High home ownership bad for employment?

ScreenHunter_10 Mar. 29 12.46

By Leith van Onselen

Overnight, the Peterson Institute of International Economics (PIIE) released an interesting study exploring the hypothesis that high home ownership damages the labour market. The study, which is based on an examination of data from the US, found that rises in the rate of home ownership are a precursor to eventual sharp increases in unemployment in that state, due to:

  • lower levels of labour mobility;
  • greater commuting times; and
  • fewer new businesses being formed.

The study has potentially important implications for Australia, where home ownership rates are relatively high by international standards, according to the IMF (see next chart).

IMF Home Ownership Rates

Current policy in Australia tends to favour home ownership over renting, possibly leading to ownership rates being higher than they otherwise would be. More importantly from an economic perspective, housing transaction costs – particularly stamp duties on property transfers – are high in Australia, which act as a road block to moving house, stifling labour mobility and increasing commuting times in the process.

Given these issues, there is merit in examining policies that strengthen the attractiveness of renting, such as instilling greater security of tenure, as well as shifting state government taxes away from inefficient and inequitable stamp duties towards broad-based land values taxes.

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23 Responses to “ “High home ownership bad for employment?”

  1. Jud says:

    beware, high home ownership PIIGS domain :D

  2. ceteris paribus says:

    I am sure that there is some level of validity in this study. But the underlying philosophical question is: Is life about only about squatting in rentals and being ever-ready to move on at a moment’s notice to meet the needs of a labour market. Surely, we don’t need to revert to nomadic hunter-food gatherers, constantly breaking family and community networks to chase the first meal that comes along. Surely, in modern times, there is a role for a support system, which allows us to adjust to employment and labour-market shocks, at least for a short while.

    Secondly, I think the population distribution and spread of jobs in the US is a bit different from Australia.
    The US has about 35 major centres whereas about 5 mega-population centres accounts for Australia. There may be more need for mobility there and less support to labour adjust “in place”.

    Interesting study- but I think man (or woman) is not solely a cog in meeting the needs of industry.

    • emess says:

      Yes, but when the company relocates the job to the other side of the city, one gets the opportunity to spend an awful lot of travelling time (and money) away from the family to be able to contemplate one’s philosophy.

      In any case, there is a very good argument for making the transfer of property a lot easier and cheaper. Why should it be as complicated and costly as it is? Mind you, that might involve some tax reform, and taking on of vested interests who suck on the costs of transfers. Whoops, tax reform and taking on vested interests! What was I thinking?

      • PhilBest says:

        I suggest there will be a major difference in the effect of home ownership, between cities with unaffordable housing and those with affordable housing and shallow urban land rent curves.

        The cities in the USA with affordable housing all have low urban density. They also have a higher rate of marriage and childbearing. Therefore one would expect their data on commute to work times to reflect the disadvantage of more households having to compromise on location decisions, between two jobs and one or more schools.

        But strangely, the data does NOT show that. These cities tend to have highly competitive average commute to work times, not uncompetitive ones. The reason is that employment is dispersed and there is little “pricing out” effect in any one location, unlike with cities with unaffordable housing and very strong “pricing out” effects.

        I strongly suspect the correlation between “increased home ownership” and a later collapse in employment, is a bubble induced by supply-side subsidies to home ownership.

        I strongly doubt that the correlation between increased home ownership and a later collapse in employment, will be able to be found in the data set of affordable, stable price US cities, of which some 150 can be found using Demographia data. I have commented repeatedly about the fallacies that result from using “US aggregate” data, which conceals wide disparities of outcomes between subsets of the data, which subsets provide valuable clues about what policies are helping and which are not.

  3. Jake Gittes says:

    I came across this thesis in 2009 from an Australian economist who argued that ownership was a problem. Can’t recall that name.

    It was when this survey was released

    http://www.gallup.com/poll/162488/381-million-adults-worldwide-migrate-within-countries.aspx

    showing Australia had high movements that seemed out of whack with the other evidence.

  4. Sidelined says:

    Home ownership rates in Germany, Denmark, Netherlands, France, Finland, Japan, Sweden, USA, Canada and the UK may be lower than Australia’s. But apart from Japan, all of these countries have higher unemployment rates than Australia. So I’m not sure this study proves anything.

  5. Rusty Penny says:

    In 1951, out of a population of approximately 7 million, Australia had less than 2,000 unemployed.

    During WWII, there was zero unemployment. Every idle labourer was allocated a vocational task.

    it isn’t too much of a stretch to say that the 8% of the populaion in haki and engaged in wealth destruction, even if returned to barracks and painting rocks white, meant full employment and the highest possible aggregate demand.

    Imagine the concept, miraculous to some it seems, that they eventually filtered out of barracks, and engaged in creating product.

    Now, similar policies were engaged inthe U.S., and home ownership soared, yet unemployment stayed low.

    Ownership of shelter is about agency, particularly in regards to bounded property. people upgrade houses and have the same snetiment.

    • PhilBest says:

      Yes, I bet the post WW2 era did not perform anything like the above study alleges of the current era.

      I suggest the crucial thing is this: a boom in affordable housing and an increase in home ownership, will only be good for employment and the economy. It is a bubble in prices, demand side subsidies, and debt-based increases in home ownership that will be found to be bad.

  6. Diogenes the Cynic says:

    Perhaps we also need to rethink what we are living in. Smaller ecohouses on tiny lots would be affordable even at today’s outrageous land prices. With sensible land prices they would be affordable to many Australians.

    • PhilBest says:

      There is no evidence from anywhere in the world, that downsizing the land per person restores affordability when the land supply is being rationed; the price of land seems to behave like a slack variable that expands to fill whatever “gap” is created by a reduction in space per person.

      Otherwise UK cities would be affordable. They are not. Their prices are double or more, what people in affordable low density US cities pay for 3 to 4 times the space.

  7. The Householder says:

    I’m not sure if a state-to-state comparison in the US is relevant in a comparison of countries, however the article does raise some valid points. In the US, a homebuyer with a mortgage receiving unemployment insurance could well be financially worse off in the short term if they need to move for work.

  8. Nunatak says:

    Many moons ago I was involved in the release into the Australian market of a compact gas regulator made by Honeywell.
    The target market was what the Yanks call mobile homes – we called them caravans.
    A bloke from Honeywell came out from the States to run a seminar for us on the new product, and to this day I remember his opening statement:

    “One in three homes in America is a mobile home”

    Now that was some time back, and I don’t know what the stats would look like now, but that simple fact was fairly indicative of the mobility of their workforce.

    And, of course, when he said “mobile home” he sure as hell wasn’t talking about caravans :-)

    Of the three downsides raised by the report (mobility, commute time, reduced business formation) I feel that the last one is that which is most overlooked – probably because it is a “hidden” effect, as opposed to the more conspicuous mobility and commute issues.
    Imagine how many more small business startups, and consequent employment opportunities, might exist if some of that $4 trillion-odd tied up in housing was unleashed on the economy. And those new businesses would potentially have the support of consumers with more spare cash in their pocket.
    Of course, we would possibly have to endure the pain and ignominy of fewer wealthy real estate agents and bankers, but…….well, sometimes you just have to grin and bear the sacrifice :-)

    • aiecquest says:

      +10 Had heard few years ago from an economist whose name escapes me, that Australia borrowing billions offshore to then invest in property does nothing for national long term prosperity.

  9. Lori says:

    Mobility of the work force in falling house prices market is much lower and this will be a bigger issue for our economy than for the Americans, because here the mortgage has to be paid anyway and people feel more entitle for some kinds of lifestyle.

    • Rusty Penny says:

      In 28 states of the U.S., the mortgage also has to be paid. Not every loan written in the remaining 22 is non-recourse.

      There is no grander sense of individual exceptionalism, and the concomitant sense of entitlement that what exists in the U.S., though we are starting to give them a run for their money.

      • PhilBest says:

        Generalisations re “the US housing market” are not helpful.

        Your observation that non recourse loans exist in some states and not others, is helpful.

        It is also vital that many cities do not have housing supply side restrictions and hence do not have a problem with affordability or with price bubbles.

      • Nunatak says:

        “Not every loan written in the remaining 22 is non-recourse.”

        This is true.

        And further, in many of these States, satisfaction of non-recourse loans can be pursued with a judicial judgement against the borrowers other assets.

        Additionally, non-recourse, in most cases, only applies to the primary mortgage, and does not apply to second mortgages and line-of-credit secured by the subject property.

        There is a great deal of generalised misinformation circulationg regarding the nature of the American home-loan market.

  10. RaglanParade says:

    People take less risks at work, leading to less innovation in the work place, because they are too scared of losing there job, because they have such high financial commitments (mortgage, etc.) privately.

    This has been to the detriment of Australian innovation and productivity over the last 10 years.

    I own a house, and I would not sell it to move interstate for work. (due to stamp duty, agents commission, and the fact the price has only shifted about 10k up since I bought it 18 months ago). The only reason I’m interstate for work at the moment away from family and friends (including a soon to be wife) is because my employer is paying rent.

    Remember that Gen Y are much more social then previous generations (and connected), and might be reluctant to leave friends behind just to chase a job.

    My belief is that you may see companies offering to pay rent more often to get talented employees to relocate.

    • PhilBest says:

      Someone on MB made the highly astute observation recently that many members of Gen Y are risk-averse to the point of phobia, ironically given that the cause is that they were not averse to taking a massive gamble on a massive mortgage.

    • aiecquest says:

      Had work at a university in 90s on temporary rolling contract. Word had it that if you wished to survive and thrive (in the eyes of management), get a mortgage and don’t join union (even though management were in union)…. some things don’t change.

  11. yogiman says:

    There is a general belief in society that people who stay in the same house forever are “good” people, while those moving from house to house are “bad” people who deserve to be heavily taxed for their sins. Whenever Warren Buffett is mentioned in the media, it is obligatory for the reporter to also mention, with extreme admiration, that he is still living in the same home he bought in 1958.

  12. PhilBest says:

    Note that Joel Kotkin has now debunked the Peterson study here:

    http://www.newgeography.com/content/003755-market-surge-confirms-preference-homeowning