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PROPERTY
such a hold on the popular imagination
in the realm of government policy as in the realm of culture
The real estate market is unique.
‘An Englishman’s home is his castle’
‘no place like home’
Even children are taught how to climb
the property ladder, long before they
have money on their own.
1903: Monopoly
Elisabeth ‘Lizzie’ Phillips
A devotee of the radical economist Henry George
“A world in which the only tax would be a levy on land values.”
The game’s intended purpose was to expose the
iniquity of a social system in which a small minority of
landlords profited from the rents they collected from the
tenants.
Charles Darrow
Monopoly’s
commercial potential
1934 Christmas season
A game for would-be property owners.
Crises and Opportunities
An optimistic message
In the middle of the Great Depression:
Monopoly -A phenomenon of international success.
1930s: The Great Depression
1935-Monopoly success
Parker Brother’s announcement
for the Monopoly game in April 1935:
“As the name suggests the players deal with real estate…
Excitement runs high …
A comparison to share:
…a Mania!
…and the game is over when the rest players –apart from the winnerthe rest get out of money.
A quick
reminder:
A bubble is an upward price movement over
an extended range that then implodes’
(Kindleberger)
‘Asset price movements not explainable by fundamentals’
(Garber)
a typical crisis according to the Kindleberger-Minsky model
Monopoly: a risk free game
No consequences
In real-life, it may be hard
Big consequences.
Source: the diagram and definitions are taken from the Lectures Notes.
Ferguson:
Keyword: psychology
There is nothing safer than lending money to people with property.
If they default on the loan, you can repossess the house.
The single most important source of funds in the United
States is a mortgage on the entrepreneur’s house.
Financial institutions have become ever less inhibited about
lending money to people who want to buy property.
“Safe as houses”
“Nothing beats bricks and mortar as investment”
“Land and building are ‘immobile’ property”
In 1956 American owner-occupiers owed a
sum equivalent to 38% of US GDP
Since 1959 Total mortgage debt outstanding
in USA: An increase 75% fold.
By the end American owner-occupiers owed a
of 2006 sum equivalent to 99% of US GDP
A boom in residential investment, which
reached a fifty year peak in 2005.
• The supply of new housing unable to keep
pace with accelerating demand.
• In the first half of 2005, about half of all
growth in US GDP was housing related.
2006
nominal house inflation exceeded 10%
in 8 out of 18 countries in the OECD
Property-owning democracies
 Between 65%-83% of households owning the home
they lived in.
 A majority of voters are also property owners.
In recent years it has been spreading fast, with house
price booms in Australia, Canada, Ireland, UK, USA,
China, France, India, Italy, Russia, South Korea, Spain.
Property safe as houses or
more like a house of cards?
Arousing expectations
which it may be impossible to fulfill.
England between 1975-2006
The 15% fold increase of house prices
has put home ownership out of reach for nearly
all those first-time buyers who cannot get financial
assistance from their parents.
England
Around forty million acres out of sixty million are
owned by just 189,000 families.
Duke of Westminster, the third-richest man in the UK (est.
assets ￡7 billion)
In the top fifty of the 'rich list' are:
Earl Cadogan (￡2.6 billion) and Baroness Howard de
Walden (￡1.6 billion).
The Property-owning Aristocracy
for most of England’s history
An exclusive privilege of an aristocratic elite.
The right to vote in elections: a function of property ownership.
1.
Estates were passed from father to son,
along with honorific titles and political privileges.
2.
Tenants were paying rent to their landlords and were bound to the
wealthiest landowners by an intricate wed of patronage.
Property and a socio-political aspect thereof
England
•Early 1800s
370 out of 514 MPs were selected by nearly 180 land-owning patrons.
More than a fifth of MPs were the sons of peers.
• 1832: Still statutes passed in 15th century
Only men owning freehold property, worth at least 40 shillings a year
in a particular country, were entitled to vote there.
At most 435.000 people in England and Wales.
Property and a socio-political aspect thereof
England
Electoral reform acts in 1832, 1867 and 1884
eroded the aristocratic monopoly on British politics.
By the end of the nineteenth century, paying ￡10 a year in rent qualified you to
vote just as legitimately as earning ￡10 a year from property.
The electorate now numbered 5.5 million -40% of adult males.
In 1918, that last economic qualification was removed.
After 1928 all adults, male and female, had the vote.
In 1964, The last aristocrat to serve as Prime Minister, Alec Douglas-Home (the 14th
Earl of Home) left office.
On the contrary: as late as 1938, less than a third of the UK housing
stock was in the hands of owner-occupiers.
Property and Economy
England
Until 1830s fortune smiled on the elite –the thirty (30) or so
families with gross annual income from their lands above £60,000.
Land values had soared during the Napoleonic Wars
Demographic pressure and wartime inflation caused the price of
wheat to double.
Industrialisation brought windfalls to those who happened to be sitting
on coalfields or urban real estate.
(A steady stream of remuneration from the public purse.)
The great magnates took full advantage of their ability to
borrow to the hilt.
Some to ‘improve’ their estates (drainind fields and common land).
Others to finance a lifestyle of conspicuous consumption.
Property no matter how much you own,
is a security only to the person who lends you money.
Many 19th century investors (local solicitors, private banks
and insurance companies) were attracted to mortgages
as a seemingly risk-free investment.
The borrower’s sole security against the loss of his
property to such creditors is his income.
For the great landowners of Victorian Britain,
income suddenly fell away.
Erosion of the economic position of landowners
From the late 1840s onwards,
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Increasing grain production around the world,
Plummeting transport costs,
Falling tarrif barriers,
The repeal of Corn Laws in 1846,
Grain prices slid from a peak of $3 a bushel (1847) to a nadir of
50 cents (1894)  so did income from agricultural land.
• Rates of return on rural property slumped from 3.65% in 1845
to just 2.51% in 1885.
• In Ireland: political unrest as well.
The economic decline and fall exemplified by the fortunes
of the family that built Stowe House, in Buckinghamshire
Stowe was only part of the vast empire of real
estate acquired by the Duke and his ancestors
Stowe House: aristocratic
grandeur, mortgaged to the hilt
Richard Greenville, 2nd Duke of Buckingham
From barony to dukedom in the space of 125 years:
political patronage and strategic marriage.
The Duke owned around 67,000 acres
in England, Ireland and Jamaica.
It seemed a more than adequate basis for his
extravagant lifestyle.
He prided himself on
‘resisting any measure injurious to the agricultural interests,
no matter by what Government it should be brought forward’
The new age of aristocratic decline
By 1845:
Gross annual income: £ 72,000
Annual Expenditures: £ 109,140
Accumulated debts: £ 1,027,282
January 1845: visit by Queen Victoria and Prince Albert
(refurbishment of Stowe House and if not only…)
August 1848: auction of the entire content of Stowe House
Expired in 1861: living at his son’s expense in the Great Western Hotel at Paddington railway station.
His son: chairman of the London and Northwestern Railway Company.
In modern world, a regular job mattered more than an inherited title,
No matter how many acres you owned.
Home-owning Democracy
The rise of Home-owning
Democracy
Property-owning aristocracy
for most of history.
Before 1930s, little more than two fifths of American
households were owner-occupiers.
Mortgages an exception to the rule (farmers).
In the 1920s, few people borrowed to buy their own house.
The great Depression  deep difficulties
(especially if the main breadwinner among the millions who lost
their jobs and their incomes.)
Average difference (spread)
between mortgage rates and high-grade corporate bond yields.
1920s
about 2% points
1988-2008
about 0.5%
Mortgages in the 1920s
• Short-term (3-5 years)
• Not amortized, that is borrower repaid the principal only at the end of
the loan’s term, facing a balloon-sized final payment.
• Substantial regional variations in mortgage rates
When the economy nosedived, nervous lenders simply refused to renew.
In the middle of the Banking crisis
• 1932-1933: over a half million foreclosures.
• By mid 1933: over a thousand mortgages foreclosed every day.
• House prices plummeted by more than a fifth.
• The construction industry collapsed, revealing
(as in all
future recessions of the twentieth century)
the extent to which the wider US economy
relied on residential investment as an engine
of growth.
• While the effect of the Depression was perhaps most
devastating in the countryside, where land prices fell
below half of their 1920 peak, the predicament of
America's cities was little better.
Detroit automobile industry:
employed half the number of workers it had in 1929, at half the wages.
On 7 March 1932 five thousand unemployed workers laid
off by the Ford Motor Company marched through central
Detroit to demand relief.
Detroit
• Europe’s many countries: totalitarianism
• USA: Franklin D. Roosevelt and the
NEW DEAL
New Deal
• Roosevelt's first administration saw a proliferation of new
federal government agencies and initiatives intended to
reinject confidence into the prostrate US economy.
• its most successful and enduring component was with
respect to housing.
• At one level, an attempt by government to step in where
the market had failed.
• Some New Dealers favoured the increased provision of
public housing, the model that was adopted in most
European countries.
Roosevelt administration's lifeline to the rapidly
sinking mortgage
• 1932: Federal Home Loan Bank Board to encourage
and oversee local mortgage lenders, and to reassure
depositors.
• A new Home Owners' Loan Corporation stepped in to
refinance mortgages on longer terms, up to fifteen
years.
• Roosevelt introduced federal deposit insurance.
The idea was that putting money in mortgages would be
even safer than houses, because if borrowers
defaulted, the government would simply compensate
the savers.
1946 –It’ s a Wonderful Life
• A family-owned Bailey Building & Loan which
George Bailey (played by Jimmy Stewart)
• 'You know, George,' his father tells him, 'I feel that
in a small way we are doing something
important. Satisfying a fundamental urge. It's
deep in the race for a man to want his own roof
and walls and fireplace, and we're helping him
get those things in our shabby little office.'
Federal Housing Administration
Re-inventing the mortgage market
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encouraged large (up to 80 % of the purchase price),
by providing:
federally backed insurance for mortgage lenders,
long (twenty-year),
fully amortized and low-interest loans.
2. By standardizing the long-term mortgage and
creating a national system of official inspection
and valuation.
Foundation for
a national secondary market
• 1938: Federal National Mortgage Association (Fannie Mae)
– issue bonds
– use the proceeds to buy mortgages from the local Savings and
Loans (restricted by regulation both in terms of geography and in
terms of the rates they could offer depositors (the so-called
Regulation Q, which imposed a low ceiling).
• these changes tended to reduce the average monthly payment on a
mortgage.
• property ownership -and mortgage debt- soared after the Second World
War, driving up the home ownership rate from 40% to 60% by
1960.
Segregation: a direct consequence of
government policy.
• In 1941, a real estate developer built a six-foot high wall
right across Detroit's 8 Mile district.
• He had to build it to qualify for subsidized loans from the
Federal Housing Administration.
• The loans were to be given out for construction only on
the side of the wall where the residents were mainly
white.
• In the predominantly black part of town, there was to be
no federal lending, because African-Americans were
regarded as uncreditworthy.
• It was part of a system that divided the whole city, in
theory by creditrating, in practice by colour.
In the wake of the Civil Rights
legislation of the 1960s
• 1968 Fannie Mae was split in two:
1. the Government National Mortgage Association (Ginnie
Mae),
to cater to poor borrowers like military veterans,
2. a rechartered Fannie Mae,
a privately owned government sponsored enterprise (GSE),
permitted to buy conventional and government guaranteed
mortgages.
• 1970, Federal Home Loan Mortgage Corporation (Freddie
Mac). The effect was once again to broaden the secondary market
for mortgages, and in theory at least to lower
mortgage rates.
the Community Reinvestment Act of 1977
• racial discrimination became a federal
offence.
• American banks came under statutory
pressure to lend to poorer minority
communities.
In the United States,
• mortgage interest payments were always
tax deductible, from the inception of the
federal income tax in 1913.
• As Ronald Reagan said when the rationality
of this tax break was challenged, mortgage
interest relief was 'part of the American
dream'.
The rate of home ownership caught up more slowly on
the other side of the Atlantic.
• In post-war Britain the conventional
wisdom among Conservative as well as
Labour politicians was that the state should
provide or at least subsidize housing for the
working classes.
• Between 1959 and 1964, roughly a third of
new houses in Britain were built by local
councils, rising to half in the subsequent six
years of Labour rule.
As late as 1971, fewer than half of British
homes were owner-occupied.
• 'Rachmanism' the use of intimidation to evict the
sitting tenants of rent-controlled properties,
replacing them with West Indian immigrants who
had to pay market rents.
• Conservatives to deregulate the private rental
market, in the hope of encouraging private
landlords, and the equal and opposite resolve of
Labour to reimpose rent controls
Britain-Margaret Thatcher to encourage ownership
• 1983: Mortgage Interest Relief At Source (MIRAS) for
the first ￡30,000 of a qualifying mortgage.
• By selling off council houses at bargain-basement prices
to a million and a half aspirant working-class families.
• The result was a leap in the share of owner-occupiers
from 54% in 1981 to 67% in 1991.
• Owner-occupied properties has soared from just over 11
million in 1980 to more than 17 million in 2008.
• late 1960s and 1970s:
• tendency for inflation rates to rise above
interest rates in the late gave debtors a free
lunch as the real value of their debts and
interest payments declined.
• 1970s up until the 1980s, mortgage lenders were
offering thirty-year fixed-rate loans at 9% or less. For a
time, lenders were effectively paying people to borrow their
money.
• Meanwhile, property prices roughly trebled between 1963
and 1979, while consumer prices rose by a factor of just
2.5.
Governments:
• 'property-owning democracy‘
• in price stability, or at least lower inflation.
Achieving that meant higher interest rates.
the most spectacular booms and busts in the
history of the property market.