Second Homes Keep Market in Good Shape
From the April 8, 2007 Sunday Times (London)
April 9, 2007
by Irwin Stelzer
There I was, sitting in a hotel room in Florence, struggling with an article on the crisis in the sub-prime mortgage market for my weekly column, rather than taking the more sensible course of reacquainting myself with the artistic marvels of that city. I leave to my readers the question of whether this sacrifice in their interest was worthwhile.
From the hotel to lunch with my wife and her art-expert guide, and a chat about the economy of Italy. It seems that while America was in the process of lending too much money to people who couldn’t afford the houses they were buying, the Italian banking system was in the process of denying mortgages to people who by any standard are very good credit risks, indeed. Take our guide: a good earner about to marry a good earner, a civil engineer. But neither has the lifetime employment contract that was once the common arrangement in Italy. They now work in a labour market that is more flexible, more likely to enable Italy to compete in globalised markets as employees no longer cling to jobs in dying industries.
The world has changed, but the banks haven’t. To them, this young, hard-working, good-earning couple seems too great a credit risk — no mortgage unless the parents act as guarantors. If anything is designed to destroy support for more flexible labour markets, this is it.
On to Venice, where another characteristic of the property market becomes obvious — its globalisation at a time when the rich are awash in money and the merely comfortable are benefiting from low air fares. Tales of the prices paid for New York and London property are now common currency. Those cities are not alone. In Venice and in Florence, once-derelict buildings, and commercial properties, are being converted to condominiums or expensive residents’ clubs.
Sir Elton John is one of many celebrities restoring Venetian palaces to their previous splendour. And the famed glassmaker, CVM Pauly, doing business in Venice when it was still a republic and before there was an Italy, has sold its palazzo showroom to developers. Want to be one of 260 lucky people with access to 26 scrumptious apartments when visiting Venice? If you can pay a lump sum of €350,000 plus an annual €14,000, one of the apartments could be yours for about five weeks every year.
Where is all this money coming from? Short answer: nobody really knows. There is talk in London of rich Russians showing up with suit-cases containing millions of pounds to buy flats as investments, and estates for themselves — high walls essential. Celebrities such as Madonna hunt for prime properties with a passion and fickleness once reserved for lesser acquisitions — a new pair of shoes, for example. Chinese investors are said to be acquiring properties throughout Italy. The Arabs, for some of whom $100m is a snip, prowl London and the south of France. And then there are the American investment bankers, in love with London life, and any place easily reached by private jet after a hard day’s trading.
That’s not all. What we once called “ordinary people” are finding one home confining. Some 40% of all homes sold in America last year were to buyers of second homes, mostly baby boomers approaching retirement.
Second-home buyers benefiting from low air fares snap up about 100,000 properties in Spain every year, with more and more preferring Jerez to the overcrowded and overpriced Costas. Brits, among them moderately well-off professionals, have always hankered after second homes in France (palatable food trumps unpalatable politics) and Tuscany — or Chiantishire. They now find their tastes running to sun-dappled residences on the Red Sea in Egypt or in Florida, home of the weak dollar.
Then there are the merely rich, such as Don Rumsfeld and Dick Cheney, who have acquired homes on the eastern shore of Maryland, while New York’s higher-flyers pick up second properties in the Hamptons or on some ski slope or other.
All these people have access to credit, or cashflows so large as to make mortgages unnecessary. Meanwhile, the poor in America are struggling with their mortgages, the middle classes in Italy are denied an opportunity to move out of their parents’ homes, and Britain’s young moan that they cannot get a foot on the property ladder.
A big social problem? Hardly. Property is not available in infinite quantities and the most convenient and desirable properties are scarcer still. The Soviet Union solved the problem by assigning the best Moscow apartments and the finest dachas to Communist party apparatchiks. The market system solves the scarcity problem differently.
First, those whose incomes are highest — broadly, those who contribute the most to the economy’s success — get first crack at the best and the poshest. Second, those who have yet to realise the second home of their dreams know they have an opportunity to do just that, especially as the bidding-up of prices increases the supply of second homes. Which is why it is so important to make sure that the race goes to the swift, rather than the well-born or the corporocrat with an amiable board, that opportunity remains by and large available to all who would take advantage of it, and that there are no artificial impediments restricting the flow of credit to the creditworthy.
That doesn’t mean everyone will be able to join that club in Venice, or gaze at a sunset across Chesapeake Bay, but it does mean that more and more couples have an opportunity to end life as the old folks who live on the hill — or in a valley, or anywhere they care to call their own.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.