I talked about change last week and how it is difficult because we cannot imagine what it would look like. This week I need to talk about one type of debt which needs to be replaced with something else but I cannot imagine what.
I have thought about and come up with ideas of what might replace most kinds of debt in my white paper, but I am stuck with this one – borrowing to buy houses.
And then I began to think about what I said last week. And maybe we do not need an alternative to debt; maybe we need a completely different way of thinking about it. I am British and we like to live in our own homes – statistics say anything from 60% to 70% are owner-occupiers – we own the homes we live in.
Not every country is the same – but when I tried to find real numbers, it seems that most of Europe goes for owner-occupation (see European Housing statistics). So we are all in a similar situation and there is no obvious model to follow for changing anything. Even comparing houses financed by borrowing, a lot of north European countries (which are generally the wealthier countries) seem to go for this whereas eastern Europe have more properties owned outright.
So whatever answer we could come up with is going to look very different from what we have at present.
Perhaps there is part of the answer in my idea of phasing in changes. If we set ourselves to change the world over 50 years, all of the current house loans would have been repaid by then, so we would end up with people owning properties outright, rather than property being financed by debt.
Would housing become more affordable? The answer is almost certainly yes since the housing market (in the UK) depends upon available borrowing to keep values high which in turn encourage lenders to provide funds to buy houses. If the underpinning of borrowing is taken away, then house prices will be lower.
Would affordable housing be a problem for existing home owners? This is a more difficult question since we cannot be sure how people would react to the withdrawal of finance for house purchases. There might be a house price freeze so that property becomes relatively more affordable as a result of inflation but there might also be a fall in house prices (perhaps to below the level of the amounts borrowed) – particularly if (as seems possible if not likely) inflation is closely related to growing debt.
Whilst this sounds like a disaster for existing home owners; it is not necessarily a problem. Lenders want their money paid back – they only care about the underlying security if and when repayments stop being made. So for most home-owners who pay off their mortgages, there is no problem. If personal circumstances change (losing a job through illness or redundancy for example) then there is a problem – but there would be anyway when the main source of income stops. In these situations state aid may be needed; or alternatively mortgage lenders could end up absorbing the drop in value in the same way they do on mortgage defaults in the current system.