The Fallacy of Home Ownership and Financial Security
Home ownership has made many people very wealthy over the last few decades leaving us with the belief that owning a home secures our financial future. As housing costs are now extortionately high, efforts are being made to increase housing supply so people can get on the housing ladder and benefit from this perceived financial security.
But I believe there is an elephant in the room that no one is talking about. Namely, home ownership has created wealth because supply has been constrained. The current draft London plan has outlined 650,000 new homes by 2029 (london.gov.uk). This amounts to 18.00% of London’s current housing stock (gov.uk). London’s population is only set to grow by 7.60% over the same period (london.gov.uk).
My rudimentary economics tells me if supply is increased, values will stop increasing and the very purpose of getting on the housing ladder comes into question.
The Elephant
Between 1990 and 2019 annual house price growth in London averaged over 7.00% (Land Registry, 2020). This was driven by a few very logical reasons including:
- Constrained supply
- Abundance of cheap financing
- Introduction of Assured Shorthold Tenancies (making it safer and more profitable to be a Buy to Let landlord)
- 1990s mortgage market deregulation
- Ease of entrance for overseas investors
These causes led house prices to increase for such a long period of time we started to believe that “home ownership = financial security”. But this is a logical fallacy. We have forgotten a crucial little caveat: home ownership only creates financial security when the value of homes continues to rise. On the contrary, a home with a mortgage is a liability not an asset, if you cannot guarantee values to increase (Kiyosaki, 1997).
Of the five reasons mentioned above at least three are changing – BTL landlords are now being penalised, it’s harder to invest from overseas and supply is increasing. These changes are causing house prices to fall.
Since March 2018 house prices in London have averaged a 1.00% annual decrease. People I know are selling houses in desirable parts of London for exactly the same amount they brought them for 5 years ago. If we continue to increase supply then this trend will continue. This is great for getting on the housing ladder, but would we want to buy a house, take out a loan against an illiquid asset, pay maintenance and running costs, if we didn’t believe that prices would increase?
This is The Elephant in the room, as I see it. Increasing housing supply will make homes cheaper which will make the very purpose of striving to get on the property ladder futile.
What can we do about The Elephant?
- Shift Our Home-Ownership Narrative
Margaret Thatcher was instrumental in creating the home-ownership paradigm. This is encouraging because it shows that attitudes can be changed within a generation. Whilst, for many, buying a home has been financially accretive over the last few decades, it wasn’t before the 90s and won’t necessarily be going forward. We can change our narratives. The Economist has started to do this with an in-depth report released in January 2020. In that report The Economist showed if there is no capital growth then the cost of paying a mortgage vs paying rent is equal (The Economist, 16/01/2020). We often hear it said renting is “throwing money down the drain” but we don’t think of paying interest on a mortgage in the same way. Wouldn’t we be better off investing the, say, £75,000 deposit required, in a diverse mix of risk-adjusted investments rather than in a single asset?
- Improve Tenant Rights
For many owning a home feels more secure than renting – it’s nice to know you cannot be kicked out by an unscrupulous landlord. However we forget that we could be kicked out by an unscrupulous bank should we be unable to make our mortgage repayments or if we fall into negative equity. This hasn’t happened for so long, on a large scale, it’s slipped from our collective memory.
If we could take a 5-year lease with a tenant option to break every 6 months, then a greater level of security could be achieved without the capital outlay of buying a house. This approach is normal in the States and in Europe – in Germany the average length of tenancy is 11-12 years (The Economist, 16/01/2020) – there’s no reason this shouldn’t work in the UK.
- Increase Affordability
For many, mortgage repayments are cheaper than rent. The more delivery we have of high-quality rental units on scale, the more affordable they should become, giving people more choice on where to invest their money.
Ultimately we need to dispel the myth that “home ownership = financial security”. We need more affordable homes but we can create these without encouraging people to tie up their life savings in a single asset. There is no intrinsic element of the housing market that means house prices will inevitably increase in the long run.
We see the “Past Performance Is No Guarantee of Future Results” waiver on every other product we buy as an investment, so why do we not see it on a “For Sale” sign?
People | Spaces | Places 
Hey Hattie, great post and a very timely warning to the herd! The logic of your argument is so obvious that It is only not getting attention because of the vested interests at play.
Well said – the proposed abolition of ‘no fault evictions’ should only add to the move away from home ownership and towards rental property. Times are changing.