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An
Englishman’s home is his pension
21 April 2003
Budget day offers a reminder
of how governments try to influence the way that people behave. But the effect
is not always predictable and certainly not always what the government intends.
The trick is to harness the existing momentum, or "go with the flow".
The principle is well known. Children playing on a beach with their spades
and buckets soon learn how difficult it is to dam a stream. The water starts
to pool and then to flow round the obstruction, finding a different path but
still heading in the general direction of the sea. So the children change
their objective, making the most of this tendency by digging channels to get
the water to flow round their sandcastles on the way to the sea.
Why are governments so slow to heed this lesson? Why are policies always characterised as intending to "confront", " radically change", "re-invent", "challenge" or "turn things round", as if, somehow, it was the easiest thing in the world to get people to do something other than what they want to do. When a policy is characterised as a "war on something" you know that it is almost guaranteed to fail.
The Budget offered an example of this. Noting peevishly how the housing market could threaten macro-economic stability, the government would now like to change it. To this end it has two modest proposals, one relating to supply (it wants more new houses) and the other to volatile mortgage rates (it wants more long-term fixes). The sub-text is that it wants to change the way that people relate to their houses.
If a house is simply a box to live in, then it will play more-or-less predictably in the macro-economic picture. According to this model a house is a cost, a big or richly appointed house merely a bigger cost. A Frenchman knows in principle that when he nips to Castorama for a load of wood or paint or a new bathroom suite he is essentially spending money. This is a measured purchasing choice like eating in a restaurant or buying new clothes.
In Britain, however, things are manifestly different. The British homeowner, as he stands at the checkout in B&Q, is not spending money at all but investing it in an appreciating asset. He has learned that over time there is no safer repository for his hard-earned cash and for that reason he has invested in it as much as can possibly afford. Whereas the average family might think twice about borrowing £100,000 to invest in the FTSE 100 index, in the property market they do so as a matter of course.
This is not stupid: much less stupid, anyway, that the gold standard or investing in diamonds. Britain has, after all, in chronological terms, the most advanced post-agrarian economy in the world. To have reached the stage where the ultimate repository of value is something essential to sustaining life is pretty sophisticated. As a currency of investment housing is not only useful but easy to understand and manage, relatively accessible, minimally taxed and able to be cheaply traded in a transparent market. It also provides opportunity for personal expression and something to tinker with on Saturday afternoons. Share certificates lack most of these attractions.
Building more houses to meet demand could depress prices for a while. This could bring social benefits, such as helping low-paid professionals in expensive areas to climb onto the bottom rung of the property ladder, but it will not help with the stated objective of making the market less volatile. All it will do is increase the size of the market by bringing into it a new chunk of investors - the ones who, as first time buyers, are the most likely to be over-exposed. Others further up the ladder will take advantage of lower prices to trade up to a bigger house.
The stability the government wants will only occur if home-owners systematically build an affordability buffer into their house purchase, so that they still have spare cash if the market turns against them or interest rates rise. In practice any cash they may have is dwarfed by the amount of the loan they take out to fund their investment in housing. And it is because people see their houses as investments that the government's enthusiasm for long-term fixed mortgages will not be heard. A good investment market must be liquid and in Britain houses change hands a great deal. Every two years or so people move on, and often only to the greener grass in the next street. This flexible approach requires flexible financing - short term discounted deals or two or three year fixes at most since no one knows where they'll be at in a year or two's time.
Housing as the ultimate repository of value is here to stay, and it is catching on in other countries. Pension plans and their ilk will have to be made very sexy indeed if this ever is to change. Instead of fighting the phenomenon it makes sense for the government to embrace it and channel the energies that flow through it so that it achieves the government's objectives another way. Liquidity is the key: the ability to move in and out of the market at will is the factor most likely to reduce macro-economic shock when the conditions of the market change. That means lower-still transaction charges and much easier procedures for buying and selling. These are objectives well within the government's grasp, and, in the case of the latter in particular, long overdue.
© Copyright mindhenge
2003
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