Thursday, 13 August 2015

Would You Pass My Xenophobia Test?

Civitas wants the government to introduce a ban on black people buying houses in London. Just kidding, they are not a racist charity. They are, however, a xenophobic one, because if you replace the words 'black people' with the word ‘foreigners' then the statement I wrote is the truth - Civitas wants to ban foreigners from buying homes in the UK (well, some foreigners, those that are outside the EU). 

I ended the last blog on London housing by mentioning that I know all those buyers who purchase properties in London as an investment but have no intention of living in them make many of you mad. The main reason they make you mad is because their purchases mean that there are thousands of London homes sitting empty, while at the same time there are thousands of people looking for housing in London. If Civitas reflects the views of a proportion of the demographic then statistically there are likely to be many people who agree with them that many of these sales should be banned.

Alas, this sort of feeling is dangerous - wanting the State to intervene to prohibit transactions just because they think the wrong kind of people are buying these properties. Their misunderstandings are plentiful, but I'll just focus on the two biggest ones.

Firstly, in a free market the people that buy property are not the 'wrong kind of people' - they are precisely the right kind of people because they are the people who valued that property more than anyone else (this is evidenced by the fact that they were the ones that bought the properties). You may argue that people who want to live in London but couldn't afford the properties, and people without homes at all, would value them more, but the knowledge that those properties are far out of their price range shows evidentially that those properties are not being bought at the expense of either of those groups of people. It's a tragedy that there are so many people who are homeless in the UK, but people buying expensive properties in London are not the cause of their plight, and nor are any actions that prohibit those purchases going to be the solution.

Secondly, and following on from the first point, even just a basic understanding of economics would inform people that Britain is actually better off when those properties are sold, irrespective of whether the buyer is an English person or a foreigner. To see why foreign buyers make Britain better off, and why banning them would be counterproductive (not to mention xenophobic), consider who benefits when an Englishmen (Jack) buys a house from a second Englishman (Tom). Suppose Jack buys a house from Tom for £300,000. Jack must value the house at more than £300,000 otherwise he would be unwilling to buy it, and Tom must value the money more otherwise he would be unwilling to sell it. Suppose the maximum Jack would pay is £310,000 - his consumer surplus (the difference between the most he'd pay and what he actually pays) is £10,000. Suppose that Tom would have sold his house for no less than £295,000, then his surplus is £5,000, which means the transaction generates a net societal surplus of £15,000

Now suppose that up steps Johnny foreigner, out-bidding Jack by £7,000, offering him £307,000. Jack gets no benefit from the sale of Tom's house to Johnny foreigner, but Tom's surplus has risen to £12,000, meaning that if Johnny's consumer surplus is the same as Jack's then society now has a net gain of £22,000, which is £7,000 more than when the transaction was between Jack and Tom (there are complex reasons why, in terms of a weighted average, we’d expect the consumer surplus to be roughly the same – but we won’t deviate into that now). Of course if you ban Johnny foreigner then Jack gains, but his gain is less than the loss incurred by Tom - plus on top of that you also have to count Johnny's lost consumer surplus.  

The desire to ban foreigners from buying homes in the UK (by which we really mean London) is perfectly coterminous with the definition of xenophobia you’d find in any dictionary – it is a desire to impose an unfair discriminatory procedure on a bunch of people solely on the grounds they do not share the same nationality as you.

The test for you, dear reader, not just on this, but in life in general, is to keep a check on how often in the free market you find yourselves favouring people who just happen to share your nationality – in terms of jobs, goods and services – over people who happen to be of a different nationality. For I hope I don’t need to remind you too often that the more globalised we become the more we should erode away these old misconceived notions of jobs, goods and services being available only to people who share your place of birth.

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