Home ownership is in decline

That is not a big cause for concern

More than nine in ten Singaporeans are homeowners, a higher rate than in any other rich country. And what a nice place it is to live. The city-state is rich, stable and has virtually no crime. The streets are clean.

Singapore seems to confirm what conservatives have long believed: that home ownership makes for richer, happier folk. Lee Kuan Yew, its first prime minister, was a big fan, arguing that it gave ordinary people “a stake in the country and its future”.

Margaret Thatcher’s “right-to-buy” programme in the 1980s, allowing Britons in social housing to buy their property at knock-down prices, is said to have been influenced by the Singapore model.

It might be seen as worrying, then, that for the first time in a century home ownership in the rich world is in decline (see chart). Yet having more renters might not be such a bad thing.

For most of the past millennium, the only people with a good claim to be homeowners were landed gentry and farmers who worked the fields. Then, from the mid-20th century onwards, home ownership was democratised. A combination of rising household incomes and government policies helped more people get onto the property ladder. In most countries home ownership peaked around the year 2000.

America has some of the most generous fiscal incentives to become a home-owner. Official estimates suggest that the government forgoes over $200bn a year (over 1% of gdp) subsidising homeowners through the tax code, with policies including a tax deduction on mortgage interest and not taxing the income homeowners implicitly earn by avoiding paying rent.

Mark Zandi of Moody’s Analytics adds that subsidies to mortgages provided by Fannie Mae and Freddie Mac—two government-sponsored enterprises that support much of the country’s mortgage finance—and the Department of Housing and Urban Development amount to a further $9bn or so a year.

America is especially generous, but schemes to boost home ownership are common. Most rich countries do not charge capital-gains tax on the sale of an owner-occupied house. Inheritance-tax regimes routinely make exemptions for housing. Many countries subsidise mortgages and down-payments. Yet for all this, the factors pushing home ownership down are now stronger.

One possibility is that younger folk may be less interested in home ownership. After all, many millennials desire “asset-light” lives in which they rent cars, music and clothes, rather than owning them. Why not housing too?

The private sector has spotted an opportunity. Silicon Valley types are bullish on “co-living”, where people rent a dwelling and share common spaces such as kitchens, washing facilities and gyms. Hmlet, a co-living firm, is expanding in home-ownership-obsessed Singapore. Sharing a kitchen might sometimes be annoying, but Hmlet’s properties are well kitted out.

The attraction of co-living is, however, exaggerated. The majority of people would still prefer to be homeowners. Surveys from America suggest that the share of people who think that home ownership represents a good investment is growing.

Economic factors may be a bigger cause of the decline in home ownership. With weak earnings growth since the crisis, young folk have struggled to accumulate savings for a down-payment.

Tighter regulation of mortgage markets since the financial crisis has made it tougher for first-time buyers to acquire finance. Baby-boomers, looking for a return on their savings, are pushing aside prospective first-time buyers and becoming landlords. As millennials have taken on more student debt, buying a home has become trickier.

How low could the home-ownership rate go? It seems unlikely that rates in the English-speaking world will ever approach Germany’s (with a rate of just 44%) or Switzerland (40%).

Home-ownership rates are the product of history and culture. Countries with a history of weak real house-price growth—Germany and Switzerland fit the bill—have lower owner-occupation, because fewer people see buying a house as a worthwhile investment.

Densely built places also tend to have lower home ownership. People are generally less keen on owning a flat in a high-rise block than they are in a detached house (55% of Germans live in apartments, a high rate by international standards).

Politicians across the rich world bemoan the emergence of Generation Rent. “American home ownership rate in q2 2016 was 62.9%—lowest rate in 51 yrs,” tweeted Donald Trump when he was campaigning for president. “we will bring back the ‘American Dream!’ ” Boris Johnson, Britain’s prime minister, seems equally concerned about his country’s falling rate of owner-occupation.

But lower home ownership need not be a cause for concern. For one thing, owning a home is not necessarily the route to riches that many people believe it to be (see article). The evidence that home ownership is good for society is, in fact, fairly weak. There are many counter-examples to Singapore.

Romania probably has the world’s highest home-ownership rate, at 96%, but it has its fair share of social problems. Switzerland, at the other end of the scale, nonetheless has low crime and high social trust.

Academic studies offer only weak support for the idea of promoting home ownership. One paper suggests that owner-occupiers have better-tended gardens. But if nice shrubbery were a goal of public policy, it might be a better use of public money to subsidise wheelbarrows and trowels.

Another study in America found that homeowners’ children were far more likely to graduate from high school—even after controlling for parents’ earnings. Researchers have struggled to discern which way the causality runs, however: does home ownership make good parents, or do good parents become homeowners?

Other evidence, meanwhile, finds that home ownership carries costs. The stresses of paying back a big mortgage are real. And the mad dash in the 1990s and 2000s to create “property-owning democracies” ended with the global financial system on its knees.

Home ownership does subtler sorts of economic damage, too. Indebted homebuyers are 30% less likely to become entrepreneurs, according to one study. Responsibility for a large mortgage debt may make people loth to take on further risk.

When the home- ownership rate in an American state has risen, a sharp rise in unemployment has followed, according to David Blanchflower of Dartmouth College and Andrew Oswald of Warwick University. Homeowners are less willing to move to find work.

As the rented sector has grown in size, and as Generation Rent becomes a more powerful constituency, governments are putting more effort into improving the sector. One increasingly popular measure is rent control. London’s mayor, Sadiq Khan, has advocated restricting rent rises in the capital.

Berlin’s legislators recently voted to freeze rents for five years. Paris reintroduced rent controls last year, having scrapped them in 2017. Such interventions are misplaced. Rent control generally dissuades investment in new construction, the last thing many of these cities needs.

More promising than rent control, however, is a move towards improving tenancies. Many politicians in English-speaking countries have Germany in mind. There, renting is not seen as a second-class tenure. It is fairly secure: the average tenancy lasts for 11-12 years, compared with 2-3 years in Britain. Some 3m Germans are members of tenants’ organisations, which can bargain on their behalf with landlords (the mascot at one association in Munich is dressed like Superman and calls himself the “Rentstopper”).

Emulating the German experience will be tricky. In Germany landlords treat tenants well not just to be nice, but because they have an incentive to do so. In recent decades Germany has seen little house-price appreciation. Since making money through capital gains is difficult, German landlords’ best hope of getting a decent return is through keeping their tenants in place for as long as possible. Only if house prices in other countries were more stable would their landlords start to behave in this way, too.

Still, governments can make some reforms. Britain has abolished letting fees, a murky system of charges slapped on by estate agents using a methodology that renters and landlords rarely understood. Spain is moving to give renters longer tenancies as standard. New Zealand is passing rules to ensure that certain basic standards for rental accommodation are met.

Perhaps the most promising development, however, is growing private investment in the rental sector. Since 2010 global institutional investment in residential property has more than doubled in real terms, not only because investors are looking for yield in a low-rate world but also because the number of potential customers is rising.

Across America the share of the rental sector owned and operated by companies is rising, according to research by Hyojung Lee of Virginia Tech. By one estimate, the annual number of homes in New York City bought by professional investors has doubled in a decade.

An expansion of corporate housing will raise average standards in the rental sector. Big firms may be more professional than mom-and-pop landlords, and may also benefit from economies of scale which allow them to provide better-quality accommodation at lower prices. “Build-to-rent” apartment blocks often include goodies such as gyms and free Uber rides with the rent.

That said, corporate landlords have a more transactional relationship with their tenants. A study of Atlanta, Georgia, published by the Federal Reserve Bank of Atlanta in 2016, found that large corporate owners of single-family rentals were 8% more likely than small landlords to file eviction notices. To help the poorest or most vulnerable members of society with their housing needs, governments may need to do more.

Knocking off work

Traders lose interest in America’s jobs report

Markets react less to jobs data than they did before the financial crisis

BY 9.30PM ON the first Friday of the month, the bars in Marunouchi, Tokyo’s financial district, used to empty out as foreign-exchange traders returned to their desks. London’s investment bankers, back from lunch, would be sharp and alert, helped by a rare early night.

All awaited perhaps the world’s most important data release: America’s jobs report.

The release—which includes figures on non-farm employment, the unemployment rate and wages—often generated sizeable market moves. On average, five-year Treasury yields moved by 0.17 percentage points on the day of the report in 2004.

The four biggest daily moves that year occurred after a release. Since then, though, market reaction has cooled (see chart). In 2019 yields barely budged, moving by less than 0.04 percentage points on publication. What explains the lack of excitement?

Before the financial crisis jobs data were thought to give a good signal about the likely actions of the Federal Reserve, which is tasked with ensuring maximum employment and stable inflation. The more people in jobs, the thinking was, the closer America got to full employment.

A tighter labour market would push up wages and consumer prices. (In other words, what economists call the Phillips curve, which plots inflation against the unemployment rate, sloped downwards.) That made it more likely that the Fed would raise interest rates, making dollar assets more attractive.

As most financial assets are priced in dollars, the data took on worldwide significance. Hence Marunouchi’s emptying bars.

The reason for the subsequent lack of interest is that falling unemployment is no longer a good guide to the Fed’s actions. Inflation has been unusually quiescent. The unemployment rate has fallen from 9% in 2011 to 3.5%, the lowest rate in 50 years.

If the usual Phillips-curve relationship held, a rise in inflation would have followed. In fact, it has fallen: personal-consumption expenditure inflation, the Fed’s preferred measure, has slipped from 2% to 1.6%.

At first that prompted Fed officials to think that there was more slack in the labour market than they had assumed. Lately it has caused them to doubt that the amount of slack is knowable at all, and to wait for inflation to pick up rather than predicting it based on jobs data.

As a result markets no longer expect strong payroll numbers to be followed by interest-rate rises. Traders still pay attention to the wage figures in the report, though. In February 2018 a larger than expected pickup in average hourly earnings, together with a flat unemployment rate, led to a spike in bond yields and a stockmarket sell-off.

But pay growth has lost momentum since, even as unemployment has fallen. Ahead of this month’s jobs report, due on February 7th, after The Economist went to press, traders might be forgiven for choosing to stay at the bar.

Trade War’s Pain May Deepen Even as Tensions Abate

Manufacturers and farmers struggled last year because of tariffs, and there are signs that damage is spreading to other sectors of the economy.

By Ben Casselman, Niraj Chokshi and Jim Tankersley

Kevin Luke, who transports goods from the Port of Long Beach near Los Angeles to local distribution centers, says his business has clearly felt the impact of the trade war.Credit...Rozette Rago for The New York Times

The trade war is de-escalating, at least for now. But the economic damage it caused could be far from over.

Two years of tit-for-tat tariffs and on-again-off-again trade talks have left American farmers reeling. The manufacturing sector is in a recession, albeit a relatively mild one, and factory employment declined in December after rising slowly for most of last year. And in recent months, there have been signs that the damage is spreading: Railroads and trucking companies have been cutting jobs, and consumers — at least in the parts of the country most affected by the trade disputes — may be pulling back as well.

“Even if manufacturing started to recover, there’s still going to be some continuing cutbacks in nonmanufacturing industries as they start to respond,” said Michael Hicks, an economist at Ball State University in Indiana. “The full effect of the layoffs hasn’t really been transmitted to the full economy yet.”

Events last week in Washington signaled a shift from confrontation to conciliation. President Trump signed a preliminary trade deal with China that, if fully carried out, would increase American exports and prevent new tariffs, though it will not remove most duties already in place. And the Senate approved an overhaul of the North American Free Trade Agreement, which now awaits Mr. Trump’s signature.

Experts said the agreements should help restore confidence among business leaders after months of trade-related uncertainty. But even if those deals hold, the ripple effects of the trade war could take time to dissipate.

Other factors are also hurting manufacturing. A global economic slowdown — caused partly, but not entirely, by trade tensions — has curbed demand for American products abroad. Falling energy prices have led to a pullback in oil drilling and reduced the need for oil field equipment. Boeing’s recent decision to halt production of its troubled 737 Max aircraft has sent shock waves through the company’s vast supply chain; economists at Moody’s Analytics estimate that the shutdown could shave half a percentage point off first-quarter economic growth.

But economists say there is little doubt that trade has been the driving force of the industrial slowdown, with implications for the rest of the economy. The spillover effects are clearest in the transportation sector, where business slowed for railroads and trucking companies as trade slumped last year.

Freight volumes fell 7.9 percent in December from a year earlier, the greatest year-over-year decline since the recession a decade ago, according to data from Cass Information Systems. More than 10,000 jobs were cut by transportation and warehouse employers in December, the biggest drop in nearly four years.

Job growth has slowed sharply — from an annual rate of 2.6 percent at the start of 2019 to 1.3 percent at the end — in so-called middle wage sectors that include mining, construction and transportation, according to calculations by Nick Bunker, an economist at the Indeed Hiring Lab. That slowdown is driving the deceleration of job growth across the American economy.

Railroads have been hit particularly hard, analysts said. Ian Jefferies, president of the Association of American Railroads, said the slowdown in trade had led to lower rail volumes in grains and industrial equipment in particular.

“Trade uncertainty has played a pretty large role” in the rail slowdown, Mr. Jefferies said. The recent deals, he added, should “provide some much-needed certainty back into the system.”

To Kevin Luke, who transports goods from the Port of Long Beach near Los Angeles to local distribution centers, the effect of the trade war has been clear and pronounced.

Business was brisk in 2018, with Mr. Luke’s company, KNL Luxury, collecting about $250,000 in revenue, prompting an investment in a second truck. But the slowdown in imports meant the demand he had expected never materialized. In the end, he collected only slightly more revenue in 2019 — just shy of $290,000 — despite having doubled his capacity.
“I tried to invest in the future, I tried to be ready for opportunity,” said Mr. Luke, who has seven children ranging in age from 7 to 19.

If conditions don’t improve, Mr. Luke may have to take up long-haul trucking, which would keep him away from home for long stretches.

The trade war hit the trucking industry at a vulnerable moment, said Aaron Terrazas, director of economic research at Convoy, a shipping-focused technology company. Trucking companies expanded aggressively in recent years, adding trucks and drivers more quickly than demand was growing. The resulting glut pushed down prices, just as the slowdown in trade began eating into demand.
“There was almost this one-two punch where we were having this normal supply correction in the market and subsequently we got hit by the trade war,” Mr. Terrazas said.

Mr. Trump and his allies have said the trade deals will deliver a jolt to the economy and lead to faster growth this year. But economists are skeptical. Wall Street analysts expect growth, which is already cooling, to slow further in early 2020, and few have marked up their estimates in response to the trade announcements.

“I think we’re seeing the bottom, but we’re going to bounce around for a period of time before we really see any noticeable growth,” said Eric Starks, chief executive of FTR, a freight research firm. “That is assuming that there are no outside shocks and it seems like every other day a new shock keeps happening.”

Economists said the agreements should help shore up the struggling manufacturing sector and prevent further damage to the economy. But they won’t necessarily heal the damage that has already been done. Companies that shifted supply chains away from China in response to the trade war won’t necessarily move them back now that tensions have cooled, for example. And companies may be hesitant to commit to long-term investments until they see evidence that the trade deals will last.

“How much can we really go back to the way things were before this tiff?” Mr. Terrazas asked rhetorically. “Are they going to go back quickly to the way things were before, or are companies going to say this new uncertainty is going to be a feature of the global trade picture for the years ahead?”

Manufacturing is a relatively small part of the American economy, and there is little risk that even a sustained slump in manufacturing could, on its own, push the country into a recession. Consumer spending remains robust, and the fears of a downturn that gripped financial markets over the summer have eased.

Still, the factory sector remains the centerpiece of Mr. Trump’s economic appeal to voters, especially in the industrial states that lifted him to the White House in 2016. “This is a blue-collar boom,” Mr. Trump said on Tuesday in a speech in Davos, Switzerland. “We have created 1.2 million manufacturing and construction jobs — a number also unthinkable.”

Only 197,000 of those jobs were created last year, however, a sharp deceleration from the first two years of his administration. The United States created 1.1 million manufacturing and construction jobs in the three years before he took office.

There are signs that in the places most exposed to the trade war — particularly Wisconsin and other Midwestern states — those effects have spread beyond the industrial sector and begun to affect consumers. In a recent working paper, Michael E. Waugh, an economist at New York University, found that automobile sales were growing significantly more slowly in the counties most affected by the tariffs than in the rest of the country. Those places have also seen slower job growth in their retail sectors.

“Things are spilling over in these communities that are relatively more affected,” Mr. Waugh said. “New York is all fine. But there are places in the U.S. that are really struggling.”

The Midwest went through a similar economic soft patch in 2015 and 2016, when falling oil prices and other factors caused a mini-recession in the industrial sector. Mr. Waugh said he saw parallels — although it isn’t clear how they will play out given that this time Mr. Trump is the incumbent.

“Those places slowed down” in 2016, Mr. Waugh said. “Those places influenced the election. And now what do you have today? You have those same places slowing down, and they’re looking pivotal in the election again.”

While some of the effects of the trade war could soon be reversed, others may last longer.

“A lot of customers moved their production out of Asia to Europe and some of them moved their production from Asia to Mexico, so there’s a migration,” said Lidia Yan, the chief executive and co-founder of Next Trucking, a start-up that matches shippers and truckers.

Even in cases where production has been shifted from China to other parts of Asia, including Vietnam and India, West Coast ports may be losers, as exports from the more southerly Asian countries tend to be shipped to the East Coast.

“It’s early days,” said Gene Seroka, the executive director of the Port of Los Angeles. “But it’s enough to notice at this point in time, and we’re watching it very closely.”

The Case for Consumption Equality

Demographic, economic, and technological trends are making the world increasingly “flat” with respect to consumption. By supporting this shift, government and private-sector leaders can help to create a more cohesive, sustainable, and inclusive future.

Sarita Nayyar

nayyar1_Sean GallupGetty Images_shoppingconsumerismgermany

NEW YORK – Discussions about economic development often focus on how to increase income equality. More recently, however, thoughtful observers have begun to regard consumption equality – the equal use of goods and services – as a more robust indicator of parity in human wellbeing.

After all, it more accurately captures inequality as people experience it when they consume, and consumption can be affected by borrowing and saving, as well as by social safety-net programs.

But consumption equality is a double-edged sword. Although increased consumption by citizens of less-developed countries will improve the lives of millions, it will likely have negative consequences for the planet’s already stressed environment. Furthermore, reducing the high levels of individual consumption in richer countries may result in short-term economic pain until new long-term sustainable production and consumption practices are in place.

One recent study of the interaction between the 17 United Nations Sustainable Development Goals found trade-offs between SDG 12 – Responsible Consumption and Production – and ten of the other goals. The stewards of the factors of production – mainly businesses and governments – must therefore carefully manage these trade-offs in pursuing the SDGs.

Demographics will likely play an essential role in driving greater consumption equality. This year, Generation Z, born between 1995 and 2010, will become the world’s largest cohort, overtaking Millennials (born between 1980 and 1994). Together, these two groups will likely be the world’s most tech-savvy, sustainability-conscious consumers.

These generations have grown up with the so-called sharing economy. In general, they are not interested in buying things or owning assets like houses or cars; instead, they value experiences like new media, tourism, entertainment, and e-sports. And the resulting shift from conspicuous to conscious consumption is changing the face of consumerism.

Moreover, 80% of the world’s middle class will live outside the United States and the European Union by 2030. These citizens will likely seek to improve their lives by consuming more – but not simply by copying developed-world consumption patterns. Rather, they will probably follow their own path, driven by an acute awareness and concern about the planet’s sustainability.

In fact, global consumption is already rapidly becoming more equal. For example, the astonishing growth in smartphones and subsidized broadband in India allows all social and economic groups to enjoy television shows and other entertainment, and more generally enables both producers and consumers to participate more in the global digital economy. Indian farmers can now decide what to plant and where to sell their produce on the basis of market information and weather forecasts. And children in far-flung villages can be taught languages, mathematics, and science via television shows instead of having to learn by rote in near-empty classrooms, where teachers are often absent, under-trained, or both.

A similar equalization trend is evident in health care, particularly in Africa, as widely available vaccines are administered for a small fraction of the cost in developed economies. Better health outcomes in turn lead to opportunities for self-development and improved wellbeing, and, eventually, to increased productivity and more robust economic development.

Even parts of the developed world are taking significant steps to boost consumption equality by increasing access. In New York City, for example, government-funded preschool is now free, dramatically leveling the playing field for all children aged four – the most crucial stage in their development.

More equal patterns of global consumption will change the mix of goods and services, as well as how and where they are produced and consumed. And companies can help to lead this transformation.

For starters, firms should focus on developing innovative new products and processes that actually improve the environment, rather than merely doing no harm. Businesses also should reconfigure their strategy to encourage less consumption, not more. By eliminating fixed costs wherever possible and lowering marginal costs, they could make themselves less reliant on economies of scale and become profitable at lower volumes of output. In addition, firms should minimize lead times to help eliminate inventory from value chains, and dramatically reduce response times to meet demand.

Rather than push product ownership, companies need to offer more services that deliver the utility consumers seek. Furthermore, their product planning should include end-of-life strategies, actions, and costs from the start. The aim should be to reuse, repurpose, refurbish, redistribute, and reclaim.

Finally, firms should seek to increase access to their goods and services in less-developed countries. They could consider sharply lowering their prices, for example, or even ask themselves whether they could succeed if their product was free.

The world, to borrow a metaphor, is becoming “flat” with respect to consumption. By supporting this shift, government and private-sector leaders can help to create a more cohesive, sustainable, and inclusive future.

Sarita Nayyar is a member of the Managing Board and Chief Operating Officer, USA, at the World Economic Forum.

The Race for UBS’s New CEO Is On

Four internal candidates to replace Sergio Ermotti have the opportunity to prove their chops against lower financial targets this year

By Rochelle Toplensky

A lower bar should be easy for UBS—and the four board members vying to replace Chief ExecutiveSergio Ermotti —to clear.

Mr. Ermotti cut UBS’s targets for 2020 to 2022 Tuesday.

He is now promising a return on core Tier 1 capital of between 12% and 15%—the top target was previously 17%—and a cost-to-income ratio of between 75% and 78%.

Expectations for future dividends and buybacks were also pared back.

The stock dropped 5% in early trading, even though fourth-quarter profit announced alongside the new targets came in ahead of expectations.

A bit more breathing space in its financial guidance is not a bad idea for UBS, which like its European rivals faces another brutal year.

Negative interest rates in Switzerland and the euro area will continue to hit banks where wealthy clients stash cash to ride out economic uncertainty.

UBS recently started charging customers with balances over 1 million Swiss francs for holding cash, down from a threshold of 2 million in the third quarter.

The Swiss bank hopes to improve its returns primarily through revenue growth rather than cost cutting. This is ambitious in the circumstances.

In addition to the challenging macroeconomic environment, UBS faces rising competition for wealth-management assets in the high-growth Asian region.

The lender may also have to pay a $4.2 billion fine this year in a French tax-evasion case; a decision on the bank’s appeal is expected in the second half of 2020.

Mr. Ermotti has been in post since 2011 and is expected to retire before the end of 2022.

Beating his targets would be a nice send-off.

This seems achievable at the reduced level—and with ambitious potential successors keen to prove their skills.

Earlier this month, UBS veteran Tom Naratiland recently arrived Iqbal Khan announced big plans for the global wealth-management division that sits at the heart of the bank.

Suni Harford’s asset management division delivered a 48% uplift in profit before tax in the fourth quarter of 2019 compared to the same quarter the previous year.

The long-time Citigroup banker joined UBS’s asset management group in 2017, though she only assumed full control last October.

Finally, there is Sabine Keller-Busse, a former McKinsey consultant who joined UBS in 2010.

Currently chief operating officer and president of the Europe, Middle East and Africa region, Ms. Keller-Busse is focused on cutting costs through technology investments and bringing capabilities in house.

Her results might be more difficult for outsiders to identify.

While an external candidate is always possible, investors should keep an eye on the internal race to beat the bank’s targets.

It won’t just determine the stock performance, but will also provide interesting insight into who might lead the bank next.

Sergio Ermotti is expected to retire as CEO of UBS before the end of 2022. Photo: christian beutler/Shutterstock