If you look at the property boom that spawned from the “dotcom bust,” we see the collective heard shunning fantasy business plans and instead opting for “hard assets.” But there are a few inherent issues with investment in real estate that make it a potentially dangerous asset class:
- As mentioned before, Americans have more of their wealth in Real Estate than any other asset
- Property and debt go hand in hand—and the banks that secure that debt set aside less money for those loans because of the property as a hard asset as collateral for the loans.
- As property values increase, homeowners have the opportunity to re-leverage debt by accessing equity (There was a doubling of mortgage debt in the US from 2001 to 2007).
- Property is not only an inefficient market, but also an inefficient asset class—meaning that you cannot offload pieces of it like you could with an equity portfolio (e.g., you cannot sell off your kitchen, but you could dump an underperforming large cap stock); illiquidity can strand owners in their properties even when it is not a negative equity situation; and the market for the same four walls will be different in different locations (arbitrage?)
Given all of the danger, let’s not get the idea that owning a home is a bad idea, however creating government subsidies and programs to promote “irresponsible” home ownership may not be a good one. The systemic issue seems to be the amount of debt that home buyers are allowed to take on. The Swedish government set a maximum loan to value of 85% last year for mortgage ratio; and that is a step in the right direction.
Whether ending the 30-year mortgage device, or phasing out income tax deductions for mortgage interest, or setting more stringent standards for first-time buyers & family businesses (where all household income is reliant on one business) makes the most sense is hard to say.
