The Difference Between Brand and Product in Three Slides

The Illusion of the Property Ladder

“Property ladder” or the creation of the home-ownership illusion.
by Diego A. Salzman PhD and Wahyd Vannoni

If you live in the US, you will likely take a mortgage to buy your home. But in the UK, a mortgage is more likely to be adverstised as a means to buying a “property” not a home. For instance, while Zillow.com and its US peers prominently feature the word “house” on their home pages, Rightmove.co.uk helps you “Search properties for sale and to rent in the UK” and zoopla.co.uk brands itself as “smarter property search”. An article by The Guardian titled “property websites: 15 alternatives to rightmove” seven out of 15 of these websites use the word “property” in their url while only one uses “house”.

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This is no accident; the UK real-estate industry often uses a concept known as the “property ladder”, a concept which we argue leads to irrational behavior.

Although the term is used by both professionals and the general public, it is paradoxically difficult to find a precise definition of “property ladder”. Dictionaries such as Collins English Dictionary (Collins 2010) and Longman Dictionary of Contemporary English (Longman 2005), and even real estate specific works such as Dictionary of Real Estate Terms (Friedman et al., 2000) and The Glosary of property terms (Parsons ed, 2003) have no entry for Propperty Ladder, even journals specifically written about the ladder (Lemanski, 2011) do not provide a definition.

When definitions can be found they often vary significantly from each other suggesting that there is no true definition for “the property Ladder”, even though this concept is at the heart of British society.

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(http://www.bbc.co.uk/kent/have_your_say/news/houses.shtml)

It seems that the concept of “property ladder” meld property and social ladder, thus leading people to a belief that “home-ownership” conveys social status. In other words, success is reflected by the size and post-code of an aspirational home.

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For most first-time buyers, the first step of the ladder involves a mortgage.

An inconvenient truth: a mortgage is in essence a leveraged asset buyout.

Few people are able to make an accurate risk-assessment when applying and ultimately getting a mortgage.

Unless you were working in a specific sector in finance, it would not occur to most people to engage in a leveraged buyout. Yet, this is what we all do when a bank accepts to grant us a mortgage; we borrow significant amounts of money to have what in most cases is only the illusion of ownership. (It is striking that different formulations of the same concept lead to opposite patterns of behaviour; imagine how many fewer commissions would a real estate agency make if people borrowed money using the LBO frame).

As mentioned above, the term property-ladder in the UK has been used by both industry professionals (brokers, lenders, journalists) and the general public, to imply a steady, systematic ascent to greater wealth and happiness.

It also strongly suggests that first-time buyers will progress upward, but never downward, till the end of their lives, safe in the knowlegde of having accumulated the maximum value for their properties.

Furthermore, the industry openly uses and exploits the concept of property ladder. Indeed, Channel 4 in the UK airs a show whose title is Property Ladder.

The way this concept contributes to the illusion of outright ownership, is by encouraging people to enter into a buy-sell-buy cycle every few years. The consequence is that a a 20 or 30-year mortgage is never paid in full to the lender so the borrower will never be a 100% owner. This partial ownership is justified as a means to ascend the housing ladder.

In the UK the situation is further exacerbated by the distinction between “freehold” (building and ground ownership) and “leasehold” where a landlord owns the ground and leases a property for a given number of years.

Et tu? (is the public is also guilty?)

The public bears its part of responsibility in fueling this system. For instance, its perception appears to be that a home should be purchased as early as possible in life to avoid being ’left behind’ by the market. [Banks et al. (2002) that “British households appear to move into home ownership at relatively young ages”(p. 1).]

Another important bias is loss aversion as described by Kahneman and Tverskys (1979; Kahneman, 2002). There is greater weight given to loss of value than to the prospect of more gains. In practice, as David Genovese and Christopher Meyers demonstrated in their paper influential NBER paper this means that some owners who face the prospect of nominal loses “set higher asking prices of 25-35 percent of the difference between the property’s expected selling price and their original purchase price”.

In summary, the “property-ladder” approach to housing is poorly understood and often leads to irrational behavior. We want to project an ever-increasing status in society by buying homes without outright ownership and with other people’s money. The risks we incur, such as defaulting on payment, for this illusion are mostly underestimated, ignored or we are simply unaware of.

Diego A. Salzman
Wahyd Vannoni

References:

Brunnermeier, M. and Julliard, C., 2006. Money Illusion and Housing Frenzies. National Bureau

of Economic Research (NBER) Working Paper no. 12810 . Available at: http://www.nber.org/

papers/w1 2810

Green, L., Fry, A., Myerson, J., 1994. Discounting of delayed reward: A life span comparison.

Psychological Science. Vol. 5 (1). pp. 33-36.

Hamilton, A., 2005. Asset price bubbles and manias. How much was the property boom

driven by collective psychology and herding behaviour? MA. Available at: http://

http://www.housepricecrash.co.uk/p df/alexander-hamilton-dissertation.pdf

Kahneman, D., 2002. Maps of Bounded Rationality, Nobel Prize Lecture. Available at: http://

http://www.no belpr ize.org/nobel_prizes/economics/laureates/2002/kahneman-lecture.html

Kishore, R., 2006. Twelfth Annual Pacific Rim Real Estate Society Conference: Theory of

Behavioural Finance and its Application to Property Market: A Change in Paradigm. Auckland,

New Zealand 22-25 January 2006. Sydney: PRRES.

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Lambert, S. 2010. House prices vs average earnings. This Is Money. Available at http://blogs.thisi smoney.co.uk/2010/04/house-prices-vs-average-earnings.html

Loansite, 2011. Houses overpriced. Available at: http://www.loansite.co.uk/mortgage/property-
news.htm 2011

Paton, G., 2008. House Prices £20,000 higher near good schools. The Telegraph.

Available at:

http://www.telegraph.co.uk/finance/economics/houseprices/3164767/House-prices-20000-higher-near-good-schools.html

Tierney, J., 2007. The mystery of buyers remorse or should you look for a money back guarantee?
The New York Times.

Available at:

http://tierneylab.blogs.nytimes.com/2007/11/05/the-mystery-of-buyers-remorse-or-should-you-look-for-a-money-back-guarantee/

Thaler, R. H. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization,1, 39–60.

Here’s What Microsoft CEO Satya Nadella Thinks Apple And Google Do Best

Originally posted on TechCrunch:

At a recent event on its Redmond campus, Microsoft CEO Satya Nadella detailed his views on what Google and Apple do best.

His comments, as the chief executive of the company worth less than Apple, but more than Google, are notable. For context, in his thus-short tenure at Microsoft , Nadella has completed its purchase of Nokia, and also continued the company’s push into cloud computing.

Here’s Nadella’s quote on his rivals:

When I think about what Apple does, what Google does and what Microsoft does, therein lies perhaps the simplest answer to why these three identities are actually pretty distinct. To me Apple’s very, very clear, and, in fact, I think Tim Cook did a great job of even describing that very recently where he said they sell devices and that’s what Apple is all about. And Google is about being, it’s about data or it’s about advertising…

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This is Google’s incredibly simple hiring formula

Originally posted on Quartz:

Google’s intensive studies on hiring that have changed how it works, leading to the elimination of brainteaser questions and GPA as deciding hiring factors. But the most important rule it follows is remarkably simple: to never once compromise on a high hiring bar.

Once you do, each person you hire ends up being a little bit worse than the last one. Here’s how former Google product head Jonathan Rosenberg put it in a podcast interview with the Harvard Business Review:

So what happens is people lose their focus on the absolute value of the talent, and they often get sidetracked with things like the urgency of a role. And as soon as you start allowing your teams to do that, then you start hiring people who are just below the current bar.

And then you create the negative dynamic of what we had called in the book “the herd effect,” right? As…

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Twitter was right—it’s not the next Facebook

Originally posted on Quartz:

Today marks one year since Twitter triumphantly went public on the New York Stock Exchange. Back then, the company’s goal was to avoid becoming the next Facebook. Well, it certainly achieved that. Both in terms of the IPO process itself, which was much smoother than that of its much bigger rival. But also operationally—and not in a good way.

In the run-up to the IPO, there was talk among investors about Twitter becoming bigger than Facebook. That now looks ridiculous. Twitter had 284 million active users at last count. Facebook had more than 1.2 billion. And few think Twitter will ever close the gap.

Meanwhile, although people were questioning Facebook’s strategy a year ago, it now dominates mobile advertising (alongside Google) and has already moved into moonshot mode: splashing out on a virtual reality headset maker and planning to deliver the internet to unconnected, emerging market regions through drones.

Like it…

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Confirmed: Doritos-flavored Mountain Dew is for real

Originally posted on Quartz:

Pepsi recently conducted taste tests of a Doritos-flavored Mountain Dew. A “nacho-flavored chips”-flavored soda.

The arrival of this appalling-sounding combination was first reported on Reddit by Steve Barnes, a freshman at Kent State University, who tasted the “Dewitos” drink when Pepsi offered samples on the Ohio college’s campus recently. Other flavors up for consideration, according to Barnes (he goes by joes_nipples on Reddit): lemon ginger, mango habanero, “and rainbow sherbet[,] which tasted like medicine.”

Like other media outlets, Quartz at first wasn’t sure whether this was real or a stunt (like that false alarm on pumpkin spice condoms a few weeks ago), but a Pepsi spokesperson has confirmed that these product tests are indeed in progress. A statement to Quartz via email said:

We are always testing out new flavors of Mountain Dew, and giving our fans a voice in helping decide on the next new product has always been important…

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The Creation of a Flat White

Crafted by Tom at
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London SW11 1SZ