Do high home ownership rates really kill the labour market?
A construction worker works on a house in a new housing development in this file photo. (Richard Buchan / THE CANADIAN PRESS)
Published Saturday, May 11, 2013 7:00AM EDT
A new study of U.S. data has found a link between higher home ownership rates and a rise over time in unemployment. But that doesn’t mean home owners are more likely to be unemployed.
The report, entitled ‘Does High Home-Ownership Impair the Labor Market,’ was co-authored by David Blanchflower of Dartmouth College in New Hampshire and Andrew Oswald of the University of Warwick.
The study suggests that a doubling of the rate of home ownership in any U.S. state is followed over the long run by a more than doubling of the unemployment rate.
For example, the five states with the biggest increase in home ownership -- up an average of 23 per cent in Alabama, Georgia, Mississippi, South Carolina and West Virginia -- saw unemployment go up by 6.3 percentage points between 1950 and 2010.
In contrast, the five states with lowest growth in home ownership -- an average increase of 1 per cent in California, North Dakota, Oregon, Washington and Wisconsin – saw a rise in unemployment of 3.5 percentage points.
The researchers say they are not suggesting that there is a higher rate of unemployment among homeowners.
Rather, that a rise in home-ownership can lead to three factors that can drive up jobless rates: a less mobile workforce, longer commuting times and fewer new businesses.
While the researchers don’t offer concrete reasons for why these conditions develop, they suggest that:
- Longer commute times, for example, raise costs for both employers and employees, which can lead to layoffs or more people choosing to leave their jobs.
- Business and other development may be thwarted as homeowners take a “not in my backyard” approach to development in their neighbourhoods.
- And homeowners may be reluctant to sell their homes and move for a new job opportunity, particularly in a weak housing market, and instead tough out a period of unemployment.
“The results in this paper are consistent with the view that high home-ownership impairs the vitality of the labour market and slowly grinds out greater rates of joblessness,” Blanchflower and Oswald write.
Their findings “should be worrying for policy-makers,” and they warn that such trends may go unnoticed elsewhere because the lag times between the changes – in ownership rates and jobless rates -- are so long.
“High levels of home-ownership do not destroy jobs this year; they tend to do so, on our estimates, the year after next,” they write. “Unless these long linkages are studied, the consequences of high levels of home-ownership are not easy to see.”
Blanchflower and Oswald say that although they studied U.S. data, “our conclusions may have wider implications.”
They note that a recent study out of Finland reached similar conclusions about home ownership and the labour market in that country. They point to countries like Spain, which boasts 80 per cent home-ownership but 20 per cent unemployment, and Switzerland, where only 30 per cent of residents own their homes but the unemployment rate is a paltry 3 per cent.
Home ownership numbers in Canada
The study reflects a known phenomenon both in the United States and Canada, says Benjamin Tal, deputy chief economist at CIBC. However, home ownership’s drag on the economy is less of a concern in a strong economic climate, and more so when the economy is down and the housing market is weak, he said.
Homeowners are often reluctant to sell in bad times. This scenario worsened in the United States with the sub-prime mortgage crisis, when homeowners couldn’t or wouldn’t move because they were in a negative equity position.
So, the labour force becomes less mobile, which creates a ripple effect that impacts economic growth.
“If it’s a normal economic cycle, then I don’t think mobility is an issue. Because the market is up, or stable, you sell and everything is fine, it doesn’t impede mobility,” Tal said in a telephone interview. “But when the market is down and you lost equity on your house and you are stuck and you don’t want to sell because you know that you’ll lose money, then it can be a very significant negative.”
Tal says the report focuses on only the potential “negatives,” and ignores the known benefits of home ownership. Studies show that in neighbourhoods with high rates of home ownership, crime is lower, children do better in school and there are a host of economic benefits as infrastructure gets built.
“When you build houses you build infrastructure, especially if you expand to areas that were not built before, which happens in many places in Canada,” Tal said. “So that’s creating jobs.”
Michael Haan, Canada Research Chair in population and social policy at the University of New Brunswick, agrees, saying he prefers to look at home ownership as a means to establish roots and build stronger communities.
“I like to think of home ownership as an anchor in a positive sense, rather than in a negative sense,” Haan said in a telephone interview. “Whereas this report makes home ownership sound negative because it reduces the efficiency of the labour market.”
He agrees that NIMBY-ism may keep some development out of neighbourhoods where homeowners band together to oppose it.
“But you could think about home ownership as something that’s productive as well,” Haan said. “There’s a whole other body of economics literature that talks about home ownership as a source for economic and social capital, because parks get built, lawns get mowed, fences get painted, etcetera -- in a way that wouldn’t necessarily happen in a rental neighbourhood.”
He also points out that the study does not explain the relationship between higher homeownership rates and higher unemployment.
In Atlantic Canada, for example, unemployment rates are higher than in the rest of Canada, but home ownership rates are, as well, “because housing’s cheaper. So to actually pull those things out and try to identify causality is tricky. Because we don’t know which came first and we don’t know if there’s any relationship between the two whatsoever.”
Blanchflower and Oswald encourage other researchers to check and advance their work, particularly given how government policies, particularly in North America, encourage home ownership.
Haan agrees, but says studies should look for that causal link, if one exists, to prove that higher home ownership causes a spike in unemployment.
“To get the true causal effect you’d have to track individuals over time, and observe variations between people that buy a home and people that don’t, and then see if there’s an emerging differential in the propensity to be employed,” Haan said. “So does it actually alter an individual’s trajectory? And I don’t know.”