that a section of society saves money, instead of spending it. An individual will purchase a property, take a mortgage and pay this back. Once the mortgage has been repaid, this individual will have that much more income. This could be invested in purchasing extra properties and receiving more money from rent. At some stage, this individual will die, and offspring inherit assets. This leads to an ever increasing income and wealth for that section of society. Investing in property is low risk, so of course many people invest in it. This demand results in higher property prices, higher rents and more money for landlords. On the whole, a society does not benefit from this above a certain extent.
An individual might also decide to purchase a secondary home and choose not to rent it. In a remote rural area, that is beneficial: the property in the remote area needs renovating and maintenance that locals could not afford. Not only that, this individual is employing these same locals, creating employment and wealth. This allows the rejuvenation of otherwise completely derelict areas. St Tropez in France could be listed as an example.
Now, if wealthy individuals own secondary properties in dense urban areas such as London or Paris, that means there are that many fewer properties available, which in turns creates a shortage of supply, leading to higher rents and house values. It seems such individuals are welcomed under the belief that they are going to help the economy by spending on goods and services. This is a very short sighted way of looking at matters: such individuals are there only for a certain amount of time and spend only a limited amount. They are increasing property value in such a way that locals have less to spend on those goods and services, leading to an overall negative effect on economy. When house prices and rents move beyond a certain threshold, this is extremely damaging to economy and wellbeing of people as a whole. I am truly flabbergasted wealthy people are being encouraged to invest in property in London. It is very well paid, highly skilled professionals who actually work in the UK that lose out here.
Properties slowly degrade over time. Unless proper maintenance is made, it will eventually reach a state of complete disrepair. It might even fall down altogether. Now, again I see a clear distinction between remote rural and dense urban with this situation. In a remote rural area, there are absolutely no benefits whatsoever to anyone in rebuilding a derelict old barn in which no one would want to live. Quite the contrary: such ruins are often part of the scenery and only add some charm to the landscape.
This state of affairs is completely different in a dense urban zone. Here, the derelict property is using up space in an area where space is in short supply. In London, where property value has reached stratospheric levels, it is surprising how often you see buildings that are in an advanced state of disrepair.
I am shocked by the current British government handling of housing. Policy is being put in place to facilitate mortgages, but that is not the root of the problem. The real issue is property prices and supply.
In Britain, there is also the concept of council homes. These are in short supply and there is a long waiting list. Council homes are offered to people on low income. As these homes are in short supply, only a small, privileged number of poor people can live in these. On top of that, the government is offering those people who are already lucky enough to live in a council home the possibility of buying their home at a cut down price. This has always struck me as outrageous: not only are such individuals lucky enough to get accommodation, but are also able to purchase state property at a reduced price. This results in further shortage of affordable homes for the less advantaged in future. Not only that, it is stealing from A, the taxpayer to give to B. I would agree with helping the poor, but this help should be distributed fairly.
A solution to the issue of secondary homes and state of property mentioned above would be to cut up a nation into small areas, with different regulations governing each area. For instance, one could have small areas called ‘remote rural’, ‘rejuvenated rural ’, ‘depressed urban’, ‘urban’, and ‘stressed urban’ for instance. In a ‘remote rural’ area, legislation could be put in place to facilitate secondary property ownership. In ‘stressed urban’, the ownership of a secondary property ought to be fiscally discouraged. Heavy taxes should be levied on empty and derelict buildings.
Generally speaking, renting of property ought to be less fiscally advantageous, with heavier taxes, and legal obligations to maintain property: heating, repairs etc… Taxes on property should be levied in the country in which the property is actually located and taxed at source, immediately as a percentage of rent. The reason it should be discouraged is that society as a whole would benefit much more from investment in industry, rather than property. No new technology or great invention is going to ever come out of it. Also, unlike a car manufacturing production plant, property cannot move elsewhere. Rents are dictated by supply and demand, not by what landlords want.
A full control of rents is known not to work. Landlords simply stop investing altogether. This has happened in Mexico City in the past. However some control might be put in place: landlords should not be able to exploit situations of shortage by charging obscene rents in a particular area. The amount a rent may increase should be legally constrained. It is important to understand property is illiquid, so a tenant (individual or business) cannot simply move out without incurring extra expenses. Maybe such extra expenses should be borne by the landlord should the latter wish to increase rent above a certain threshold?
A lot of further thinking needs to be done in this area. The ideal situation would be for investors to remains interested in investing in property, but for such investment to become a lot less lucrative in such a way that it is more interesting to invest in industry either in services or manufacturing.
Right now, it is definitely far too easy and advantageous to make money investing in property. If you are investing in a business, you have to worry about selling your product, remaining competitive, paying salaries, suppliers, etc… You are creating wealth, firstly by paying salaries, secondly by making your product more cheaply and better than the competition. In property, you have far fewer of such worries and you are not creating actual wealth.