Josh Barro of the New York Times thinks that we should rent our homes instead of owning them. He uses an ingenious thought experiment to make his point:
“Imagine if we bought food the way we buy housing.
“Instead of buying the food you need right now, you would buy a contract giving you rights to a stream of food in perpetuity. Say, a contract entitling you to five pounds of chicken breasts, delivered to you every week, forever. That’s basically what buying a home is: securing the use of a residence, indefinitely.
“Buying that stream of future food would be expensive, so you’d get a loan from a bank to cover most of the cost, secured by your interest in those future chicken breasts. And if for some reason you didn’t need your chicken contract anymore… you could sell the contract at the current market price.”
There are many reasons why we wouldn’t want to buy our food in this way, but Barro focuses on the one that also applies to the way in which we buy our housing:
“With this system, perverse things would begin to happen. Normally, consumers prefer that food prices be low. But this practice would create a large constituency of foodowners, who would benefit from rising food prices: If you bought your chicken contract for $20,000, and rising chicken prices pushed its value to $40,000, you’d have a nice windfall…
“People might start buying contracts on food they don’t even want to eat in hopes of selling later at a profit. That might lead to a food bubble. And if food prices crashed, a lot of highly leveraged foodowners would end up in bankruptcy.”
Of course, there’s nothing hypothetical about the financialisation of our food supplies. There are futures markets in a number of edible commodities and all of them are subject to price swings. Barro’s point, though, is that you don’t get millions of households staking their entire financial futures on the food market – rather, commodity investment is a specialised business in which the major players supposedly know what they’re doing. By way of contrast, ordinary homeowners, and would-be homeowners, provide a vast and sometimes gullible market for dodgy mortgages and other property-based financial products.
Barro also points out that all those millions of people have the vote – which he says creates political pressure for restrictive planning policies that drive up property prices.
So, is he right to “urge people to rent their homes, and start viewing housing as a consumption good, like food”?
The answer to that is no.
Firstly, a key difference between the food and property markets is that local demand for food can be satisfied from just about anywhere in the world; while local demand for property can only be satisfied locally. This and not ownership is the fundamental reason why it is difficult for housing supply to keep up with demand.
Secondly, the main reason why people object to local development isn’t because they fear that additional supply will lower property prices, it’s because they think new development will spoil the places they live. Not only are they often right to think this, but it applies just as much to people who rent their homes as those who own them.
Thirdly, the special factors that restrict the supply of property drive up rents as well as purchase prices. Indeed, it is usually the case that buying a property is cheaper than renting it. Barro argues that investing in a “balanced portfolio of stocks and bonds” is better than bricks and mortar, but this is irrelevant if paying the rent leaves you with nothing left over at the end of the month.
And finally, reckless lenders who target homeowners are just as capable of targeting landlords – as we saw during the last British property boom and bust.
Therefore, while there are serious problems with the way in which we plan and finance housing, turning homeowners into tenants is no solution.