Occasional reflections on Life, the World, and Mathematics

The agony and the equity


There was a time when the British, like their American and Canadian counterparts, believed in promoting equality. Now, all anyone cares about is equity. Housing equity. The UK, like the US, is entirely in the grip of the house-price inflationists. One of the most extreme examples is a recent BBC report, which reads like an investigation of satanic cults and their strange and twisted morality, but is actually about young workers who have not been able to afford to buy their own homes, and who, deep in their poverty-depraved hearts, wish secretly for… a decline in housing prices. Horreur! One “frustrated young professional” is quoted saying “I can’t wait for the crash. Bring it on… People talk about the crisis in the property market. But the real crisis is that so many people can’t afford a home of their own.” Terribly immature, the article suggests, as it goes on to quote a more mature voice, a 29-year-old teacher who “is old enough to remember the repossessions and negative equity that followed the crash in the early 1990s.” Even this otherwise reasonable person is being driven to vile wishes for a housing Armegeddon. “‘Morally, I feel bad about wanting it because I know people will end up on the street,’ she says. But unable to find anywhere affordable on her £30,000-a-year wage packet, she admits that doom-and-gloom headlines are giving her hope.”

Since every transaction involves a buyer and a seller, why is it that the press in these countries almost invariably report from the perspective of sellers: High prices are good, low prices are bad? We don’t see reports on the “catastrophe” of low food prices and sinking profits at supermarkets (though occasionally they play a part in heart-tugging stories of farm foreclosures), analysis of the “booming” gasoline market, or speculation about when computer prices will “recover”. I have seen one spectacularly daft comment on this phenomenon, that of an American professional political blogger (see here, and scroll down to December 27) who conjectured that this was part of a perfidious plot by journalists to twist neutral economic news about the Bush years to the negative. Why do British and Canadian journalists show the same bias? Political blogging ends at the water’s edge, so he didn’t have to answer that. And why do German journalists not show that bias? This seems like a fruitful topic for a political scientist to study. I can only speculate that it has something to do with the level and distribution of home-ownership. In Germany, most people do not own homes, and those that do are generally older. A young or middle-aged professional of average means or a bit higher — the demographic domain of most journalists — is more likely to see him- or herself as a potential buyer than as a seller of property. (An analysis of the age distribution of home ownership is given in Figure 1 of this paper, though the figures are hard to read. The published version of the paper, with more legible figures, may be found here, but it’s not freely accessible.)

No one ends up “on the street” because of negative equity. No one even loses their home because of negative equity. Mortgage payments don’t rise because the house price falls. If you were able to make the payments before, you should still be capable of making them. And if you can’t, the only way rising prices will help is by enabling you to take on yet more debt. I’m no financial expert, but this really does not sound like a recipe for long-term stability. And if the house is repossessed, it’s not going to produce families of bindlestiffs camping by the sides of the road. The unenviable fate that awaits the repossessed is that of… renters. Friends of ours down the street, university scientists with two young children, just had to move out of the house they’d resided in for years, on two months’ notice, not because they made a risky financial decision, but because the owner suddenly decided it was a good time to cash in his investment.

People made obviously dicey investments — effectively making a hugely leveraged investment — to vault themselves into the ranks of the homeowners, ahead of people who were fiscally more cautious. How many tears should we weep when circumstances now force the homeowners to become renters, and help the renters to become homeowners?

I remember about a dozen years the newspapers were full of the social chaos wreaked in Albania as large parts of the population lost their life’s savings to pyramid investment schemes. A Dutch mathematics professor with whom I happened to speak around that time found the plight of the Albanians simply hilarious. “Anyone in the west knows not to invest in such a scheme,” he said (inaccurately). “It’s simply part of the general culture, something we’ve learned from history.” Two things I thought everyone knew, at least since the Great Depression, are 1) The more specialised the investment, the more risk, and 2) Investing on margin multiplies the risk. And yet, these together are what people do when they buy houses, and they call it a safe investment. “Safe as houses,” they say. I wondered about this five years ago, when friends in Berkeley were buying houses for ten or more times their annual income, and received no plausible answer. It seems strange to me that there is not a market for house-price insurance.

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