“Property ladder” or the creation of the home-ownership illusion.
by Diego A. Salzman PhD and Wahyd Vannoni
If you live in the US, you will likely take a mortgage to buy your home. But in the UK, a mortgage is more likely to be adverstised as a means to buying a “property” not a home. For instance, while Zillow.com and its US peers prominently feature the word “house” on their home pages, Rightmove.co.uk helps you “Search properties for sale and to rent in the UK” and zoopla.co.uk brands itself as “smarter property search”. An article by The Guardian titled “property websites: 15 alternatives to rightmove” seven out of 15 of these websites use the word “property” in their url while only one uses “house”.
This is no accident; the UK real-estate industry often uses a concept known as the “property ladder”, a concept which we argue leads to irrational behavior.
Although the term is used by both professionals and the general public, it is paradoxically difficult to find a precise definition of “property ladder”. Dictionaries such as Collins English Dictionary (Collins 2010) and Longman Dictionary of Contemporary English (Longman 2005), and even real estate specific works such as Dictionary of Real Estate Terms (Friedman et al., 2000) and The Glosary of property terms (Parsons ed, 2003) have no entry for Propperty Ladder, even journals specifically written about the ladder (Lemanski, 2011) do not provide a definition.
When definitions can be found they often vary significantly from each other suggesting that there is no true definition for “the property Ladder”, even though this concept is at the heart of British society.
It seems that the concept of “property ladder” meld property and social ladder, thus leading people to a belief that “home-ownership” conveys social status. In other words, success is reflected by the size and post-code of an aspirational home.
For most first-time buyers, the first step of the ladder involves a mortgage.
An inconvenient truth: a mortgage is in essence a leveraged asset buyout.
Few people are able to make an accurate risk-assessment when applying and ultimately getting a mortgage.
Unless you were working in a specific sector in finance, it would not occur to most people to engage in a leveraged buyout. Yet, this is what we all do when a bank accepts to grant us a mortgage; we borrow significant amounts of money to have what in most cases is only the illusion of ownership. (It is striking that different formulations of the same concept lead to opposite patterns of behaviour; imagine how many fewer commissions would a real estate agency make if people borrowed money using the LBO frame).
As mentioned above, the term property-ladder in the UK has been used by both industry professionals (brokers, lenders, journalists) and the general public, to imply a steady, systematic ascent to greater wealth and happiness.
It also strongly suggests that first-time buyers will progress upward, but never downward, till the end of their lives, safe in the knowlegde of having accumulated the maximum value for their properties.
Furthermore, the industry openly uses and exploits the concept of property ladder. Indeed, Channel 4 in the UK airs a show whose title is Property Ladder.
The way this concept contributes to the illusion of outright ownership, is by encouraging people to enter into a buy-sell-buy cycle every few years. The consequence is that a a 20 or 30-year mortgage is never paid in full to the lender so the borrower will never be a 100% owner. This partial ownership is justified as a means to ascend the housing ladder.
In the UK the situation is further exacerbated by the distinction between “freehold” (building and ground ownership) and “leasehold” where a landlord owns the ground and leases a property for a given number of years.
Et tu? (is the public is also guilty?)
The public bears its part of responsibility in fueling this system. For instance, its perception appears to be that a home should be purchased as early as possible in life to avoid being ’left behind’ by the market. [Banks et al. (2002) that “British households appear to move into home ownership at relatively young ages”(p. 1).]
Another important bias is loss aversion as described by Kahneman and Tverskys (1979; Kahneman, 2002). There is greater weight given to loss of value than to the prospect of more gains. In practice, as David Genovese and Christopher Meyers demonstrated in their paper influential NBER paper this means that some owners who face the prospect of nominal loses “set higher asking prices of 25-35 percent of the difference between the property’s expected selling price and their original purchase price”.
In summary, the “property-ladder” approach to housing is poorly understood and often leads to irrational behavior. We want to project an ever-increasing status in society by buying homes without outright ownership and with other people’s money. The risks we incur, such as defaulting on payment, for this illusion are mostly underestimated, ignored or we are simply unaware of.
Diego A. Salzman
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