Spare a thought for Alison O’Riordan. In 2008, she “ploughed in head first” and paid an eye-watering €525,000 – about $700,000 – for an apartment in Dublin. Just two years later, as Irish property prices crashed, neighbouring apartments were fetching less than half that, about €190,000.
As Ms. O’Riordan discovered, she was among the last to be sucked into the Irish property bubble: Fewer than a dozen of the properties in the complex were sold. “Today,” she laments, “the other apartments in my building are filled to the brim with wise renters.”
To buy or to rent? An agonising question, especially when you know that getting it wrong could seriously hurt your finances. But, as the recent crisis demonstrated, such decisions can have a much wider economic impact – look to how countries like Spain, Ireland and the United States cope are still coping with the hangover from property bubbles. That’s one reason why there’s increasing interest in how government policy can shape individuals’ housing decisions and reduce the harmful side effects on the economy.
A new paper from the OECD looks at a number of these issues, and argues for policies that would reduce volatility in home prices and provide greater flexibility for buyers and renters.
Take the decision to buy. In a number of countries, governments have promoted home ownership in recent decades, in part because they believe it gives people a stake in society and promotes responsible citizenship. But at a time of high unemployment, that can have a downside: In effect, people who are tied to their homes – and, in some cases, burdened with negative equity – may be less willing to move to another part of the country to start a new job.
The solution, says the OECD, is not to discourage home ownership, but to reduce barriers that discourage people from moving. There are many such obstacles, but one striking example is the charges you pay when you buy a new home – stamp duties, property registration, notary and property agency fees and so on. These differ greatly between countries: In Denmark and Iceland, they amount to only about 4% of the value of the property; in Belgium, France and Greece they’re equal to at least 14%.
Another area where government policy can help determine people’s property decisions is taxation. In many countries, the tax system effective encourages people to buy property, typically by providing tax relief on mortgage interest payments. That helps people buy homes, but there can be downsides. Firstly, by making it attractive to take out mortgages, and so cut individuals’ tax burdens, it can encourage property speculation. Secondly, it benefits only people who pay tax; low-paid workers outside the tax net get no benefit.
The OECD paper suggests such tax incentives should be scrapped, and that an investment in property should be treated like any other investment. This, it argues, would curb excessive property investment – and limit price bubbles – and free up funds for investment in more productive areas of the economy.