The real reason for favors to mortgage holders
Why Does Government Promote Home Ownership?
by Fred E. Foldvary, Senior EditorGovernment chiefs seek to maximize the ownership of houses and the lands they sit on. They don’t do this for other assets. Governments do not promote the ownership of cars or computers or toasters. Why houses?
There are two types of real estate promotion going on. First is real ownership. Government chiefs want the majority of citizens to be permanent home owners. The reason given is that home owners tend to be more concerned with the well being of their communities. They have a stake in better government, as it affects their property value.
But the relevant issue is whether the promotion of real estate provides a greater interest in communities than there otherwise would be. Renters fall into two categories. First are those who seek temporary housing because they move around or are not sure whether they will stay put. Government promotion of real estate does not affect them. Second are those who rent housing because they cannot afford to buy. These do respond to incentives to own, but they would have some interest in their home towns anyway, since they have an stake in security and services. So the push for more home ownership probably yields only a small amount of better government.
The more fundamental reason for promoting home ownership is that each person who owns land is one more voter opposed to an increase in using land value for public revenue. Although the typical home owner is also a worker and also owns financial assets, and would be much better off with an efficiency tax shift that replaces taxes on wages and interest and buildings with a tax on land value, the psychology is such that the real estate is the owner’s biggest asset, he will fight any attempt to increase his property tax.
So the big landed interests, those who own valuable commercial real estate, seek the widest possible home ownership, because the little owners are “useful idiots,” allies of the big owners in minimizing taxes on land. Government promotes real estate ownership and excessive land speculation in many ways:
1. Keeping taxes on real estate low, as with California’s Proposition 13.
2. Preventing a separate tax rate on land and buildings.
3. Puffing up the building value relative to the land value to maximize depreciation.
4. The deductibility of mortgage interest and property taxes from taxable income.
5. Exemptions from capital gains taxes on owner-occupied housing.
6. Tax-free exchanges of investment and speculative real estate holdings.
7. Artificially low interest rates due to monetary expansion.
8. No taxes on unrealized capital gains.
9. Depreciation starts all over again with a new owner.
10. Real estate taxes are levied in large amounts twice a year to make the payment visible and large, to promote opposition to property taxes.
11. Government-sponsored enterprises Fannie Mae and Freddie Mac and others create a large artificial secondary market in mortgages with guarantees, subsidizing mortgages.
12. The Community Reinvestment Act and other laws push banks to provide mortgages to risky low-income buyers.
13. Inclusionary zoning requires builders to include low-income housing in their developments so that some of the low-income class also opposes higher taxes on real estate.
14. Governmental works and services are paid for mostly from taxes on wages, goods, profits, and buildings, pumping up land values that capitalize benefits into higher rent and land value.
15. The capitalization of economic development and civic services into higher land value is kept out of economics textbooks to prevent students and the public from being more aware of it.
16. After the real estate crash, governmental assistance to over-mortgaged homeowners prevents a large decrease in home ownership.
17. Federal insurance of bank deposits, which enable banks to make riskier real estate loans.
18. Federal Housing Administration and other mortgage guarantees.
There is a second type of real estate promotion, and that is fake ownership. Laws subsidizing low-income home ownership and prohibiting discrimination combine with the artificial secondary market for mortgages to push poor folk to buy houses. They sign documents that they don’t understand, and shame about their ignorance keeps them from asking questions. This becomes a cruel hoax as their house payments rise, they can’t afford the mortgage, and they are pushed out of their homes. Those who keep their homes end up paying half their income for a mortgage that may well be greater than the sinking value of the property.
In the USA, government chiefs boast that two-thirds of Americans are home-owners. Ignorant voters believe this is a great thing, and reward the chiefs by electing them back into office. The gainers from fake ownership are the financial guys that made the deals: the bankers, mortgage brokers, title insurance companies, and real estate agents, and the politicians who receive campaign funds to maintain the status quo. The losers, besides the victimized home buyers, are the taxpayers, who bail out the too-important-to fail financial players.
The proper position of government with respect to home ownership is strict neutrality. Whether to own or rent a home should be a personal decision and none of government’s business. If taxes were efficiently shifted to site values, the political difference between owning and renting land would disappear, since the owner would no longer profit from rising land values. But that is precisely what the landed interests seek to avoid, so these home booster roosters flap their wings and cock-a-doodle-do about the high rate of home ownership, and the chickens will cluck in agreement even as their roost collapses. So far it has not dawned on people that the ownership of land value is a social curse, not a benefit, so long as it is puffed up by government subsidies.
-- Fred Foldvary
Copyright 2008 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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