The High Cost of Homeownership
Is being a homeowner incompatible with being an entrepreneur? That is the conclusion of a study published by economists at the Spatial Economics Research Centre in London. They found that homeowners in the U.K. were less likely to become entrepreneurs as their mortgage debt discouraged them from assuming the additional risks of starting new businesses. The study’s authors believe that homeownership reduces “genuine entrepreneurship”, defined as creating a business more substantial than a sole proprietorship. Being self-employed, or even working from a home office, is one thing; taking on the commitment of a payroll for others is something else entirely. U.S. government policies, such as the mortgage tax deduction, create incentives for homeownership. Did the policy goal of fostering homeownership (more than 2/3 American households live in homes they own) stifle our economic growth? In reading the study, I was reminded of the premise of the “Rich Dad, Poor Dad” series of books by Robert Kiyosaki. Conventional wisdom posits that we “own” our homes. Not so, says Kiyosaki, the bank owns the home; we own the right to service the debt. As entrepreneurial start-ups consume capital in their early years, it would be an additional burden to tie up capital in the down payment for a home. The study’s conclusion seems plausible, but homeowners may be a self-selected group that would not have otherwise chosen an entrepreneurial path. I agree with the authors that government policies incenting homeownership are unwise. Why motivate people to tie up capital in illiquid assets that are cash flow negative? The study focuses on homeowners in the U.K., but let’s hope the team at the U.S. Small Business Administration reads it. SBA loans require collateral, typically property and usually the home of the small business borrower. Now there is a senseless policy incenting needless risk.