This paper argues that the housing market lies at the heart of the European unemployment problem. It describes a practical suggestion to reduce joblessness in Europe's nations -- that our continent should revive private renting and try to make the housing market function more smoothly. We can put Europe back to work, the essay argues, by reducing home ownership.
It is worth beginning with three background facts. Of the major industrial nations:
• Spain has the highest unemployment, and also the highest rate of home ownership
• Switzerland has the lowest unemployment, and the lowest rate of home ownership
• In the 1950s and early 60s, the United States had the highest unemployment, and at that time had the highest rate of home ownership.
The underlying argument in the paper is that an economy's 'natural rate' of unemployment depends on the ease with which its citizens can move around to find jobs. Fluid societies have efficient economies. Although Milton Friedman pointed this out in his famous American Economic Association address of 1967, few European economists have thought hard about labour mobility and different forms of accommodation. Yet we know the housing market is likely to have an influence on the degree of labour mobility.
By making it expensive to change location, high levels of home-ownership foster spatial mis-match between workers' skills and the available jobs.
This paper, in conjuction with my first ever post, sparked a long discussion with a friend, a loyal reader who is going to guest-blog here soon. He emails me:
The "self control" thing could explain a lot of the English obsession with house-buying, which for many people seems to create accidental saving that they are then very pleased with later in life.
Viewing repayment mortgages as a form of forced (non-discretionary) saving that in many cases people are unaware of explains a certain amount of the government policy aim of increasing home ownership and the love of property ownership amongst people who have seen others benefit massively from their own accidental saving.
e.g. my folks never seemed to save anything but have a mortgage free house now. My sister (who has a limited understanding of all things financial) has a strong desire to own a home because she can see the benefits of my parents' accidental saving without understanding that a similar outcome could be achieved with regular saving without home ownership.
There's more to home ownership than meets the eye. Comments are open, and very welcome.
Postscript: Here's a short article Oswald wrote for The Times a while back.
Addendum: Another reader emails me with many interesting comments. Here's some excerpts:
Your latest blog entry. Oswald has a point, and he doesn't.
I've heard the link between friction in the housing market and unemployment made before. Tenure for life in social housing is another issue here. Once you've passed the (almost insurmountable) obstacles these days to get into social housing you've a) got it for life and b) you simply cannot transfer to social housing even five miles away.
While it's worth arguing that more renting is beneficial overall it's simply the case that the private rented sector is locked into a kind of low-price/low-quality equilibrium in this country. Landlords won't invest in buying and renovating high-quality housing as they know tenants will only stay in the short to medium term. Tenants want to buy as they can afford to and as such have no interest in demanding the kind of good-quality housing they want to live in long-term. It's hard to know which causes which but it's a cycle that I don't see ending any time soon.
I agree that people's involuntary saving by putting all of their resources into housing (what 98% of people in Britain on the 18th of July 2007 are convinced is a riskless asset) is unhealthy and leads to booms and busts. In the long run there's little enough that productivity gains can do to improve housing and it would probably be better if capital was allocated where long-term returns were higher. But, I've worked in removals and I've lived in 10 different places in the last 4 years and I'll tell you that in many cases the psychic costs of moving outweigh the financial costs. Indeed the reason I'm paying over the odds at my current place is that I just wasn't prepared to go on with the hassle of keeping on hunting for a place to live.
Oswald's dead right on the NIMBY things though. I was reading about a case where planning permission was sought to increase the density of an infill development in Dublin (where a shortage of supply amongst other things has led to prices hitting greater than London levels). 265 objections from local residents, none in favour. And this is an area that is ossifying and losing population as no one under 40 can afford to move in.
So anyway I fully intend to be an owner-occupier with a hefty mortgage by the time I'm thirty. Would renting be a wiser use of cash in the long term? Probably. Does the behaviour of me and my peers mean that we're keeping prices higher than they could be? Definitely.
But will I find a house for rent that I'd want to live in for say 20 years, with a certain security of tenure and the freedom to modify it to how I would like? Not a hope. And will I get mortage interest relief? Yes. So I think it's an easy choice to make.