PROPERTY

such a hold on the popular imagination

The real estate market is unique.

in the realm of government policy as in the realm of culture

‘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 OpportunitiesAn optimistic message

1929-1930:

Wall S

treet crisis

1931-1934:

Banking crisis

1930s: The Great Depression

In the middle of the Great Depression:In the middle of the Great Depression:

Monopoly -A phenomenon of international success.Monopoly -A phenomenon of international success.

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 …

…and the game is over when the rest players –apart from the winner-the rest get out of money.

…a Mania!

A comparison to share:

‘Asset price movements not explainable by fundamentals’ (Garber)

a typical crisis according to the Kindleberger-Minsky model

Source: the diagram and definitions are taken from the Lectures Notes.

A quick reminder:

Monopoly: a risk free gameNo consequences

In real-life, it may be hardBig consequences.

A bubble is an upward price movement over an extended range that then implodes’

(Kindleberger)

Ferguson:

“Safe as houses”

“Nothing beats bricks and mortar as investment”

“Land and building are ‘immobile’ property”

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.

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 of 2006

American owner-occupiers owed a sum equivalent to 99% of US GDP

A boom in residential investmentA 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.

2006nominal 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 1975-2006England between 1975-2006

The 15% fold increase of house prices has put home ownership out of reach for nearly put home ownership out of reach for nearly all those first-time buyers who cannot get financial all those first-time buyers who cannot get financial assistance from their parents.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 Aristocracyfor 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.

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

EnglandElectoral reform acts in 1832, 1867 and 1884eroded 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 a socio-political aspect thereof

Land values had soared during the Napoleonic WarsDemographic 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 and EconomyProperty and EconomyEngland

Until 1830s fortune smiled on the elite –the thirty (30) or so families with gross annual income from their lands above £60,000.

Property no matter how much you own, Property no matter how much you own, is a security only to the person who lends you money.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-freeseemingly risk-free investment.

The borrower’s sole security against the loss of his The borrower’s sole security against the loss of his property to such creditors is his income.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,

• 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 fortunesThe economic decline and fall exemplified by the fortunesof the family that built Stowe House, in Buckinghamshireof the family that built Stowe House, in Buckinghamshire

Stowe House: aristocratic grandeur, mortgaged to the hilt

Stowe was only part of the vast empire of real estate acquired by the Duke and his ancestors

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’

Richard Greenville, 2nd Duke of Buckingham

By 1845:Gross annual income: £ 72,000Annual Expenditures: £ 109,140Accumulated 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

The new age of aristocratic decline

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.His son: chairman of the London and Northwestern Railway Company.

In modern worldIn modern world, a regular job mattered more than an inherited , a regular job mattered more than an inherited title,title,No matter how many acres you owned.No matter how many acres you owned.

Property-owning aristocracy for most of history.

The rise of Home-owning Democracy

Home-owning Democracy

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 1920sMortgages 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 ratesWhen 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 DEALNEW 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 BoardFederal Home Loan Bank Board to encourage and oversee local mortgage lenders, and to reassure depositors.

• A new Home Owners' Loan Corporationnew Home Owners' Loan Corporation stepped in to refinance mortgages on longer terms, up to fifteen years.

• Roosevelt introduced federal deposit insurancefederal 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 AdministrationRe-inventing the mortgage market

• encouraged large (up to 80 % of the purchase price), 1. 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 fora national secondary market

• 1938: Federal National Mortgage AssociationFederal 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.

• 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'.

In the United States,

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 As late as 1971, fewer than half of British homes werehomes were owner-occupied.owner-occupied.

• 'Rachmanism''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.

the most spectacular booms and busts in the history of the property market.

Governments:• 'property-owning democracy‘

• in price stability, or at least lower inflation.

Achieving that meant higher interest rates.