History of Real Estate Democracy


History of Real Estate DemocacyIn pre-modern agricultural societies, humans were at substantial risks from premature death due to malnutrition or disease, to say nothing of war. People in those days could only do much less than later generations, only seeking the ways of gods to determined incidences of famine, plague and invasions. As the generations go by, into the eighteen and nineteen century, did they began to understand the wisdom of saving: putting money aside for the extreme rainy days. Food and other provisions were hoarded and our tribal species intuitively grasp from the earliest primitive times that it makes sense to pool resources together through genuine safety in numbers. The idea of Insurance and hedge funds was thus born.

Through the centuries of greedy capitalism, hedge funds and increasing insurance premiums become increasingly more expensive and complicated for the common people. Hedge funds, for example, typically ask for a minimum of 6 or 7 figure investments and charge a management fee of 2 per cent of your money and 20% of your profits. Most ordinary households cannot to hedge at all and would not know how even if they have too. Lesser mortals thus have to rely on the relative blunt and also often expensive instrument of insurance policies to protect them of life’s nasty surprises, or hope for the welfare state to take care of them.

There is of course, a third and much simpler strategy for saving for that rainy day. Or, rather, borrowing to buy assets whose future capital appreciation will supposedly act as a cushion against calamity or as a form of insurance for future living expenses. The uncertain future has taken the very simple form of an investment – in a house. The value of the house is supposed to keep rising until the day the breadwinner needs to retire. If your pension funds fall short or your health insurance runs out, there is always home, sweet home. There is however, one obvious and dangerous flaw – The unhedged bet on one single market: the property market. As you might have come to realise through this article, the brick and mortar is very far from being safe as houses.

The decline of the aristocratic elite

Home ownership, for most of history, belonged only to the exclusive privilege of the aristocratic elite. Estates were passed down from fathers to sons, with honorific titles like Dukedom, Lord, knights, kings, etc. In short, they were defined as landlords. These elites had political privileges as well as power to rule over the lesser commoners. If you were just a commoner, you were a mere tenant, paying rent to your landlords. You will no rights whatsoever to vote in elections, which was only reserved to property ownership or unless you owned a freehold property worth at least a certain amount. As a commoner, you worked your land and pay your rent.

The decline of aristocracy as a political force has been finance. As industrialisation slowly overtook the agrarian age, fortune starts to smile on the capitalists. Windfalls were brought to those whose lands happened to be sitting on rich coal fields, especially during the Napoleonic Wars. Land values rose tremendously, and the many great magnates took full advantage by borrowing to the hilt either to improve their estates or to lead conspicuous lifestyle.

Many nineteen century investors – local solicitors, private banks and insurance companies were attracted to mortgages as a seemingly risk-free investment and were of course only too glad to finance these pot of gold. The trouble is that property, no matter how much you own, is a security only to the person lending you the money. On the other hand, the borrower’s sole security against the loss of his property to creditors is his income. Many of those magnates or land owners had outstanding interest payments much more than what their land income could pay.  From the 1840s onwards when a major depression caused plummeting prices across the globe , all that fell away and the first modern property crash occurred in 1848, Buckingham, England.

Home-owning democracy

As much as property elite ownership is to the British, the property owning democracy was American-made. The Great Depression of 1929 has caused wide unemployment, foreclosures of home owners and tenants being evicted. There was a huge revolution among the common American citizens and this eventually led to the pioneering of a property-owning democracy by the Roosevelt administration, by radically increasing the opportunity for more Americans to own their own homes. It proved to be the perfect antidote both for quashing revolutionary ideas as well as to garner huge political votes among happy voters who will be home owners.

The property-owning democracy idea spread across the Atlantic, back to the British where there were 1.5 million British voters residing in public housing projects. In the 1980s, Margaret Thatcher suggested a program to turn these renters into homeowners. To borrow a leaf from her playbook…”A bold and innovative approach to the problems of poverty…..would be to look at ways to turn renters into homeowners…For the poor, real progress may come only once they have an ownership stake in society. People who own property feel a sense of ownership in their future and their socie4y. They study, save, work, strive and vote. And people trapped in a culture of tenancy do not…”

In America, community leaders who vetoed the property owning democracy idea said:”American Dream is home ownership, and one of the things that concerns us is – while the dream is wonderful – we are not really prepared for it. People don’t realise you have a real estate industry, an appraisal industry, a mortgage industry now that can really push to put people into houses that a lot of times they really can’t afford.”

As a business, the whole idea of a property-owning democracy worked perfectly for greedy capitalists. As for politicians, property-owning democracy proved more alluring to gather sensitive political votes among left and the right wing political parties as well as aspiring home owners.

Politicians designed various policies to entice as many people to own their homes (Even if they were pay high prices to own one), so as grow an economy. When there is a mortgage, there is credit. When there is credit, the monetary system will function and grow, thus ballooning the pockets of governments as well as those capitalists who are savvy enough to take vast opportunities through the many possible (maybe limitless) money making business industries, like banks, property developers, mortgage brokers and a wide range of other blood sucking mongers to capitalise on the very original idea of simply helping a ‘commoner’ to own his own home.

Lands were bought at peanuts from the land owners (governments), and either flip at hugely inflated prices to other ignorant investors, or developers would built homes on them and made huge profits by selling to too eager home owners. Ignorant home owners too decide to jump on this supposedly money making venture and also decide to use their ‘safe houses’ as a bet against uncertainty. They borrowed heavily and start to lead the conspicuous life they have never experience before owning their homes, all on borrowed money. They bet their homes would give them their ‘guaranteed’ retirement pension through increasing values. (We saw that many retirees dream of relying on their homes as a pension fund was blown away after the 2008 USA mortgage crisis) Governments are happy as long as their voters are happy, and they naturally go along with this illusionary wealth creation. As President George Bush had said in October 2002, ‘We want everybody in America to own their own home.” This spending of course fuelled tremendous economic growth but also the ‘property Bubble”. All these then ensured the boom and bust of the property market. By 2007, several countries around the globe (including Singapore) were in bubble state and the biggest of course was no other than the first to coin the term “property owning democracy” – America.

So, it turns out that your regular home is not a uniquely safe investment after all. Prices can go up as well as down. And a house is very illiquid. When banks stop borrowing, credit stops, and sellers cannot sell as their buyers cannot borrow, the result is a glut of unsold properties with depreciating prices. Home ownership tends to reduce labour mobility, thereby slowing down economic recovery. These turn out to be the disadvantages of the original idea of property owning democracy, appealing though it once seemed to turn tenants into homeowners.

Remember: It is not owning property that gives you security; it just gives your creditor security. Real security comes from a steady income generated by the property itself, not supposedly increasing values that are’ illusions’, created by blood sucking capitalists or even by our governments to have us believe it is our insurance and hedge fund against the uncertainty.

– Conspiracy of Real Estate Investments, Gerald Tay