Buy Now, Pay Later
Urban Crossroads #35
"Buy Now, Pay Later" is a recipe for a life of debt. However, it often is the only way through which many people are able to own a home. Only a few people have the financial ability to buy a home with a single payment. Some have to wait to inherit a house or inherit the money that would enable them to buy one. Some only can buy a house if they are lucky enough to have well-off parents who can help them out.
What many people end up doing instead is renting the homes in which they live. In fact, this is one of the reasons why various jurisdictions at one time or another instated rent-control laws, which keep the rent a tenant pays unchanged over the years. This is what had happened in Jordan. The problem with such laws is that they unfairly require a few citizens to heavily subsidize the housing needs of others, even though this is a responsibility that society as a whole should shoulder. Because of rent-control laws, rents in Jordan for numerous properties often remained unchanged for decades, thus creating considerable structural imbalances in the real-estate market and discouraging various forms of investment in it. Only now are these rent control laws being phased out, and market forces should completely rule the housing market by 2010.
Instead of trying to keep rents low, which is what rent-control laws inefficiently attempt to accomplish, a better solution would be to achieve high levels of home ownership. High levels of home ownership traditionally have been closely connected to a country's prosperity, and also to its economic, political, and social stability. Securing ownership of a home means that a household has one less thing to worry about in the daily grind, and it is safe to state that those who own their homes have a bigger stake in a country's wealth and wellbeing than those who do not.
The most effective method of increasing levels of home ownership is through encouraging the availability of long-term mortgages. Accordingly, one would make a down payment for a house, which usually amounts to a small percentage (5 - 10%) of the price of the house, and pay the remaining amount as fixed monthly payments distributed over a relatively long period of time (usually somewhere between 15 and 30 years) through a long-term loan set at a certain interest rate. Instead of paying rent, which only secures housing for the period covered by the rental payment, and which will go up (in a free market system) as property values increase, one makes mortgage payments, which are fixed and eventually provide full ownership of the house. With each payment made, one owns a bigger percentage of the house.
The system of mortgage payments as we know it now for the most part came into being during the second half of the nineteenth century. We often forget the tremendously strong impact that the advent of home mortgage arrangements will have on a given society. Such mortgages have allowed for the mass transformation of tenants into homeowners, thus strengthening the relation that people have with the places in which they live.
In Jordan, the public sector has for some time provided long-term loans for a few low-income groups to help them secure home ownership. Private banks, however, were very reluctant to offer long-term loans. In a region marked by political and economic instability, such reservations are understandable. Fortunately, over the past five years or so, a more positive outlook had come to define lending policies in Jordan's banking system. A higher level of confidence in the country's long-term economic, financial, and political stability had been building up. As a result, the country's banks began offering housing loans for periods of 15 years and longer, thus making long-term housing loans available to a wider segment of the population. The fact that interest rates in Jordan have been relatively low over the past few years also has encouraged prospective homebuyers to apply for those loans. All this has brought about a boom in the purchase of housing units (specially apartments) in Jordan over the past few years. More people are switching from spending their housing money on rent to obtaining mortgages that allow them to secure full ownership of the houses in which they live.
The sums spent on housing needs usually account for somewhere between a 25 and 35% of the total expenses of a household. In certain areas where housing costs are especially high, housing-related expenses can take up 40 and even 50% of a household's overall expenses. In either case, housing most often is the single most expensive cost item that a household has to address. We in Jordan should do all we can to facilitate realizing the option for people to direct this sizable housing expense into owning a house through long-term mortgages instead of paying it as rent. If one is to go into debt, it might as well be to secure a roof over one's head.
March 3, 2005