Oct 20, 1997 - always been a relatively small part of the housing market (Table 2). ... quite common for tenants to own a secondary residence or even rental housing. ...... 23. In 1960, one half of all mortgage credits had fixed annuities.
HOUSING POLICY TOWARDS OWNERSHIP IN SWITZERLAND Philippe Thalmann 1
Professor of construction economics
Swiss Federal Institute of Technology, Lausanne
20 October, 1997
Abstract
The proportion of home owners in Switzerland is the smallest in the OECD. But is this a problem? Should measures be taken to promote home ownership? Recent experience in the UK and Sweden warns us of the macro-economic instability that a large proportion of home owners can bring. What is being done on that account? And what more could be done? It appears that interesting instruments have been developed by the federal authorities to lower the financial burden, particularly in the early years of ownership, and that these principles are being adopted by private lenders. An important issue that has not yet been addressed by Swiss housing policy is the perception of consumers that buying one’s home is a risky investment.
1
I am grateful to Philippe Favarger and Alastair McFarlane for expert research assistance, and to the editors of this volume and Peter Gurtner, Henner Kleinewefers and Rudolf Strahm for valuable comments. They all bear no responsibility whatsoever for this paper.
2
Introduction One striking feature of the Swiss housing market is the very low proportion of households that own their home. This proportion is the lowest in the OECD, at 31.3 per cent in 1990. This compares to owner-occupation rates of twice that size in many other OECD countries (Table 1). There is a wide variation within Switzerland. The owner-occupation rates in primarily urban cantons such as Geneva (13.8 per cent), Basle-City (11.0), and Zurich (20.9) are much lower while rural cantons have rates over 50 per cent. The owner-occupied sector has always been a relatively small part of the housing market (Table 2). *** insert Table 1 *** *** insert Table 2 *** The low proportion of home owners does not mean that so few people own real estate. It is quite common for tenants to own a secondary residence or even rental housing. In 1990, 68.8 per cent of all housing units belonged to individuals. 2 Much of that property is concentrated in the hands of few, however. Only 4 of the 69 per cent of tenants own some residential property, mostly secondary residences (Gerheuser and Sartoris, 1988, based on a survey in 1986). One may also consider that households participate in the housing property market through pension funds (5.9 per cent of all housing units in 1990), life insurance companies (3.4 per cent) and real-estate investment trusts (1.4 per cent). The relatively small size of the owner-occupied housing stock is not at all a sign of poor housing conditions. Its complement is a private rental sector that provides comfortable housing to most households and adequate opportunities to private investors. In comparison to other countries, regulatory interference (e.g. rent control) is moderate and housing policy is favourable towards rental housing. The provision of rental housing relies heavily on private initiative. On the other hand, little is done to promote home ownership, although the issue is one that is often on political agendas. Because not promoting home ownership is so unusual in international comparison, this paper focuses on that element of housing policy. It gives some clues why home ownership is so low in Switzerland, although no definitive explanation exists. It also proposes measures for facilitating the accession to ownership. The paper addresses the following questions: Why should home ownership be encouraged? That question is debated both in Section 2 and with special emphasis on macro-economic aspects in Section 3. What are current policies towards home ownership in Switzerland? (Section 4) How can home ownership be encouraged efficiently? (Section 5) Answering these questions will bring us closer to understanding whether the low ownership rate in Switzerland is an indicator of an inefficient allocation of resources relative to other OECD countries. If the housing and financial markets
2
That is the sum of 27.8 percent owner-occupied main residences, 30.4 percent rental housing and 10.6 percent secondary residences, vacant homes and others.
3
in Switzerland are not efficient in allowing people their choice, then it may be worth seeking policy solutions.
Rationale for Promoting Home ownership Economists usually seek a rationale for policy intervention in market imperfections that lead to inefficiencies. In the case of owner-occupied housing, a market completely free of public interference would suffer from high transaction costs, because the good is bulky and immobile. It would suffer from informational asymmetries, because of the heterogeneity of housing, and it would be rather thin for the previous two reasons. Whether these imperfections lead to inefficiencies in themselves is not clear and correction of any inefficiencies that arise may be constrained by the imperfections themselves (Arnott, 1987). Social objectives are often advanced to promote policies in favour of owner-occupied housing. For example, home ownership may be regarded positively as a preferred vehicle for consumer saving, allowing households to share in rising real-estate prices. Today there exist better ways to that end, such as real-estate investment trusts (REITs), which allow for diversification. Home ownership is also seen as a way to provide a strong link with the community, or as a means to better quality housing. 3 De Neufville and Barton (1987) explain the US' pursuance of pro-ownership policies over prolonged periods of time by the adherence to a myth: the Jeffersonian myth of the yeoman farmer as a pillar of the democratic society. In the USA as in Great Britain, favourable tax treatment was granted to home owners that was not extended to landlords, while rent control and other regulation discouraged investment in rental housing. Housing policy in Switzerland is rather oriented towards protecting tenants and encouraging the construction of rental housing. The reason for low ownership rates may be imperfections that are inherent in the land, housing, construction and financial markets. There are also tax and legal barriers. In Switzerland, condominium-type ownership was impossible under civil law until 1965. 4 Promoting home ownership should be directed at removing these barriers. In 1988, the UN General Assembly approved the priority of 'enabling strategies' in response to housing conditions that were perceived to have worsened in most of the world. According to Mayo and Angel (1993), the correct housing policy should be the reform of institutions and regulations to let housing markets and related markets function more efficiently. The authors discourage direct intervention by governments as it may only lead to a misallocation of resources and no fundamental improvements. In Switzerland, fundamental improvements would consist of further steps against price agreements in the construction industry, easing
3
4
Choko (1993, p. 23) refers to Switzerland, 'one of the wealthiest countries, with the lowest percentage of home owners, and definitely one of the least conflicted societies, with the bestmaintained housing', to refute such arguments. The principle 'superficies solo cedit' in Roman law defines the owner of the land as the owner of every building situated on the land. A strict application of that principle had lead to forbidding the separate ownership of apartments from 1912 to 1965.
4
of land-use and construction regulation, unrestricted rights of real estate ownership for foreigners living in the country, and further development of the housing finance sector. Finally, a few arguments against encouraging home ownership should be considered (macro-economic reasons are developed in Section 3). They are related to the fact that most households mix tenure choice with the choice of housing, both in their aspirations and when they buy a home. They move into larger, higher quality housing, preferably single-family detached houses outside the central cities. As a result, 56.7 per cent of owner-occupied housing is single-family houses, even though such houses make only 21.3 of the housing stock (not counting second homes). Households feel that if they make the effort of saving the required equity, they should be rewarded with greater housing comfort. This aspect is another distinct feature of the Swiss housing market that explains why ownership is so rare in Swiss cities compared to larger foreign cities. 5 This feature singularly complicates the promotion of home ownership. Indeed, it may require helping households to move to more expensive homes. It is not clear that the role of government is to subsidise that move at the expense of other goals in the national housing policy. That feature also forces the policymaker who promotes ownership to consider the potential environmental and fiscal effects of suburbanisation and urban sprawl. The promotion of a greater proportion of home owners should not be blind to demographics. The home ownership rate stagnated in the United States through the 1980s, very much as it did in Switzerland. Home ownership did not become less affordable or less advantageous, rather to the contrary (Green, 1996). The change in demographic composition of the population accounts for the decline, because different types of household have very different ownership rates. There were many more single-person households in 1990 than in 1980. In Switzerland, demographic changes are not favourable to an increasing share of home owners. The proportion of one-person households, for instance, reached 32 per cent in 1990, and the proportion of two-person households 19 per cent. Households become smaller, older, less stable, and more mobile. In addition, nearly all population growth is due to positive net immigration. It is not obvious that home ownership is still an ideal for such a population. The structure of the Swiss population appears rather more favourable to home ownership than that of other European countries in terms of household size, but not as regards aging and the proportion of foreign households. Despite the potential ambiguity concerning the overall welfare effects of home ownership, one may agree on a minimal program: imperfections in related markets prevent those who have the ability and future income to purchase housing from doing so; housing policies that break down barriers that serve no higher objective without being simply a subsidy to owneroccupation are not contrary to other social and economic objectives. The promotion of home ownership is also less controversial (but possibly less effective) if it is concentrated on the
5
In the cities of Geneva, Zurich and Basle, the proportions of home owners were 5.0, 6.2 and 9.1 per cent respectively in 1990. In 1984, 29.5 per cent of all inhabitants of Manhattan owned their home. In the city of Paris, that proportion was 24.2 per cent, in Seoul 40.8 per cent (1985), and in the agglomeration of Tokyo 42.3 per cent (1983) (Choko, 1993).
5
ownership of high density housing, that is, if it merely aims at changing tenure status and not housing status.
Macroeconomic Reasons to Promote (or Not) Home ownership Severe and prolonged recessions in several European countries, most notably the UK and Sweden, have revived interest in the relation between the housing sector and the business cycle. Indeed, different analysts attribute the economic problems of those countries since 1990 to what happened in the market for owner-occupied housing. It is important, therefore, to address the issue of promoting home ownership not only from a micro-economic, individual choice perspective, but also from a macro-economic perspective. That may suggest that a free-market share of owner-occupation is too high. Unfortunately there exists little direct evidence on the economic behaviour of home owners versus tenants in Switzerland. It is even more difficult to estimate the impact of changes in real-estate prices on choices as they are not registered in a statistically satisfactory way. We must therefore refer to foreign estimates to guess what could happen in Switzerland in an economic downswing if the proportion of home owners were larger.
Consumption and Saving A greater share of owner-occupants means that more households participate in the real estate market. They are rather heavily exposed given the required down-payment and amortisation. That has consequences for their consumption and saving behaviour. Empirical research suggests that anticipated increases in real-estate prices lead consumers to buy more of those assets, as they strive to benefit from the capital gains (Peek, 1986, Ziegert, 1990). Global consumption increases when real estate wealth increases, for instance under the influence of a liberalisation of financial markets (Bhatia, 1987, Hendershott and Peek, 1985, Koskela and Virén, 1994, all using macro data), but this increase concerns almost exclusively durable consumption goods (Ziegert, 1990, with micro data). Those estimations were performed over periods of increasing house values. By symmetry, one would expect that the recent deflation contributed to depress household consumption, of durable goods particularly. 6 Berg and Bergström (1995) show concomitant strong decreases in house prices and in consumption in Sweden since 1991. They obtain a better fit of consumption when housing and financial wealth are separated. One should probably distinguish between decreases and increases in housing wealth. Indeed, what evidence there is suggests that the response of consumption is much stronger to capital losses than to capital gains. Engelhardt (1996) uses micro data to examine the incidence of house price
6
Increasing unemployment, which lowers expected permanent income and increases risks in relation with liquidity constraints, is another factor for the current stagnation in private consumption. The influence of that factor cannot be assessed over periods of economic boom.
6
changes on voluntary saving, that is, on the increase in wealth that is not due to changes in asset values. His sample contains households that experienced capital losses on their house along with households that experienced capital gains. The former increased their voluntary saving by 35 cents for every dollar loss on their house. The latter did not alter their voluntary saving. Those results confirm the view that the decrease in real-estate prices in the early 1990s depressed household consumption, as the losers tried to restore their wealth. The incidence of house prices on consumption is not obvious from a theoretical point of view. Single shocks to house prices should have little impact for households which plan over a long horizon, particularly if the shocks were anticipated (Miles, 1994, chap. 4). Indeed, the change in wealth is largely offset by the change in the user cost of housing that goes in the same direction. It takes changes in the rate of change of house prices to significantly affect private consumption. The evidence that real estate prices affect consumption suggests, therefore, that the theoretical model of intertemporal consumption smoothing is not a good description of real behaviour. In particular, households are subject to liquidity constraints. It becomes necessary to look at institutions to predict consumption and saving responses. An increase in house prices is an increase in the collateral available for consumption credits, which may help liquidity constrained households to increase their consumption, provided that they are allowed to increase their mortgage debt. A decrease in house prices locks in households, because they can no longer raise the down-payment for a new, even smaller house. Other research suggests that it is not so much changes in asset values that affect the consumption of home owners. King (1994, table 2) looks at average expenditures of home owners in the UK in 1989 and 1991, a period of sharply increasing interest rates and decreasing house prices. The data reveal a marked difference between home owners who own their house outright and those who are still faced with mortgage debt. The former increased their non-housing expenditures by 1 per cent while the latter reduced those expenditures by 4 per cent in real terms. King sees in those figures an illustration of Fisherian debt deflation. It is worthwhile to look a little closer at the UK housing market in the eighties and early nineties. Indeed, few other countries have pursued equally energetic policies of promoting home ownership as the UK under the government of Mrs. Thatcher. The share of home owners increased from 55.8 per cent in 1981 to 67.2 per cent in 1990. That was obtained on the supply side by the sale of council housing at a discount of 33 to 60 per cent and by the liberalisation of the mortgage credit market with resulting fierce competition among lenders. 7 On the demand side, increasing real incomes, falling unemployment and general optimism in the future were driving forces. The boom in house prices, beginning in 1986, is widely believed to be responsible for the consumption-led increase in inflation. When interest rates rose in response to inflation and employment faltered, a reversion began in 1988. Recent
7
In 1989, two first buyers out of three took up mortgages for more than 90 percent of the purchase price, and half of them even went beyond 95 percent (Bank of England Quarterly Bulletin).
7
home owners experienced 'large, rapid and frequently unforeseen increases in monthly mortgage repayments' (Doling, 1993, p. 586). Not only did interest rates soar, but banks pressured debtors to reduce outstanding loans. Indeed, the borrowers' collaterals (value of home) were declining. In London, houses lost a third of their value between 1989 and 1992. It is estimated that 2 million households had a mortgage debt superior to the value of their home in 1993. They are locked in houses they cannot sell. Households seeing the value of their asset decline faster than their debt borrow and consume less. When the number of households plagued by this difficulty is large, a vicious circle appears: low consumption depresses the economy, unemployment remains high and house prices cannot recover. To find a way out of it, housing associations buy the homes of families in serious arrears since 1992. They rent those homes to the same residents or to homeless families. In short, promoting home ownership may expose the economy to a greater volatility of aggregate consumption as it ties households to the swings in the real-estate market.
Production Subsidies granted for the purchase of targeted assets such as one's home are likely to stimulate saving, but since it must be channelled into particular uses to benefit from the subsidy, there may be too much spending on that particular asset. The distortion in the allocation of savings may more than offset the gain from increased saving (Koskela and Virén, 1994). 8 The favourable tax treatment of home ownership in the United States, for instance, was shown to have that effect and to reduce productivity growth (Hendershott and Hu, 1981). Comparing the returns from housing and non housing investment, with due account for volatility, Mills (1989) estimates an unexplained differential of returns that, according to Hendershott (1989), implies over-investment in housing by as much as 50 per cent between 1929 and 1986. Using different data, Hendershott (1987) estimated overinvestment by 10 per cent under the tax law of 1985. In Switzerland, the share of residential construction in GDP is one of the highest of the world with 7.1 per cent (Table 3). That shows that heavy promotion of home ownership in not necessary for a rate of investment in housing that is probably inefficiently high. High Swiss investment in real estate is rather attributed to artificially low rates of interest on mortgage credit). Promoting housing construction does not necessarily distort capital allocation, if other types of investments are also favoured. Switzerland is a world leader in total construction (17.9 per cent of GDP in 1990) and in total capital accumulation (27.1 per cent). Yet, GDP growth is one of the lowest in the world. That suggests that the promotion of home ownership
8
Goulder and Thalmann (1993) assess the consequences of the 1986 U.S. tax reform, which levelled the taxation of capital at a higher level but spared housing, under the viewpoints of the accumulation and the allocation of capital. They show that the reduction in savings more than compensates for the allocative gains.
8
should be at the expense of, and not parallel to the promotion of rental housing. 9 It should focus on the conversion of rental to owned housing to avoid sinking even more capital into bricks and mortar. An increase in housing investment cannot be fully avoided, however, as long as home owners use more land and capital (Section 2). *** insert Table 3 *** Home owners are generally less mobile than renters, so a greater share of home owners is likely to impair the efficiency of the labour market (Minford, 1988). The mobility of workers gains in importance with European integration. Priemus (1993) predicts that this will put national housing policies under pressure and require some coordination. Low mobility may also imply more commuting, as people would rather respond to a change of employment by commuting farther rather than moving. More important, maybe, low mobility implies inefficient allocation of housing space. It implies crowding or, more frequently, under-occupation of owner-occupied apartments when family size changes. In fact, the mobility of tenants is also reduced if some form of rent control leads to discounts related to the length of residence. 10 Those rebates even occur on free markets, as asymmetric information induces landlords to retain good tenants (e.g., Clark and Heskin, 1982; Guasch and Marshall, 1987, for a contrary view). Strassmann (1991), comparing cities of 16 countries, shows that there is no correlation between mobility and ownership rates. The little evidence that exists on mobility in Switzerland suggests that home owners are much less mobile than tenants. It is estimated that 4 per cent of owner-occupied apartments change hands every year, against 21 per cent of rental apartments (Marti, 1995). With the high proportion of rental housing, the average mobility rate of 15 per cent is very high in international comparison. In short, promoting home ownership may be rather damaging to aggregate production efficiency in Switzerland, given the low mobility of home owners and an already large housing stock. The negative effects are smaller if households buy existing rental apartments. The mobility of home owners may also increase if a functioning real-estate market emerges as the number of owners grows, or if the promotion of home ownership involves reducing barriers to sales.
9 10
Other countries, that massively subsidize owner-occupied housing, dissuade more or less deliberately rental housing, so that overall housing investment is less than in Switzerland. The discounts were estimated at 0.8 per cent per year of occupation in Lausanne (Thalmann, 1987).
9
Current Policies Federal housing policy currently rests on a 1974 law, the 'Law encouraging housing construction and accession to home ownership' (here referred to as the LCAO). It is the first law to give the federal government the means to promote explicitly home ownership. The 26 cantons and many of the 3,000 communes also promote housing, but there is not enough room here to examine all those policies. No statistic exists to describe the relative importance of federal, cantonal and communal support, but we can safely state that for households wishing to buy a home federal support is most important. That statement is not quite true, however, regarding the tax treatment of home owners. Indeed, cantonal and communal income taxes are much more important than the federal income tax. The discussion of taxation (Section 4.2) will therefore consider local taxes.
Federal Support for Home ownership The primary instrument for promoting accession to property is a schedule of loans ('prime abatements') designed to lower the initial cost of new housing. The annual loans are reduced over time, then they are reversed, so that the beneficiary pays back the loans with interest. The schedule is set up for 20-30 years to make the financial charges effectively paid by the beneficiary grow with the general trend of prices and incomes. Means-tested and nonrefundable subsidies may further reduce charges. The home-buyer may also apply for federal credit guarantee separately from the loan and subsidies. It allows him to borrow at a preferred rate with a smaller down-payment. Support is available for the construction, the purchase and the renovation of owner-occupied housing. The prime abatements are designed to offset the front-end loading problem. They are calculated as the difference between annual user cost and a target charge. The user cost is defined to include interest and amortisation, the opportunity cost of funds and a provision for maintenance. The target charge is about 5 per cent of the purchase price in the first year. It is increased by about 5 per cent every second year (the rate depends on market interest rates). 11 When the target charge exceeds the user cost, presumably after 10-15 years, the household begins to reimburse the loan with market-level interest, typically over 15 more years. The beneficiary may prepay the debt, which is advantageous when interest rates decline. Reimbursing the debt is required before selling the apartment and permission is needed for renting the property. As the prime abatements involve no subsidy, they are not subject to fixed income or wealth ceilings, but the federal housing office (FHO) does not grant them if the target charge is either excessive (greater than 1/3) or low when compared to the applicant's income, nor if his net wealth exceeds 1/2 of the dwelling's price. There are limits on land and construction costs, but they are rather high and responsive to the quality of the dwelling and its location.
11
The biannual increase was just lowered to 3 per cent from 6 per cent to account for currently low inflation and interest rates and stable market rents. It has been as high as 9 per cent.
10
The loan guarantee covers second (junior) mortgages that extend the first mortgage, which covers usually 60 to 65 per cent of acquisition cost. While junior mortgages allow one to borrow 80 per cent, that limit can be raised to 90 per cent of the purchase price with the guarantee. Thus, it allows a household to buy a home with only 10 per cent down-payment. Since 1985, when the FHO introduced regulation limiting the interest rate on secured credits, borrowers also benefit from a lower interest rate. Before extending the guarantee, the FHO estimates the risks, but it does not verify whether the applicant needs it to qualify for credit. The FHO estimates that reducing financial costs is always a valuable objective. In fact, it is quite possible that the guarantee program, with its limited quotas, distorts the allocation of credit at the expense of non-insured borrowers. The FHO argues that the only costs of the program are administrative ones, as losses for the federal government have been extremely rare. This began to change in 1995, when the Office faced losses for the first time. They reached SFr. 26 million by the end of 1996. More could come as prices continue to decline. Between 1975 and 1993, guarantees were issued for SFr. 6 billion (the figure includes both rental and owner-occupied housing). 12 The same forms of support and a few more are available for rental housing. The FHO supports roughly two rental apartments for one owner-occupied apartment, which reflects the relative size of the two markets. Thus, the FHO cannot be suspected to favour one tenure against the other. Between 1976 and 1981, fewer than 500 households per year took advantage of some form of federal support to buy a home. Between 1982 and 1990, they were approximately 1,000. In 1991, the number soared to 4,000, as Swiss interest rates attained levels never seen in the later half of the century. 13 Over that whole period, an average of 40,000 apartments was built every year. The statistics are not available to compute the proportion of accessions that benefited from federal support, but it can be estimated to be well below 10 per cent, even if it may have exceeded 20 per cent in recent years (Schulz et al., 1993). Of the households benefiting from federal support, almost 90 per cent used the prime abatements and 60 per cent used the loan guarantee. The guarantee covered between 15 and 25 per cent of the loans. Schulz et al. (1993) estimate that about one half of the households which received federal support needed it to buy a home. That suggests that a sizeable part of federal support is lost on households which do not need it. It does not prove that those households would have bought their home without support. They may have used it to buy a larger home. The survey of Schulz et al. shows that home owners who benefited from federal support and those who did not all had ratios of financial charges to income close to 30 per cent in the first year, the maximum banks accept for extending credit. That ratio is stable through time, even though house prices have been rising and interest rates changed considerably. It appears that households always buy the housing unit they can afford. 12
13
In comparison, a housing unit costs, as a gross average, SFr. 400 000. The federal insurance does not cover the full mortgage but only junior mortgages, that is roughly one fourth of the purchase price. The SFr. 6 billion would thus suffice for 60 000 apartments between 1975 and 1993, compared to the 764 000 which were built. The number of owner-occupied apartments benefiting from federal support has since come down to about 3000 in 1994.
11
In short, federal support is a set of interesting instruments, but it has little effect: it helps less than 10 per cent of buyers, and half of them did not need it. There exist plans for giving up the federal loan guarantee and prime abatements for home owners in 1998. The promotion of owner-occupation that involves no subsidies would be handed over to mortgage guarantee co-operatives, which could obtain security backing from the federal government.
The Tax Treatment of Home owners It has long been held that personal income tax advantages can substantially favour ownership (e.g., Rosen and Rosen, 1980). Hendershott and Shilling (1982) estimated that those advantages increased the proportion of home owners in the United States by approximately 4 percentage points. Recent evidence suggests that taxes are capitalised in house prices (Capozza, Green, and Hendershott, 1995, 1997). As a consequence, tax advantages may have no effect on the user cost of housing or tenure choice but are simply an income transfer to those who owned housing before the favourable tax policy was expected. Swiss tax authorities are not very generous to home owners. Indeed, an implicit rent is imputed as income. The implicit rent is estimated by the cantons for the communal, cantonal and federal income taxes (the former two are heavier than the latter). Almost all cantons have tried to alleviate home owner taxation by estimating the implicit rent conservatively, often below mortgage interest paid. In some cases, the federal tax authority corrects that assessment for its income tax. In some cases, the Federal Court has cancelled tax legislation implying obvious under-assessments. Indeed, the Court has ruled that tax equity has precedence over the promotion of home ownership. Therefore the imputed rent should amount at least to 70 per cent of the comparable market rent. Taxing the implicit rent with deductibility of mortgage interest allows for flexibility in the promotion of home ownership. The parliament can decide what tax rebate it wants to grant to home owners. In contrast, the US and UK systems of zero imputed income with full deductibility of mortgage interest not only hide the subsidy but are also much harder to adjust. In fact, the parliaments never state explicitly the tax advantage they intend to grant to home owners, which is why the Federal Court could impose a ceiling on that advantage. In any case, current tax advantages to home owners are not targeted at encouraging accession (and even less mobility), since they grow with the length of ownership. Imputed rents are estimated less frequently than changes in rental rates on the market. The assessment of apartments for wealth and property taxes is even less frequent and, in most cantons, a rebate is granted which increases with the length of the holding period. Even the capital gains tax is lower for longer holding periods (to prevent speculative trading). Of course, tax advantages granted beyond the year of purchase are also valuable to home owners and may influence the choice of tenure. However, households which discount the future attach less value to those advantages at the time of deciding to buy than their cost in current public budgets. Furthermore, any under-estimation of economic income and wealth is
12
more profitable to households in high tax brackets. Those households are not the marginal home buyers. The bias in favour of long-time owners can be explained by the special problems of the retired. Taxing the imputed rent, even with full deductibility of paid interest, is a strain for them. They have often repaid a large part of the mortgage debt, which is small compared to the current value of their home. The imputed rent is therefore a major component of their income. As the income tax cannot be paid out of implicit income, they may suffer from a shortage of disposable income. That argument is always put forward in any debate about narrowing or increasing the gap between imputed and market rents. There is a paradox here: home ownership is promoted as a means of providing for old age, but taxes may put home owners in difficulty after retirement, which is avoided by granting tax rebates to all home owners. Coherence would require the retired to live from their savings. When a large part of their wealth is in the form of owner-occupied real estate, they can be expected to withdraw part of their equity through refinanced mortgages, just as elderly tenants are expected to draw on their savings to pay the rent. Elderly home owners must also be given the possibility to borrow on their home equity. Promoting such a solution with the elderly and the banks is necessary if the proportion of home owners is to be increased while the population is aging. Any comparison of the user costs of rental and owner-occupied housing must take into account the taxes charged to the landlord but borne by the tenant. If imputed rents were equal to market rents and capital gains were taxed uniformly (instead of allowing a home owner to avoid taxation by using the proceeds of the sale to buy a new home), taxation could be close to neutral for tenure choice. As it stands now, home owners are favoured. However, there is one tax that is blind to tenure but is a heavy burden to home owners: the transfer tax. It is levied by the cantons or communes at rates around 4 per cent on net sales proceeds. There are other fees, most notably the notary's fee, which increase (at a decreasing rate) with the price of the transaction. Together, a transaction may cost as much as 6 per cent of the sales price, without counting commercial costs and risks. A household that buys a home with 20 per cent down-payment loses over one fourth of its equity when it sells it without capital gain, even if it intends to buy a new home. The transfer tax is an important source of revenue for the cantons or communes, which will not renounce it without compensation. It could be replaced by raising property taxes. Another solution is to renounce the transfer tax when the seller buys a new home. 14 Those measures would make ownership more attractive to mobile households. In short, taxation is not as favourable to home owners as in many other countries, and the tax advantages benefit more long-time owners than new owners.
14
In the canton of Zurich, the transfer tax is owed in equal parts by the seller and the buyer. The seller is dispensed when he buys a new home.
13
Enabling Home ownership Recent home owners in Switzerland pay an acquisition price equal to five or six times their yearly income. In the U.S., houses cost the equivalent of three annual incomes, and in the UK that ratio reached a peak of 4.65 in 1989. The median for all industrialised countries is estimated at 3.9 in 1990 (Mayo and Angel, 1993). Even though housing units are expensive in Switzerland compared to incomes, financial charges need not weigh more heavily in household budgets than in other countries. Consider a house costing five annual incomes. If the interest rate is equal to 5 per cent and the household contributes 20 per cent equity, the financial charge is 20 per cent of annual income. Add 1 per cent of the acquisition price for maintenance expenses and 1 per cent for amortisation, which is very slow in Switzerland. You obtain an initial budget share of 30 per cent for new housing, which is the limit lenders tolerate. Low interest rates and slow amortisation have made expensive houses possible. Mortgage interest rates have remained between 4 and 6 per cent throughout the 1970s and 1980s. 15 This is not to say that land owners and house builders have claimed all the benefits of low interest rates. Indeed, housing comfort and housing quality for both owner-occupied and rental housing are high in Switzerland in international comparison. Starting in 1989, Swiss interest rates rose dramatically, in conjunction with international interest rates. It has been claimed that this was the end of Switzerland as an 'interest island'. Today, interest rates have returned below 5 per cent, but growth in house prices and incomes has practically vanished. Construction costs have come down by 10 per cent since 1989, land prices in some regions even by 30 per cent. On the other hand, household incomes are in a state of stagnation and the fear of unemployment is widespread, so that we do not observe many of them taking advantage of the lower prices. Costly housing alone cannot explain tenure choice, as rental housing is very expensive too for much the same reasons. 16 High purchase prices raise the barrier to accession in conjunction with mortgage qualification conditions. They affect particularly younger households, which also feel the strongest desire to change tenure. They have been shown to be the most important factor in determining tenure choice in the United States (Linneman and Wachter, 1989). There exist several routes to facilitate accession to home ownership. One route amounts to removing impediments to condominium housing, which is generally cheaper than singlefamily housing (Section 5.1). Expensive housing implies heavy financial charges in relation with interest and amortisation rates. A second route to facilitate ownership aims at spreading financial charges over a longer time and alleviating the mortgage qualification conditions (Section 5.2). Those 'enabling strategies' are ineffective if households perceive that investing practically all of their equity in that single asset is too risky. That perception is rather new, but
15 16
Over the same period, the CPI inflation rate has ranged from 0 to 10 percent, with an average of 4 percent. Swiss rents rank at the top of OECD countries (OECD, 1995).
14
it deserves to be addressed by developing means of protecting home owners against adverse price and interest rate shocks (Section 5.3). None of those measures may be effective in promoting home ownership if it is capitalised in higher land and construction prices. Land hoarding is common and the ancillary industries of the construction sector are cartelised. 17 Benefits to home owners may also be captured in higher margins by the lenders. That the Federal housing office had to introduce regulation to obtain lower interest rates on the credits it secures (Section 4.1) suggests a lack of competition in the credit sector. As long as the supplies of land, construction and credit remain non-competitive, subsides to encourage home ownership and housing production, or even mere enabling measures may end up benefiting the interests restricting efficiency.
Removing Impediments to Condominium Housing As was indicated in Section 2, most households dream of a detached house when they dream of ownership, or at least a more spacious apartment. However, such housing is expensive in Switzerland. Households that buy condominiums spend approximately 20 per cent less than those that buy detached houses. No significant increase in the proportion of home owners is possible without developing condominium housing. The individual ownership of a part of a building is an accepted contract only since 1965. Since then, condominium housing has picked up markedly and has become the fastest growing segment of the housing market. Yet the share of home owners actually declined between 1960 and 1990 (Table 2), while it increased in Spain, for instance, from 51 to 75 per cent. Merely making condominium housing legal again was not sufficient to increase ownership. Indeed, new condominiums were mostly built as such, with very little transformation of rental apartments. An increase in the proportion of home owners within reasonable time is only possible through the sale of rental flats. At present there is considerable reluctance among owners of multifamily rental housing to sell off their asset. The moderate form of rent control existing in Switzerland does not remove all profitability from owning and operating rental housing. 18 In addition, tenant protection against eviction and specific laws in several cantons raise barriers to the sale of rental housing. Challenging them bears considerable political risk. Tenant unions have repeatedly managed to block the relaxation of legislation that restricts sales. Clearly a solution must be found on the supply side, that gives the landlords an interest in selling off rental housing and that is acceptable for households that remain on the rental market. Drastic measures against the private rental market, as have been pursued for
17 18
Those practices are facilitated by restrictive zoning laws and favourable tax treatment of land hoarding, and by building codes of amazing complexity (OECD, 1994). Tenant protection is part of regular contract law. Its main elements are moderate forms of protection against eviction and against 'excessive' rents. Rents are not excessive if they yield the landlord a 'normal' return on his equity. The appreciation of the unit is not counted in the return. In addition, the landlord may raise rents to protect his equity against monetary erosion, while the 'normal' rate of return is a nominal interest rate on the market. Thus, the law allows unwillingly for returns that are considerably higher than market returns in periods of inflation.
15
instance in Great Britain and Italy, may be effective at increasing rapidly home ownership (both via supply and demand), but they are not politically feasible in Switzerland. An abundant and diversified supply of apartments for sale might also increase the households' willingness to gain access to ownership in that form. In general, condominiums must become more attractive. They already have the advantage of being cheaper than detached homes. They could be even more advantageous if it were possible for households to own only their apartment and no part of the structure, the common surfaces and the land. Swiss law does not accept separate ownership of parts of building. Even condominiums (referred to as 'floor ownership') are co-ownerships of the land and building, combined with reserved rights to the apartments. In other European countries, an investor may own the land, the frame and the shared surfaces, which he rents to the owners of the apartments. One can also think of other collective forms of ownership, for example, a co-operative that would own several buildings and distribute costs more equitably across older and newer units (Kemeny, 1981). One variant between renting and full ownership is quite common in the UK: the leasehold, or ownership for a limited time (e.g. Harvey, 1992). As the property returns to the initial owner after 20, 50, or even 99 years, the purchase price is lower. The leasehold can also be granted in exchange for an annual fixed income. Contrary to a rental contract, the occupant may use his property as he likes, particularly concerning maintenance and transformations or its use as a collateral for mortgage borrowing. At the same time, the initial investor ('freeholder') is freed of management concerns. The leasehold is perfectly possible under Swiss civil law since 1907, but the legal framework was really detailed only in 1965. Public authorities lease land that they want to keep under control, sometimes even with buildings. In return, they impose rather strict conditions on their use. They charge a ground rent that is sometimes set at an unduly high rate such as the current nominal interest rate on mortgages, forgetting that the lessor is not exposed to money erosion. In short, it is the ownership of apartments that should be specifically promoted. On the supply side, it must become easier and more attractive to sell rental apartments. Housing would still be expensive to buy. Land prices and construction costs are currently regressing. Further reductions in the acquisition price can be achieved when investors accept to own the land and frame and to sell the dwellings, or when the property rights are transferred for a limited time.
Facilitating Financing The role of credit is to allow the buyer of housing property to spread the acquisition price over time. Without credit, housing charges would be concentrated on the year of purchase, or rather on the years of saving preceding the acquisition. If the home-buyer could finance the full house price with credit, he could match the path of rental payments charged by a landlord, that is, he could pay for his home in close correspondence with his usage of it. The cost of spreading the purchase price over time is of course the rate of interest. Besides
16
paying interest, the borrower is asked to contribute an initial down-payment and to amortise the debt. That puts a strain on household budgets, even if it has the nature of forced saving rather than user cost. In fact, low amortisation is a distinct feature of housing finance in Switzerland. It is time to look more precisely at how housing construction and purchases are financed. The borrower generally contracts two or three mortgages, with different interest rates. The first mortgage is served first in case of forced sale. It is generally considered to be of very low risk. 19 It amounts to 60 to 65 per cent of the investment cost. It is not amortised nor repaid until the building is sold. 20 More than 80 per cent of first mortgages have unspecified duration: they can be terminated with six months notice and interest rates can be modified unilaterally with two months notice. The variability of mortgage interest rates is dampened by political pressures, as they imply rent adjustments under the current regime of rent control. A second (junior) and sometimes a third mortgage raise the credit to 80 per cent. The interest rate on second mortgages is typically one half percentage point above that of first mortgages. Second mortgages are usually amortised over 20 years. Finally the buyer must contribute 20 per cent equity. Recently lenders have begun to individualise the terms of credit.
Next to those adjustable-rate mortgages (ARM), fixed-rate mortgages (FRM) over four or five years have become more popular recently. Their share in new issues increased from about 20 per cent in 1993 to more than 40 per cent in 1995, as borrowers wish to benefit from interest rates they perceive to be low. Those are not the only forms of housing credit, as we shall see. In principle, they should all be equivalent at the time of tenure choice, if adequately priced. This is not true empirically in the United States (Brueckner and Follain, 1989). Buyers spend 12 per cent more for a home they finance with an ARM compared to a FRM, ceteris paribus. There may be econometric problems with that estimate, or borrowers may be myopic about future interest rates. Households seem to respond to differences in the timing of payments. We must therefore examine the critical elements of timing, namely the required down-payment and front-end loading of financial charges. We shall examine them in turn. As housing units cost typically five or six annual incomes, a 20 per cent down-payment requires available savings of one annual income and more. That may considerably postpone the age at which households can buy their first home. 21 The problem has become more severe with the extension of forced savings for retirement in 1985. Yet, the required downpayment is probably not the most important barrier to home ownership. Many households
19 20
21
Interest rates are ½, more recently 1 percentage point above the rate on government bonds. Switzerland stands alone in the industrialised world with the wide-spread use of non-refundable mortgages. The consequence is an average mortgage debt of SFr. 70 000 per capita in 1994 (Swiss National Bank), which may be compared to GDP per capita of SFr. 45 000. Artle and Varaiya (1978) show with a life-cycle model how the liquidity constraint can discourage a household from entering ownership. Even if owner-occupied housing is cheaper than rental housing and even if the household could secure a mortgage with sufficient life-time wealth, it may not accept to reduce its consumption in order to accumulate the required equity.
17
have accumulated sufficient financial savings, but do not buy a home. When credit was granted practically without down-payment in the second half of the 1980s, it was used more for speculative purchases than for buying homes. Entitlements accumulated in pension funds may be used since January 1995 for a down-payment or to reduce mortgage debt, but very few contributors have (yet) used that opportunity. 22 A more stringent barrier than the required down-payment may be the generalised practice of estimating the affordability of housing in the first year of purchase. Banks compare the total financial charge in the first year, including amortisation, with current income. If they find the financial burden to be too high -- typically more than 30 per cent of income -- they extend no credit. That simple calculation is a very strong test of a household's ability to pay. Indeed, the financial charge is highest in the first year, before any amortisation lowers the debt, while the household's income usually grows over time. The incorporation of an inflation premium in the interest rate aggravates front-end loading (Kearl, 1979, Schwab, 1982). On the other hand, the times are gone when a home owner could be sure that his housing charges would recede over time and that his income would grow. Recent surges in interest rates and the stagnation in incomes have destroyed that confidence. Slow amortisation increases the risks, as the share of interest in the annual burden is greater. As a result, the test of the financial burden in the first year may actually be too weak. Banks now assess the income perspectives of an applicant before extending credit. Federal housing support addresses the down-payment requirement, front-end loading and, to some extent, lowers the interest rate (Section 4.1). Banks also offer credit instruments that flatten the path of payments. The advantages of the federal instruments are: (1) they were introduced about 15 years earlier, (2) the guarantee is free of charge, (3) the lender accepts a much longer repayment period, typically 25 years, and (4) he is very accommodating: he can wait for reimbursement and he does not worry too much about losses. The FHO is quite willing to reschedule a payment plan to avoid forcing a debtor into liquidation. The comparable instrument offered by banks to address front-end loading is the graduatedpayment mortgage (GPM). The interest rate is reduced in the early years, the difference to the regular rate being added onto the debt. Over time (5-10 years), the interest rate returns to the regular rate, presumably at the same pace as the owner's income grows. GPMs have yet to gain wide acceptance. The fixed annuity mortgage, is much more popular, with a market share between 15 and 20 per cent. 23 With that instrument, the amortisation is less in early years when interest payments are large. One potential reason for the difference in popularity of these two alternative mortgages is that the fixed annuity mortgage also protects the borrower against changes in interest rates. 22
23
Many perceive the reduction in the retirement pension after an early withdrawal of funds to be very serious, forgetting that their own home is also a provision for old age. Furthermore, early retirements are taxed almost like regular income. The little money which was withdrawn since January 1995 was mostly used to amortise more rapidly existing loans, sometimes to finance renovations and almost never to buy a home. The alternative possibility of using pension entitlements as a collateral is even less popular, as it does not significantly affect the terms of borrowing. In 1960, one half of all mortgage credits had fixed annuities.
18
A savings and loans network dedicated to housing finance also helps spread the payments more evenly, even extending them (in terms of opportunity cost) into the period before purchase. Savers accept a low return on their deposits in expectation of cheap credit when their turn comes to buy a home. Such a system exists in Germany. Specific savings' banks ('Bausparkassen') pay a below-market interest rate on deposits (typically 3 per cent) but offer mortgages at a rate that is just a fixed wedge above the rate on deposits (typically 2 per cent). Households must accumulate a 40 per cent down-payment. Since deposits finance mortgages to the same pool of people, credits are granted only when the funds are sufficient, but they are disconnected from market fluctuations in interest rates. The German government used to subsidise the system by adding a sizeable bonus to the deposit rate and by allowing the deduction of deposits and earned interest from taxable income. Those advantages were subject to income and deposit ceilings. Börsch-Supan and Stahl (1991) show that this system was quite popular with German households, even with those which are not entitled to the bonus and tax deductions. Recently the latter households began to leave the system, prompting the government to raise the income ceilings. Several Swiss banks propose a contract whereby reduced interest on deposits is compensated by reduced interest on a later mortgage. Such contracts have not yet gained wide acceptance. Banks point at the lack of government support through favourable tax treatment. One may add that the contracts are not disconnected from market conditions because deposits and mortgages are not isolated in a dedicated financial system. One radically different solution to the problem of high initial charges has the lender contribute funds as equity (Miles, 1994, chap. 8). Households could buy housing with fewer own funds, without burdening themselves with a heavy debt. They would pay interest, which may or not vary with market rates, and rent, which might be less sensitive to the conditions in financial markets. By bringing in equity, the lender would be entitled to part of the appreciation of the house, which takes off as much real-estate risk from the shoulders of the owner. Such a system of co-operative ownership is an intermediate mode between rental and (full) property housing. It poses other problems that need to be addressed, but experiments are under way. In short, both credit institutions and the FHO have devised solutions to the traditional financial problems of the would-be home owner – the down-payment and front-end loading. Their solutions all have the effect of exposing households longer to financial distress. In the first years, they even increase their debt, by the amounts of the base reductions. In addition, some households which compare the initial (reduced) charge with their current income may be tempted to buy more expensive homes. Evidence mentioned in Section 4.1 suggests that households buy a home that implies roughly a 30 percent financial charge compared to their income in the first year. If their income does not grow as expected, they may have difficulty paying interest charges that grow steadily. 24 Alternative solutions that make property
24
In their comparison of home-owners who benefited from federal support and home-owners who did not, Schulz et al. (1993) show that fewer in the former group managed to lower the ratio of charges to income over time. On average, that ratio remained constant in the sample examined.
19
affordable to households with lower or less stable incomes are a dedicated savings system and financial contracts that allow the creditor to contribute funds as equity.
Promoting Risk Sharing We saw in Section 3.1 that in the UK as elsewhere home ownership is no longer associated in popular perception with security and gain but with risk and loss. That is clear also in Switzerland. Professionals invite tenants to take the step of ownership now that house prices and interest rates are low, but the response is too weak to provide stimulus to the real-estate and construction markets. It appears that the swing in interest rates observed by households since 1989 discourages many from buying their home. The volatility in interest rates may be just as harmful to housing investment as are high levels of interest rates (Deng et al., 1996). The adjustable-rate mortgage, the dominant form of housing credit in Switzerland, represents a considerable risk for the borrower when inflation or the real interest rate increase. Those two changes often cumulate, as central banks may respond to an inflation shock by raising real interest rates. The problem is particularly severe for recent buyers, for whom amortisation and increasing incomes have not yet eroded the debt-to-income ratio. Since house prices may react more rapidly to higher interest rates than the general price level, those heavily indebted households find themselves with negative equity. This is no longer an abstract problem in Switzerland. Hoesli et al. (1997) estimate that condominium prices in Geneva decreased by 25 per cent between 1990 and 1993, after a steady increase since 1970. One solution to the burden of a simultaneous increase in inflation and the real interest rate could be a price-level adjusted mortgage (PLAM). With a PLAM, payments are indexed to a measure of the price-level, so that the interest rate corresponds to a real rate. This type of arrangement eliminates the uncertainty for the borrower surrounding inflation, provided his income and the value of his house keep up with inflation (Di Pasquale and Wheaton, 1996, 196-8). It is used only in hyper-inflationary economies despite the advantages to consumers. One of the reasons for the unpopularity of a PLAM is that in the first years, nominal debt may grow, which increases the probability of default. Fixed-rate mortgages protect the borrower against variations in interest rates, though only for the length of the contract. They confront him with a different risk, that of an unexpected slowdown of inflation. In that case, the financial burden does not decline as expected relative to income. That is why borrowers do not systematically prefer the apparently safer FRM but switch to variable-rate mortgages (VRM) when interest rates are high. This stabilises the demand for owner-occupied housing over the business cycle (Brueckner and Follain, 1989). Furthermore, home owners are much less mobile when interest rates rise and they have a FRM (Quigley, 1987). Home owners need some protection against increases in financial charges and eviction, particularly when it is provided to tenants through rent control and protection against
20
eviction. 25 In Italy, the delay between default and foreclosure can be as long as four years. In France, there is a minimum delay of 30 months. Obviously, harder repossession makes creditors unwilling to risk default, so they raise mortgage qualification conditions. On the other hand, waves of foreclosure are sometimes started prematurely by lenders who fear to be the last to put property on a market with declining prices. Protecting delinquent debtors may prevent such premature waves of foreclosure to the advantage of all, like a coordination device.
Conclusions The federal government has been promoting home ownership for 20 years now, with little success. The proportion of home owners remains the lowest of all comparable countries. Admittedly, home ownership never ranked very high among political priorities, but it is a recurring concern that is addressed with much piecemeal activism. Recent experience in other countries, most notably the UK and Sweden, suggests that not promoting home ownership too actively may after-all be sound policy. Indeed, we have learned that housing investment is risky and that real-estate risks can have significant macro-economic consequences when they are borne by many households. It is time, therefore, for a new assessment of the promotion of home ownership. Recent history, research and experiments teach us the following lessons: •
Promote property of high-density housing. That is both less controversial and more effective. It does not correspond to current household preferences, which are strongly oriented towards the ownership of single-family homes. Measures are required both on the demand and supply side.
•
The target should not be home ownership for all. It is not realistic given the difficulty of many households to accumulate sufficient equity and the increasing volatility of incomes and families. It is not even a desirable target, as a large body of home-owning households exposes the economy to a greater volatility of aggregate consumption.
•
Switzerland is already a world leader in housing construction but a laggard in economic growth. The promotion of home ownership should therefore focus on the conversion of rental to owned housing to avoid sinking even more capital into bricks and mortar.
•
Home owners are generally less mobile than tenants. If labour allocation efficiency is not to be sacrificed on the altar of ownership, the promotion of home ownership should involve lowering barriers to real estate transactions such as transfer taxes, notary fees, and capital gains taxes.
•
Credit institutions and the federal housing office address the traditional financial problems of the would-be home owner: down-payment and front-end loading. Their solutions have the effect of increasing the ratio of loan to value, which enhances the risk of default. If
25
In Switzerland, tenants can be evicted if they do not pay the rent.
21
one encourages home ownership for households which have a minimum of financial reserves and income safety, then they must be protected against the increasing swings of the credit market. •
Do not promote home ownership with easy credit. Basic banking rules require that the proportion of equity be greater than the largest expected loss in value. Of course, no one expected the fall in prices that happened in the early nineties. However, there is no justification for credit proportions of 95 per cent and more.
•
Alternative solutions must be found to make property affordable to households with lower or less stable incomes. For instance, a dedicated saving's system that spreads financial costs over a longer time, one part being borne as an opportunity cost of low return during the build-up of equity, and across would-be, new and long-time home owners. Experiments have the creditor contribute funds as equity.
•
Liquidity constraints have real effects. It should become easier to modulate the amount of the mortgage. In particular, short-term income difficulties should be bridged by capitalising the unpaid interest. The flexible terms of federal support allow that.
•
Home owners need some protection against increases in financial charges and eviction. Tenants benefit from reasonable protection, except when they cannot pay the rent.
•
There is substantial scope for developing housing credit in Switzerland. There are experiments under way with new mortgage instruments, particularly since the market has become more competitive, but the secondary market is still very junior. The demand for owner-occupied housing is more stable over the business cycle when a variety of instruments are available to borrowers.
Any instrument designed to make owner-occupied housing more attractive must address the following pitfalls: •
A balance must be found between the interests of the borrower and the lender, to make home ownership less risky without making lending to home owners too risky.
•
The historical evidence suggests that cheap funds available for loans have not lowered housing costs in Switzerland but rather made possible very high land prices, rather high construction costs, a high standard of comfort and, at times, excessive credit margins. Any large-scale program to encourage home ownership must expect to be captured in the same way.
•
Public funds, including tax expenditures, should be targeted at those who need support for buying a home. That is not the case today, not even in intention. The LCAO is rather well targeted in principle, as it aims at lowering the down-payment requirement and the initial financial charges. On that criterion, it stands in good comparison with the generous tax rebates granted in Anglo-Saxon countries to all home owners. Today, it can be estimated that up to one-half of public support under LCAO goes to households which do not need it, and the rest is too small to affect significantly the proportion of home owners.
22 •
The experience of other countries suggests that the proportion of home owners increased most rapidly when the rental market was stifled. In Switzerland, such a move appears not to be feasible. Much emphasis is put on the equal treatment of tenants and home owners under tax law and federal support under LCAO allocates twice the funds to rental housing than to owner-occupied housing. It can be said that LCAO helps households on the housing market at large, without sufficient discrimination to influence tenure choice.
23
References Arnott, Richard, “Economic Theory and Housing”, in: Edwin Mills (ed.), Handbook of Regional and Urban Economics, North-Holland, Amsterdam 1987 Artle, R., and P. Varaiya, "Life cycle consumption and home-ownership", Journal of Economic Theory 18, 1978, 35-58 Berg, L., and R. Bergström, "Housing and financial wealth, financial deregulation and consumption -- the Swedish case", Scandinavian Journal of Economics 97(3), 1995, 421-439 Bhatia, K.B., "Real estate assets and consumer spending", Quarterly Journal of Economics 102, 1987, 437-444 Börsch-Supan, Axel, and Konrad Stahl, "Do Savings Programs Dedicated to HomeOwnership Increase Personal Savings?", Journal of Public Economics 44(3), 1991, 265-97 Brueckner, J.K., and J.R. Follain, "ARMs and the demand for housing", Regional Science and Urban Economics 19(2), 1989, 163-187 Capozza, Dennis R., Richard Green, and P. Hendershott, "Taxes, house prices and housing consumption", The Charles A. Dice Center for Research in Financial Economics Working Paper 95-9, 1995 Capozza, Dennis R., Richard Green, and P. Hendershott, " Taxes and house prices", The Charles A. Dice Center for Research in Financial Economics Working Paper 97-16, 1997 Choko, Marc H., "Home-ownership: from dream to materiality", in: R.A. Hays (ed.), Ownership, Control, and the Future of Housing Policy, Greenwood Press, Westport, CT, 1993, 3-38 Clark, W.A.V., and A.D. Heskin, "The impact of rent control on tenure discounts and residential mobility", Land Economics 58(1), 1982, 109-117 De Neufville, J.I., and S.E. Barton, "Myths and the Definition of Policy Problems: An Exploration of Home Ownership and Public-Private Partnerships", Policy Sciences 20(3), 1987, 181-206 Deng, Y., J.M. Quigley and R. Van Order, "Mortgage default and low downpayment loans: The costs of public subsidy", Regional Science and Urban Economics 26(3-4), 1996, 263-285 DiPasquale, D. and W. Wheaton, Urban Economics and Real Estate Markets, Prentice-Hall Inc., Englewood Cliff, 1996 Doling, J., "British housing policy: 1984-1993", Regional Studies 27(6), 1993, 583-588 Engelhardt, Gary V., "House prices and home owner saving behavior", Regional Science and Urban Economics 26(3-4), 1996, 313-336 Gerheuser, F., et E. Sartoris, Nouveaux Aspects du Logement en Suisse. Résultats du Microrecensement 1986, Bulletin du Logement 40, Office Fédéral du Logement, Berne, 1988 Goulder, L.H., and P. Thalmann (1993), "Approaches to efficient capital taxation: Leveling the playing field vs. living by the Golden Rule", Journal of Public Economics 50(2), 169196 Green, Richard K., "Should the stagnant home-ownership rate be a source of concern?", Regional Science and Urban Economics 26(3-4), 1996, 337-368
24 Guasch, J.L., and R.C. Marshall, "A theoretical and empirical analysis of the length of residency discount in the rental housing market", Journal of Urban Economics 22(3), 1987, 291-311 Harvey, Jack, Urban Land Economics 3rd Ed., Macmillan, London, 1992 Hendershott, P.H., "Tax changes in the 1980s", in: M.S. Feldstein (ed.), The Effects of Taxation on Capital Formation, University of Chicago Press, Chicago, 1987, 259-290 Hendershott, P.H., "Comments on 'Social returns to housing and other fixed capital'", AREUEA Journal 17(2), 1989, 212-217 Hendershott, P.H., and S.C. Hu, "Inflation and extraordinary returns on owner-occupied housing: Some implications for capital allocation and productivity growth", Journal of Macroeconomics 3(2), 1981, 177-203 Hendershott, Patric H., and Joe Peek, "Real household capital gains and wealth accumulation", in: P.H. Hendershott (ed.), The Level and Composition of Household Saving, Ballinger, Cambridge, MA, 1985, 41-62 Hendershott, P.H., and J.D. Shilling, "The economics of tenure choice, 1955-1979", in: C.F. Sirmans (ed.), Research in Real Estate 1, 1982, 105-133 Hoesli, Martin, Philippe Favarger, and Carmelo Giaccotto, "Real estate price indices and performance: the case of Geneva", Swiss Journal of Economics and Statistics 133(1), 1997, 29-48 Kearl, J.R., "Inflation, mortgages and housing", Journal of Political Economy 87(5), 1979, 1115-1138 Kemeny, Jim, The Myth of Home-Ownership, London: Routledge, 1981. King, M., "Debt deflation: Theory and evidence", European Economic Review 38(3/4), 1994, 419-445 Koskela, Erkki, and Matti Virén, "Taxation and household saving in open economies -Evidence from the Nordic countries", Scandinavian Journal of Economics 96(3), 1994, 425-441 Linneman, P. and S.M. Wachter, "The impact of borrowing constraints on home-ownership", AREUEA Journal 17(4), 1989, 389-402 Marti, Peter, "Droit de bail, frais de transaction et marché suisse du logement", mimeo prepared for the Federal housing office, November 1995 Mayo, Stephen K. and Shlomo Angel, "Housing: Enabling markets to work", World Bank Policy Paper. Washington, D.C.: World Bank, 1993 Miles, David, Housing, Financial Markets and the Wider Economy, Wiley, New York, 1994 Mills, E.S., "Social returns to housing and other fixed capital", AREUEA Journal 17(2), 1989, 197-211 Minford, Patrick, "Effects of housing distribution on unemployment", Oxford Economic Papers 40(2), 1988, 322-345 Organisation for Economic Co-operation and Development, OECD Economic Surveys 19931994: Switzerland, OECD, Paris, 1994 Organisation for Economic Co-operation and Development, Purchasing Power Parities and Real Expenditures 1993, OECD, Paris, 1995 Peek, J., "Household wealth composition: the impact of capital gains", New England Economic Review 1986, 26-39
25 Priemus, H., "A comparative view on European housing policies in the nineties", Scandinavian Housing and Planning Research 10(4), 1993, 235-243 Quigley, J.M., "Interest rate variations, mortgage prepayments and household mobility", Review of Economics and Statistics 69(4), 1987, 636-643 Rosen, H.S., and K.T. Rosen, "Federal taxes and home ownership: Evidence from time series", Journal of Political Economy 88(1), 1980, 59-75 Schulz, Hans-Rudolf, Christoph Muggli und Jörg Hübschle, "Wohneigentumsförderung durch den Bund. Die Wirksamkeit des Wohnbau- und Eigentumsförderungsgesetzes (WEG), Schriftenreihe Wohnungswesen 55, 1993 Schwab, R.M., "Inflation expectations and the demand for housing", American Economic Review 72(1), 1982, 143-153 Strassmann, W.P., "Housing market interventions and mobility: An international comparison", Urban Studies 28(5), 1991, 759-771 Thalmann, P., "Explication empirique des loyers lausannois", Swiss Review of Economics and Statistics 123(1), 1987, 47-70 Ziegert, A.L., "Effect of Housing Stock Inflation on Home owner Expenditure Patterns", Applied Economics 22(12), 1990, 1685-96
26
Table 1: The size of the owner-occupied housing sector in OECD countries near 1990 (%) Greece
79
USA
64
Norway
78
Portugal
58
Ireland
76
France
56
Spain
75
Denmark
55
Italy
68
The Netherlands
45
Luxembourg
68
West Germany
42
UK
67
Sweden
41
Belgium
65
Switzerland
31
Sources: Priemus (1993), Swiss Statistical Office.
27
Table 2: The size of the owner-occupied housing sector in Switzerland 1950-1990 (%) 19501)
1960
1970
1980
1990
37
33.7
28.1
29.9
31.3
Sources: Swiss statistical office, decennial censuses. 1) The figure for 1950 is not fully comparable as it is not based on an exhaustive census.
28
Table 3: The share of residential construction in GDP in OECD countries in 1990 (%) Greece
5.1
USA
3.9
Norway
3.0
Portugal
---
Ireland
4.0
France
5.1
Spain
4.7
Denmark
3.6
Italy
5.1
Netherlands
5.2
Luxembourg
---
West Germany
5.6
UK
3.6
Sweden
5.9
Belgium
4.3
Switzerland
7.1
Source: United Nations' Annual Bulletin of Housing Statistics, Geneva 1995 (table 12).
