The problem of ownership

The problem of ownership

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So you think you own property do you? You think that your assets are your own and no-one can take them from you? You think that it is clear what property rights are and all Government should do is defend them? How wrong you are. Property law is a thorny thicket of rights and claims, and the legal profession makes a lot of its (considerable) income from disputes over property where the rights are by no means clear.

Here are three statements that most people think are true:

"If I buy a house, it's my property"

"If I lend money to someone, it's still my money"

"If I've paid into a pension, I own that pension"

Actually none of these statements is necessarily true. It all depends on the terms of the deal.

No-one really owns property

Consider the first of these - the house purchase. If you buy a house or a flat with cash, you own that house outright - unless it is leasehold, in which case you only own it until the expiry of the lease. But if you buy a house with a mortgage, your ownership of the house is conditional. The owner of the mortgage asset associated with the house has a claim on it.

So we already have two forms of ownership - outright ownership, where no-one has any claim on our property, and conditional ownership, where we have to satisfy the claim of another before we can exercise our rights of ownership.

Items that we own outright are ours to dispose of as we please. So, if we own a house outright, we can give our house to our children, will it to the Dogs' Trust or sell it to a builder who will demolish it and build fifty rabbit hutches on the same plot of land. No-one can stop us doing any of this, can they?

Well, yes they can. If there are taxes to be paid - for example, inheritance taxes on the value of our estate when we die - then the Government's claim must be settled before the asset can be disposed of as we direct. And if it can't be settled, then the asset must be sold in order to settle the Government's claim. So the builder might get his flats, but the children or the Dogs' Trust would have to be disappointed. All they would be entitled to would be the financial residue after the Government's claim was settled from the sale of the house.

So even if you own your house outright and have no other debt, it's not wholly yours to dispose of as you please.  Government retains a partial claim to it. It's probably more accurate to call your "ownership" of land and property "stewardship": you buy the exclusive right to use - and the responsibility to maintain - that property for a period of time. At the end of that time it it reverts to the commons until someone else - perhaps your legatee, by settling the inheritance tax bill - buys the exclusive right to use and maintain it. For how long your stewardship lasts depends on the nature of the contract. 

If you have debts, the primary claim on your assets belongs to your creditors. Having debt - any debt, whether secured or unsecured - dilutes your ownership of your assets. If you default on your debt, your creditors may seize some or all of your assets to settle their claim. And in the event of your death, the claims of your creditors must be settled, if necessary by sale of assets that otherwise would be inherited by your descendents. You don't fully own your assets while you have debts, and you can't will property to someone if it is encumbered by debt. If you will leave debts when you die, you must make provision for settlement of those debts on your death - for example by taking out life insurance - otherwise your assets will be sold irrespective of how you have willed them.

Unsecured debt creates a general claim on your assets. But if you have secured debt, such as a mortgage, the mortgage owner has a specific claim on the underlying asset that seriously limits your right to do as you please with that asset. We say the asset is "encumbered".  If you sell the house, the mortgage must be settled - although, depending on the terms of the mortgage, it might be possible to transfer it to another similar property. You can't give the house away, not even to your children, you can't will it to the Dogs' Trust and you can't demolish it and build fifty flats in its place. On your death, the claim of the mortgage owner must be settled before any other claims, and that may mean forcing sale of the house. Of course, most people have life insurance to cover their mortgage, so mortgages in practice are usually settled on death without the house having to be sold.

If you default on your mortgage, the mortgage asset owner has the right to seize your house. So your "ownership" of your house - your right to do with it as you please - is conditional upon two things: 1) maintaining mortgage payments in accordance with the terms of the mortgage 2) settling the mortgage claim on sale of the house or your death.

So can you really be said to "own" a house that is mortgaged? You have legal title to the house, but your right to do what you like with it is limited by the mortgage covenant. You only own outright that part of the value of the house that exceeds the mortgage - what is known as the "equity". And that is the bit that varies with house prices. The nominal amount of the mortgage doesn't. So if house prices fall, and you are left with a mortgage on which the nominal amount is more than the value of the house, you don't own any of your house outright at all. All of it is encumbered by a mortgage claim. So how much of your house you own, in the sense of there being no other claim upon it during your lifetime, depends on other people buying and selling houses. No wonder homeowners like there to be a vibrant housing market.

However you look at it, ownership of land and property is at best transient and at worst an illusion. Yet we buy into this myth: we take out huge mortgages in the belief that we "own" the associated house, when what we are really buying is "grave goods". And we then spend our lives servicing that debt, while our financial system uses the future spending power that we have mortgaged to line its own pockets. Is this really a sensible way of organising society?

It's not really your money

There are many other examples of conditional or diluted ownership. Rehypothecation of securities in the repo market, for example. When securities are pledged as collateral against a cash loan, dealers may then re-pledge them as collateral against cash borrowing of their own. Zero Hedge has been sounding off for years about how dreadful the practice of rehypothecation is, and indeed the idea of pledging "someone else's property" as collateral for your own borrowing does sound distinctly shady. But it's not really like that. The legal contract under which the collateral is pledged includes a clause allowing the dealer to use the pledged securities in any way they see fit - which includes re-pledging them. Securities are fungible instruments: one bearer bond is indistinguishable from another. Provided that the dealer can obtain more securities in time to return the pledged collateral to its original owner when the deal matures, it does not matter what use they make of the securities originally pledged.

Of course, it all goes horribly wrong if the dealer can't obtain more securities. But this is exactly what happens in a bank run, except that in a bank run it is cash, not securities, that can't be found. There is no significant difference between rehypothecation of securities and banks using deposits to fund lending.  Which brings me to a point I have made before about bank deposits. Bank deposits are no more "your money" than securities pledged with a clause that allows the dealer to re-use them are "your securities". When you pledge securities in a repo transaction, you have no automatic right to return of those securities. If you fail to return the cash you borrowed, you lose your securities: but if the dealer can't return the securities, all you are entitled to is a share of the dealer's assets when it goes bankrupt. Your ownership of the securities is conditional on 1) you paying back the cash you borrowed, with interest 2) the dealer being able to obtain enough securities to settle your claim. So it is with bank lending, too: if you put money in a bank, you have lent it to the bank, and you have no automatic right of return. All you are entitled to is a share of the bank's assets if it goes bankrupt. Your ownership of your money is conditional on the bank having sufficient assets to settle your claim.

Which brings me neatly to pensions, and in particular to state pensions. And what I'm going to say now will sound brutal. But it's reality, and it's high time people understood this.

Pensions aren't property

State pension schemes are unfunded. The money that contributors pay in goes to pay pensions currently in receipt, and any surplus goes towards general government expenditure. In the UK, pensions, along with unemployment benefits and disability benefits, are funded by payments into a National Insurance scheme from payroll deductions. The fact that this is a separate tax from income tax - plus its name, of course - has fooled people into believing that they are "paying in" to a pension scheme, and that when they retire, they will draw on their contributions, just as they would with a private sector scheme. Not surprisingly, therefore, people believe that their state pension entitlement is sacrosanct, and any attempt to reduce it amounts to seizure of property. But they are wrong. There is no "property": there are no assets. All their payments have bought them is an entitlement, not an asset. And the exact nature of the entitlement can change by Government fiat.

The entitlement that people buy with National Insurance contributions is a promise that the State will support them when they are too old to work. But exactly what "too old to work" means is defined by the Government in power at any particular time. Over the lifetime of a contributor, the definition could change considerably - as indeed it already has: for example, women who started their working career believing they would retire at 60 have now been told they must work until they are 66 or more. In this respect the State pension is exactly like unemployment benefit and disability benefits, which also are merely promises - a promise to support you when you are unable to find a job, and to support you if you are too ill or disabled to work - the definition of which can be changed at the whim of Government. I find it extraordinary that the same people who demand that state pension entitlements should be protected from cuts are often only too happy to see unemployment and disability benefits cut to the bone. The same National Insurance pays for all of them. If National Insurance payments create no "property rights" over unemployment and disability benefits, why should they do so for state pensions?

Funded pensions, for example most employer pension schemes, are different. With these, the pension contributions do create assets, which are managed to give a return over time. People assume that the pension contributions they make are "their property", but in fact that isn't really true either - as the Equitable Life disaster shows. Pension assets can, and do, fall in value. Pension funds can, and do, go bust. And when they do, all the pensioner has is a claim to a share of the value of the residual assets, which may be considerably less than the amount they have paid in to the fund. Investing of any kind - including paying into a pension fund - involves relinquishing ownership of your money in the hope that in due course it will come back to you with interest. But there is no guarantee that it will do so, and you have no right to its return. Once you have lent your money, or bought shares, it is no longer really yours.  

It's only "yours" if other people agree that it is

In fact it is questionable whether anything is "really" yours. Your right to property is entirely governed by laws, and Government can change or suspend laws: additionally, Governments usually retain the right to confiscate ("expropriate") personal property in an emergency. In 1933 the United States passed a law outlawing private ownership of gold and confiscating existing holdings. Yes, that's right - people who owned gold were no longer allowed to own it. Their right to property had been wiped out by Government fiat. Expropriation has been used far more recently: in the nationalisation of the Dutch bank SNS Reaal shareholders and junior debt holders had their holdings seized without compensation by means of an expropriation order. And then there is always forcible conversion of property into something less valuable, as happened in the Cyprus bank bail-ins, or simply failing to honour a commitment to protect property against losses, as the Icelandic government did when it refused to compensate Icesave depositors. And as I write, news has just reached me that the Greek government is considering confiscating private sector assets to plug a social security shortfall. You may think your property rights are protected by Government, but in the end, if Government can't or doesn't want to protect your property it won't. 

But eliminating Government and relying on "natural" property law isn't the answer either. As I've explained elsewhere, the only "natural" property law is the law of the jungle: in the absence of civilised law, you only own property if you can defend it. 

No system of property ownership is perfect. There are always anomalies: there are always people who are able to claim property to which they morally have no title, and there are always people who are unable to enforce claims to property to which they morally do have a right. But more than that, it is fallacious to argue that property rights are in any way "simple" and easily enforced. The real problem with individual property ownership is that it does not really exist. You only own property if others agree that you do - and that is the case whatever system of law and governance is in place.

Related reading:

The illogical pricing of property

Lender, beware

A question of justice - Coppola Comment

Life for rent - Dido (YouTube)


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