Housing Boom and Bust

Owner Occupation, Government Regulation and the Credit Crunch

Peter King

• Publisher: Routledge
• Year: 2010
• ISBN:
  9781135173197
• Edition: 1
• Topic: Arquitectura
• Subtopic: Planificación urbana y paisajismo

Housing bubbles burst, creating economic misery for millions. Over the past thirty years, the culture of property ownership has become so ingrained that policy makers, bankers and households have taken for granted that housing is a good investment and forgotten about the bust. Explaining how the current crisis in housing markets has arisen, this topical and sharp analysis considers the causes of house price bubbles and the reason for the collapse in markets worldwide. Written for students, it explains the economic cycle of housing, ways in which future booms and busts can be mitigated and how the lessons of this latest housing bubble can finally be learned.

Chapter 1
Housing is not finance

Housing, we now find, is something that is both very local, yet also very global. It is close to us, literally surrounding us, providing our personal space. But it also connects us to what is distant, unfamiliar and impersonal. Housing locates us in a particular place and keeps us secure and comfortable. Yet we now see that the ways in which we gain access to it, maintain it and pay for it link us into global financial markets.

Housing markets depend on long-term borrowing. This borrowing comes from banks and mortgage lenders who are players in international financial markets. They borrow and lend across borders and often use our mortgage debt as a form of security for their borrowing. In other words, they use our debt to create more debt. And so the housing decisions we take in Detroit, Los Angeles, Derby or Lincoln link us to Frankfurt, Tokyo, Wall Street and the City of London. Many people, it now appears, have a stake in our little homestead.

It has been a taken-for-granted assumption for several decades now, in both the UK and the US, that housing is a good investment that will provide wealth and security for the current generation and the next (Ferguson 2008). Yet housing, from time to time, is prone to speculative bubbles, which see rapid house price inflation with the consequent rush to buy a house before it becomes completely unaffordable. The market is subject to what former Federal Reserve chairperson Alan Greenspan famously referred to as ‘irrational exuberance’, when people begin to believe that they can only gain from investing in property (Shiller 2005, 2008). But, as we have been reminded again, these bubbles eventually burst, and the debt used to create more debt has turned out to be toxic.

Our housing – where we live, what we call my home – is not about boom and bust. We think that it exists to be regular, to provide us with a stable platform for our lives. Our dwelling is the background in front of which we play out our lives (King 2005). Our housing, we hope, is the very opposite of a toxic asset. It is a place of safety and security (King 2004): the benign means to achieve our ends.

Boom and bust, we like to think, is what takes place outside the house, somewhere beyond our boundary. It exists outside our own little world where we feel in control. We do not want it to encroach and we can use our dwelling to help achieve this. We regard it as a fortress, a structure that is impermeable. It is resistant to ingress, and we are comforted by this. We can hide here, feel secure, we can be ourselves here. We can cut ourselves off, be with those – and only those – we wish. We are protected from the world in here.

We tend to separate out our daily lives from any sense of crisis. The financial crisis is an external entity. We get to know about it through the media, and get angry about the excesses of bankers and the incompetence and self-serving of politicians. We fulminate about the apparent greed of bankers who demand bail-outs but keep their bonuses. We despair at politicians who argue that they could not possibly be blamed for the crisis, but insist they are the only ones who can sort it out.

But for most of us, most of the time, the crisis does not impact upon us directly. Of course, as the crisis continues, we are more likely to know some of those who are affected – friends or family members who have lost their jobs or are in danger of repossession or foreclosure – and are more likely to be affected ourselves. But those affected are still in the minority. For most of us, the crisis is still somehow separate from us and distinct from how we act, behave and seek to live. We carry on with the same activities, doing the same things and will do so unless and until something happens. We carry on until we ourselves are hit. And then it is all terribly serious. We now face a huge personal crisis, which we might be unable to cope with and which we could not prepare for.

I have deliberately here emphasised the word ‘personal’ because this, it seems to me, is entirely the point. There is a necessary distinction to be made between the personal and the general. By this I mean we should distinguish between what is happening in general – namely, a crisis that is out there – with what is now, at this very moment in all its palpable certainty, happening to us. We can feel sorry for, and empathise with, those losing their jobs and dwellings, and we might think that, but for the grace of God, it could be us, but there remains a distance that separates the hypothetical from the concrete. This has nothing to do with callousness or ignorance of the needs of others (King 2004), but is rather our imperative to concentrate on ourselves and our own, with those closest and dearest to us. The enclosing aspect of dwelling (King 2008) helps us to do this. We can insulate ourselves so we can protect those we love, as well as ourselves.

This capability to use a dwelling to enclose ourselves makes the impact of any loss all the greater for us. This is because of our ability to take how we live and our housing for granted. What we have is an object which we are so absorbed in that we tend not to notice it, but whose loss would be absolutely catastrophic for us. It hits us personally, particularly and peculiarly, such that any generalities about the nature of the financial crisis become irrelevant.

Housing, we might think, is not the same as finance. Housing is something different. Housing is physical objects, places of refuge, comfort and security (King 2004). Yet we can attach ourselves to these objects only if we have the means. We need finance to allow us to gain access to housing (King 2009). But housing, we tend to think, provides us with a place to live.

But increasingly it appears that finance has become the end of housing. Our housing is an investment, an asset and a store of wealth: it is property. Of course it has always been these things, in potential at least. But we might say that the finance has started to subsume the dwelling, so that now we take it first and foremost as an asset – as an object we use as collateral. It becomes not a means for the fulfilment of needs, but a means for progression, for financial growth and development. Our housing, we think, will make us wealthy.

The danger of this position is that we stop being satisfied with our dwelling for what it is, but rather for what it can become. We divorce – a peculiarly appropriate word here – the use we make of the dwelling from the meaning we attach to it. We still use the dwelling but we attribute a financial rather than an existential meaning to it. The dwelling becomes potential. This is what an investment is: a becoming, a development, a movement from here to there. The dwelling is now seen increasingly as a place of potential, of a step towards another place or another state. Our current place is only a staging post, a place to rest and recoup as we plot the next stage of our journey upwards (King 2004).

It is quite appropriate that we use the image of climbing the property ladder. We seek to get on the ladder and, once we are on, we are safe, we have ‘made it’. We now feel we can climb the ladder, trading up to find our perfect dwelling. But the main thing is that we are actually on the ladder.

However, I must say, as someone who once found himself at the top of one when my dear brother decided to move it, I have always been somewhat dubious about ladders. I like to know just what a ladder is resting on and that it is leaning securely against something. I want to know that it is actually securely held and stable and not in danger of toppling. I also want to know if I can trust the person holding it steady. And, being of a cautious cast of mind, I need to know where the ladder actually leads, other than just up. Is it possible to actually get to the top and, if we could, what would we do when we got there? Would we just sit there, or simply come back down again? Is there any point to climbing it in the first place?

A ladder is a tool: normally we use it to help us reach something, or to get somewhere. We use it to move ourselves to a higher level, so we can reach further than we otherwise would. But this does not seem to be the case with the property ladder. Its destination is always left unmentioned. It has no end as far we can see, but merely one rung after another. What we seek to do, or are told we need to do, is to get on the ladder and then to remain on it. We might seek to go upwards, but what for? Where are we going and would we even know if we got there? Being on the property ladder becomes an end in itself, a proverbial ‘good thing’.

What concerns me about ladders is that if they slip and fall, as they invariably seem to do, then so do we. Falling off a ladder can cause us a lot of damage, but the property ladder is not like a real ladder in this regard. I don’t mean that we won’t get hurt, indeed quite the reverse. Unlike a real ladder, we can hurt ourselves just as much by falling from the bottom rung of the property ladder as from the top. Being on the lowest rung is no guarantee against disaster. The property ladder is an ‘all or nothing’ experience and our commitment has to be total. This means that the effect of a fall, from whichever rung, can be just as damaging.

We can now see that the metaphor of the ladder works only one way. We only go up the ladder. We seldom consider a downward journey, and this is because it can be quite difficult for us to come down safely. Instead of a ladder perhaps we should use the image of the escalator, which is set to go only one way. This might make the journey easier: we are assisted by the escalator itself and everyone is going in the same direction. But it is only useful if that is the direction we want to take. It is hard to stop it, and it is very difficult to change direction and go against the flow.

Also the image of the escalator is an improvement on the ladder because it suggests moving, trading up to ever better properties, using the equity in one to help fund the next. But it is this very idea of moving upwards that is problematic. If we use our dwelling as an asset, as something we seek to build on, and if we see ourselves as having a ‘housing career’, in which we move from one dwelling to another and so maximise our financial situation, we are, in truth, taking a risk with our dwelling. This risk is that we are using our dwelling – our home – as a means to achieve a non-housing end. We are using it for a purpose other than dwelling.

As Niall Ferguson (2008) has stated, the risk in a situation like this is that we transfer our security to others. We think our house is safe, but it is safe only if we have the means to continue funding it. The security is our income, and the property is somebody else’s security. If we lose our income, others are protected, but we are not. If we die, we can leave the asset to our children, and so it can be seen as security for them, and this doubtless provides us with some comfort. Yet it is again literally at our expense, and the dwelling is still just an asset. Our children may have seen this dwelling at one time as the family home, but on the death of their parents, when it is emptied of people and things and the relations between them, it is reduced merely to an asset: a thing with a monetary value and a means to greater security. This is not, we hope, because they are callous or glad to see us gone, but because they are likely to be well-housed already.

Is not the real security, on a day-to-day practical level, gained from the physicality of the dwelling and the relations it supports, rather than its quality as an asset? It is the fact that our dwelling keeps us warm, dry, safe and secure that matters. It is that the dwelling acts as a store of memories and as a place of intimacy that we really need (King 2004). Or perhaps stated more practically, we can only find financial security in our dwelling once we are secure in the physicality of the dwelling. Of course we need the income to gain the dwelling and continue to stay there, but this is a concern for the moment and not for the future. We live in a manner based on short-term regularities, of day-in-day-out activities within a particular dwelling in its specific environment. We dwell in and on the possible, on what the dwelling actually does and is. We open ourselves up to risk when we see the dwelling as potential, as a not-quite-yet emerging possibility, or of something that is just over the horizon, but never actually in clear sight. Our dwelling, properly speaking, is never a work in progress, but always finished as it is, as an object in use. We can dwell only in this moment. This does not mean we should forget the future or aspire to something else. But we should not use what is here now merely for what might be elsewhere.

Of course owner occupiers do not usually consider that they are taking a risk when buying a house by taking out a mortgage. They are doing something safe and expected – as safe as houses, as the cliché goes. This is just what we do and what everyone else is doing. It is normal, taken for granted, and certainly not risky. It is, as far as we are concerned, about getting on with the way we live now. This might be a misperception, and in hindsight many people might be judged to have acted foolishly, but is there any rational reason to have expected them to have behaved differently at the time? Despite previous house price crashes, people clearly do not expect the housing market to fall – they cannot foresee themselves falling off the ladder – and so they do not see buying houses as being particularly risky.

But this very sense of safety, of living apparently free from risk, allows us to aspire and to think of what might be if only we had a bigger house, or moved to a different part of town. We can aspire because, all the time, we sense we are safe where we are. Our dwelling can be the platform for our desires and our dreams, and it can give us the basis upon which to plan for our ascent. Here we begin to see something of a paradox, which, I want to suggest, is of crucial importance to any debate about boom and bust in housing markets. We see our housing as safe, and so we speculate. Our housing gives us a sense that we can aspire, but what we are speculating on is our housing, the very basis of our need for safety and security.

So we can certainly state that housing is not the same as finance. We need to differentiate between the existential and the economic (King 1996; Turner 1976) and not confuse means with ends. The trouble is that our housing can work so well for us that we lose sight of how we use it, and we seek to do more, to extend ourselves and stretch for a higher rung.

There is a danger that the crisis might be used to attack certain institutions. Some will use the collapse of housing markets to criticise capitalism in general, particularly the Anglo-Saxon version of it. They will argue that they were right in being sceptical of the Thatcher/Reagan legacy all along, and that as this period is now so clearly over we can return to a period of more active government. More prosaically, some will use the crisis to criticise owner occupation and argue that there is something inherently unstable about the tenure, with crashes coming with some regularity every ten to 15 years. Those who suggest that owner occupation is merely an ideological construction or hegemonic discourse used to disguise a particular interest (Jacobs et al. 2003; Kemeny 1981, 2005; Ronald 2008) can point to the crisis and suggest that reform is necessary. What is needed, so the argument runs, is to rebalance housing tenures to ensure that owner occupation is only one tenure among several and not the dominant one. In the UK this has led to calls for the building of more social housing or to develop shared-ownership products that offer some shielding from the vicissitudes of the market. More generally, there are calls for greater government regulation of markets to ensure that this type of boom and bust does not happen again. This position, of course, is as ideological as the so-called ‘hegemonic discourses’ it seeks to challenge. It is based on a series of assumptions about housing as an entirely public or social entity, in which the dominant concern is to meet aggregated need rather than having anything to do with aspiration and the existential significance of housing as a store of meaning, as well as a place of physical safety and security.

This does not help us to understand why so many people want to become owner occupiers. Why has it become so dominant, particularly in the Anglo-Saxon countries, but also in European countries like Spain? As we have seen, critics, like Jacobs et al. (2003) and Kemeny (1981), assume that this is irrational or is a constructed discourse built by government policies and rhetoric, and therefore a change in that policy and rhetoric could alter the situation. These critics tend to look to other countries, particularly in Europe, where owner occupation is less dominant to demonstrate that there is nothing natural with regard to owning. Owner occupation is lower in Germany which, like France, has not had the speculative house price increases of the US or UK. Therefore it is assumed that the problem is specific to a form of Anglo-American capitalism.

First, we should note that this tends to be a rather selective argument, in that critics of owner occupation tend to ignore a number of eurozone countries, such as Ireland and Spain, which have experienced similar housing booms and the consequent collapse. But, second, we can question the very technique of social constructionism as applied to this debate. In particular, why should we assume that the particular legal, cultural and institutional arrangements in Germany are not as socially constructed, and therefore as contingent as those in the UK and US? Why should it be owner occupation that is the ideological construct and not particular forms of renting? On what basis should we treat the German or French situation as being more ‘normal’ or ‘natural’? Social constructionists might argue that neither is natural and all tenure relations are constructions. If this is the case, then the argument is reduced to a banality and has little intellectual substance. Of course they might indeed be correct that no form of tenure is in any way ‘natural’. But what we might argue instead – and this is consistent with the constructionist position – is that in Anglo-Saxon countries the incentives and conditions are right for owning to prosper, and if these conditions pertained elsewhere then so might high levels of property ownership. This can be only speculation, but it is of the same status as that of critics of owner occupation who call for a rebalancing in favour of renting.

What is important is that we do not lose sight of what owner occupation and housing markets actually have and do achieve. It is, of course, harder in certain times than others to suggest that markets do work well and are the most efficient form of allocating scarce resources. But, by the same token, we should not throw out the many benefits of markets because they do not operate to their optimum. Even in the depth of a recession, we need to remember that most households are not in mortgage arrears or negative equity or at risk of losing their dwelling. As Akerlof and Shiller (2009) have pointed out, there is a natural tendency to place economic data in a negative light. Hence, they state, the figure of 25 per cent unemployment during the Great Depression is always given and not the fact that 75 per cent of American workers stayed in work. They suggest that there are good reasons for stressing the one figure rather than the other – we wish to deal with problems, not ignore them – but also that, even in this most tra...

Table of contents

• Contents
• Preface
• Chapter 1 Housing is not finance
• Chapter 2 Really private finance
• Chapter 3 Lots of bad decisions
• Chapter 4 A political problem
• Chapter 5 On the virtue of benign neglect
• Conclusions
• Bibliography
• Index