Andrew Oswald

If You Go There Will Be Trouble, An’ If You Stay There Will Be Double
Andrew Oswald interviewed by Jeffrey Inaba and Talene Montgomery

The foreclosed home is the most potent sign of our times, casting doubt on Westerners’ impulse to settle in one place. Community planners often highlight the importance of social capital during moments of crisis – but what are the economic values of mobility? Might stability and investment in one place rather than migration and flexibility be central to resolving our economic crisis? In an era when infrastructure and public works dominate urban debates, how might incentives to migrate be built into policies that affect the built environment? Economist Andrew Oswald’s work elucidates the mobility debate.

Jeffrey Inaba: In 2002 you anticipated the housing market crash. What were the indicators?

Andrew Oswald: Historically it’s not that hard to predict housing crashes. It’s tricky to get the timing exactly right, but we know that every twenty years there tends to be a big house price rise above the long-term trend and that’s what we’ve seen. It’s really most striking in the US. If you draw a graph of real house prices in the US over the last hundred years, it’s a wiggly line but it’s pretty fl at. When I started issuing warnings in my country, the UK, real house prices in the US had reached their highest levels in a century. Then they doubled again.

The graph is a classic example of a strongly trend-reverting economic system. You can have crazy boom periods or crazy slump periods. But you tend to come back to the sensible trend.

Most people didn’t want to listen. If the party is absolutely booming and it’s half-past midnight, anyone who says, ‘Look this is crazy, we better stop now’, [pause] most folks don’t want to hear it.

JI: Do you own your own home?

AO: I do own my own home. I deferred purchasing and bought the smallest possible home I could for family reasons. I’m pleased I’m in the smallest possible home, given the current sorts of losses.

Talene Montgomery: Over ten years ago you began making observations about the dichotomy between homeownership and private rentership. We are interested in your idea that there are ‘those who invest in immobility’ and ‘those who invest in flexibility’.

AO: If a person buys their own home, they become less mobile. Owning a home is typically a disadvantage to a worker because they tend to become locked into their particular area. And there’s a double effect: an immobile world, in the economist’s terms, is an inefficient one. You get square pegs in round holes, so firms have job openings for ultimately the wrong sorts of workers. There’s a strong link between the need for efficiency and the need for a fluid kind of housing market that allows people to move around.

JI: And do you find this to be particularly the case within a certain demographic range?

AO: Yes. Life-cycle considerations are very important, both for the individual and for the good of the whole economy. There’s lots of economic evidence that young people – those in their mid-twenties, say – are experimenting. They’re looking for the right kind of job, the right kind of career track, for the rest of their life. And because they’re doing lots of sampling, it’s simpler for them not to be tied to a particular area.

Unfortunately, all over the Western world, governments have given major tax breaks to people to own their own homes and individuals have responded rationally. But that has locked in even very young people and they’ve been more concerned about holding onto their asset than finding the right career. That’s really bad – at the group level – for the whole economy.

JI: Are there economic models or theories about the threshold at which homeowners decide that it’s not in their best interest to hold onto their asset and move?

AO: Yes. Economics assumes that people weigh the costs and benefits of everything in life including the decision whether to be an owner or a renter, whether to remain where they are or move, perhaps very far away, or possibly switch careers. In order to achieve economic efficiency, workers and citizens need to do this efficiently.

If we give very large tax incentives for homeownership then, in a sense, as a society we’re providing a huge subsidy to immobility. We’re really saying to workers: ‘Forget what’s efficient for the economy, just think about how to earn capital gains.’ That’s always a dangerous strategy, even when the housing market is rising. When it’s falling, as it has been recently, this is a very serious error.

One of the things that’s happened across industrialized countries during this huge housing boom is that people have started to think that they can make more money from just doing nothing – holding onto their housing assets – than from their real job or investing in retraining. This has caused a tremendous distortion in what you might call reliable economic values.

TM: Why is it that housing has been made to seem attractive in terms of incentives?

AO: We don’t know why this sort of homeownership fever gripped the world, but after the Second World War the idea was promoted that to be well-off, you needed to be a homeowner.

Switzerland is unusual in that it did not give big tax breaks to homeowners. Instead they kept a balance between incentives to rent and incentives to own. As a consequence only about one-third of Swiss citizens own their own homes. The Swiss have an unemployment rate of about 3.5 percent, the lowest in Europe. All the economies in which around eighty percent of the residents are homeowners – that includes places like Spain, Finland, Eastern Europe and Italy – are now experiencing serious labor market problems. Looking back to the 1960s, we see that economies seem to flourish when around fifty percent of residents are homeowners.

TM: How do patterns of homeownership and unemployment differ in European countries versus the US? Is it simply a matter of degree or are there categorical differences between these two?

AO: I think it’s a mistake to emphasize differences between the United States and most of the rich European countries. There’s a tremendous spread in the owner-occupation rate across North America just as there is across western and eastern Europe. There isn’t a one-to-one correlation between high levels of homeownership and a badly working labor market, but in both continents there is something to the idea that having a lot of homeowners slows the labor market down.

It’s useful to bear in mind that homeowners routinely block new businesses through zoning laws which is bad for employment. Homeowners also routinely commute much longer-distances and that produces pollution and congestion both of which are bad for everyone. So geography and architecture are deeply entwined in the labor as well as the housing market.

JI: I suppose that it was this fl aw that prompted sprawl. In the post-war era in western Europe and in the US, the only place where young families could afford to buy were further away from city centers. So from the very outset, one is commuting a long distance. That, as you say, is further exacerbated by the fact that when one wants to keep their home, they’re willing to seek jobs elsewhere, which could be at great distance.

AO: Yes, exactly. It’s worth emphasizing too that this is an especially serious problem for young people. If you imagine a world with very high levels of homeownership, it’s extremely hard for a new cohort of young workers because they can’t start off being a homeowner. And throughout the industrialized world after the Second World War there was a much greater supply of cheaply available rental housing that helped people, especially the young, relocate and get their first and second jobs.

JI: Do you see promising policy proposals that take stock of these effects?

AO: I have a sense that western governments are starting to realize that maybe it’s not such a great thing to try and push homeownership rates up to eighty or ninety percent.
Maybe politicians are realizing that you need a fluid element to your housing stock. Renting helps economic efficiency.

TM: If the idea of moving to a place of prosperity exists in the American collective psyche, given the current downturn is there really a ‘place’ to move to? What do you think, in terms of larger migration patterns?

AO: It’s a mistake to be overly gloomy. You can always find some sectors of the economy that are doing relatively well. And those that buck the trend are typically being driven by some sort of new technology. Of course, it does have the downside that we have these large swings up and down, but the good side is that there’s a lot of technical change and there are always good new ideas coming through. Ultimately, we need workers to move from the depressed areas and the depressed industries and follow the new technology jobs in whatever form they’re going to come in. It’s not possible, of course, to predict what the new trend will be say, twenty years from now. This kind of flexibility is the good side of capitalism.

JI: Bucking the trend seems like an important point to remember.

AO: [laughs]…If you can pull it off, yeah.