Owner-occupation: its benefits and risks in different market contexts Christine M E Whitehead Professor of Housing Economics London School of Economics 2015 APNHR Conference Gwangju, Korea 9th – 12th April 2015

Different Forms of Owner-Occupation Debt financed – Western European and anglo- saxon model – but increasingly important across the world ; Family support and self-build – model in Southern Europe and much of the rest of the world outside major urban areas; Restitution/transfer – Eastern Europe; UK and parts of western Europe resulting in loss of affordable rented homes; Government sponsored new build - South America and many other parts of the world, including Korea and China; Highest rates of owner-occupation in transition economies and emerging nations (NOT closely related to incomes).

Population by Tenure European Union

Why Owner-Occupation: Benefits to owners CHOICE – 80% plus in most of Europe still want to be owner-occupiers Control over what can do with the property The capacity to vary expenditure over time in relation to income, especially by paying off the mortgage before retirement Lower costs of management and maintenance Increased sense of security Freedom from the landlord/tenant relationship Wealth accumulation? Better than alternative investments? Other means of achieving similar benefits?

Benefits to governments Lower direct public expenditure costs than support to rental; Lower long term costs, especially with respect to pensions and long term care as owner-occupiers have lower costs; More effective maintenance of homes and neighbourhoods; Possible well-being/health benefits but are these really income; Possible benefits of stability to the economy and society – property owning democracy.

Risks to owners Not just about debt financing models – although these most important for world economy: Concerns around variations in house prices and interest rates; fears of possession; Costs of moving and other transactions costs ; Risks associated with specific asset and location and unbalanced portfolio; Management and maintenance of the stock; Associated costs – energy, services etc;

Risks to governments Labour immobility because of costs of movement; Tax distortions between tenures; Inter-generational equity issues; Finance and development ‘markets too big to fail’; Housing market volatility and its impact on macro-stability; Few available policy instruments to manage instability – especially when currency tied to another – eg to dollar.

Before and during the global financial crisis Large-scale property market crises (both residential and commercial) in the 1980s (USA, Western Europe) and mid 1990s (Asia); Rising debt to GDP ratios in many countries; Linked to increasing problems of affordability – and growing debt among existing owner-occupiers; Residential sector seen as a major driver of the global financial crisis – both because of subprime mortgage and over-indebtedness among mortgagors and bank portfolios Hit countries where relatively little direct exposure - eg Germany but most important impacts on countries with elastic supply – Spain/Iceland/Ireland Particular issues such as foreign exchange denominated mortgages – and associated inter-country risks

Residential Debt to GDP (%) (Source: European Mortgage Federation) Country EU Netherlands Denmark Sweden UK Germany France Poland Hungary Russiana 2 4

After the GFC Negative impact on construction investment levels which have not yet recovered in many countries – major impact on economic growth and employment; While households have run down debt incomes have also fallen so ratios have not always improved; Access to credit remains restricted and systemic increases in regulation are excluding many households from owner-occupation; Result is that owner-occupation rates are falling but private renting is often more expensive, less secure and and poorer quality so rarely a better choice; Also, more fundamental intergenerational issues?

Home ownership rates by age: (UK)

Reasons for Decline? Evidence from a number of countries of both decline and volatility in homeownership rates Problems of affordability – increases in house prices arising from pressure of demand from household and income growth and from investment demand Are existing owner-occupiers squeezing out first-time buyers by their increased demands and their involvement in Buy to Let ? Compare Australia in particular where overall homeownership rate has remained near 70% but the proportion of younger households has been declining since 1970s – similar patterns in Canada?

Emerging Markets Many countries building up debt finance models as need to limit public expenditure increases; But also owner-occupation often the only option for governments because of lack of infrastructure for a well-operating rental market; Large scale building programmes with ‘rent to buy’ or subsidised finance – especially in South America; Issues around maintaining the quality of the stock where incomes low; Role of public land and accessibility.

Conclusions Most people still want to own at some stage in their lives but fewer in Europe and America expect to do so in the near future; The majority of households own – and own safely - with either no mortgage or affordable repayments; Most home owners benefit from ownership in important ways which have little to do with increasing asset values; But there are still significant risks especially from housing market and macro economic volatility; In Europe patterns of ownership are moving towards systems where households buy rather later in life – but many fear they will never make it; Yet homeownership is still often cheaper for households and government than other options; Whether the turn down in home ownership is the result of increasing problems of affordability exacerbated by the financial crisis and increased regulation – or whether it is because of improved alternatives - eg better quality more secure renting - and changing tastes, especially among the young, or both is unclear; What is clear is that in many countries housing markets are far from equilibrium and the new normal has not yet evolved.