Introduction
Niall Fergusson, one of the most prominent economic historians, explores the concept of the belief that a house is the safest investment there is. The desire for acquiring your own house is being set in our minds since childhood. Fergusson provides Monopoly as an example of this – a game that was widely popular back at the beginning of the twentieth century. Originating from America, the game has achieved tremendous success in Britain, France, Germany, Italy and even Austria. The author explains that the primary reason for Monopoly’s success was that during those harsh times people ran away from the grim reality to the one where they could buy entire streets. Contrary to the original intention of the game’s inventor, people thought that the more they own, the more money they will make.
Explanation
“Safe as houses” – a popular expression that, according to the author, was the main reason why so many people strived for getting a house. The popular belief is that there is nothing safer than lending money to people with property (Fergusson, 2008). Since land and house are immobile property, it is not surprising that mortgages served as an important source of funds for a new business in the US. In the case of non-payment of debts by house owners, banks would simply confiscate the house. Fergusson narrates about how previously only the aristocracy could have both land and houses, and live off its rent. Those times have changed, however, to the point when titles were no longer as important as having regularly paid jobs. During the Great Depression period, not many workers owned a house or could afford a mortgage, so Roosevelt’s response to the rapidly sinking mortgage market was the New Deal, which increased the opportunities of affording a house for average workers. The next step was standardizing of lending and offering low-interest and low-term loans. The Federal National Mortgage Association made the loans cheaper, which resulted in 60% of the US population having a house by 1960. The downside to it was that that most of those people were white, as they were considered more credit-worthy than black people. For instance, in the 1950s, some black mortgage borrowers paid 8 per cent while no whites have ever paid more than 7 percent. It was not until 1977 that such discrimination against black people officially became a federal offense, forcing American banks to lend to minor communities.
Fergusson also provides another example of why the set belief of houses being a safe investment is nothing more than a delusional fallacy – Savings and Loan Associations, which are considered to be one of the most fraudulent and scandalous investment schemes the world has ever seen. Being insured by the state and allowed to invest in whatever they like led to total fraud and reckless investing. The final cost of the Savings and Lost crisis was 153 billion dollars, essentially making it the most expensive crisis since the Great Depression. The idea of home-owning democracy later resurfaced in the form of sub-prime loans (loans that were given to people even without a stable job) that were introduced by George Bush in 2003. As a result, massive defaults were caused by the increase in interest rates from 1 to 5.25 percent, which eventually led to the crisis that occurred in 2008.
Conclusion
This chapter provides us with sets of examples of why the expression “safe as houses” is ultimately wrong. The existing home bias of investing all our resources in houses leads to no good, as proven by numerous historic examples depicted by Fergusson in his book. Instead of throwing everything into residential property, people should have a more diversified portfolio of assets and seek a sustainable balance between debts and income.
References
Fergusson, N. (2008). The ascent of money. New York: The Penguin Press.