Different ideas about housing

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.

The problem with mortgages

A recent article in the Times “New funding rules force builders to apply brakes” (I read the print edition from Saturday 14 February) highlights one of the problems of commercial debt

In my white paper I explain that having debt in an economy creates problems. It allows the economy to overheat when things are going well (debt financed growth) and then makes the recession worse when things are going badly (debt repayments mean that the total fall in GDP is bigger than any underlying reduction in real production).

So the mortgage market in the UK has pushed house prices up, because we think nothing of borrowing large amounts of money over long terms to buy houses. The debt means that more houses can be “afforded” and therefore increases the number of houses bought. This in turn means that more houses are built and the house builders are very happy. Economists are happy because house building contributes to GDP and everything looks great.

And then along comes financial regulation – last year (2014), the Financial Conduct Authority carried out a review of the mortgage market and came up with some new guidelines, which have meant that mortgage lenders are looking at mortgage applications more carefully and as a result reducing the amounts they are willing to lend. And this is what the Times article was complainingHouse under construction about – house builders are reducing the number of houses they build because these rule changes mean fewer houses are being bought.

This supports my view that the mortgage market – commercial lending – has affected the housing market and pushed prices up.

If my suggestion of outlawing commercial lending is followed through, then the housing market will not have the support of mortgage lending and house prices will fall (relative to earnings). This would be a good thing in that house prices would no longer be buoyed up when the economy is strong and sink when the economy falls, but will remain more stable.

Sadly there is another side to all this – which is the effect of withdrawing commercial lending on the economy as a whole. As the Times article indicates, house builders are building fewer houses because buyers are finding it more difficult to get mortgages. And the same is likely to be true of many other areas of the economy – by restricting lending, economic activity will be lower (as measured by the GDP measure economists use).

Are the benefits of a more stable economy and freedom from some of the other adverse effects of debt worth paying the price of lower levels of GDP? I would say yes.

A new way of looking at economics?

I have been thinking recently.  It is a difficult and sometimes painful process I would prefer to avoid.

I have been thinking about how we measure economies and whether GDP is helpful or not.  One issue with GDP is that everything is measured in terms of finance and that does not always give reliable results.  For example I know I am well off because my house is warmer than the house I grew up in – because of improvements in insulation and heating, not because I have more finance than my parents.

And then I heard something on the news this morning.  As a result of the Ebola crisis, they (I cannot remember who was talking) think that Sierra Leone’s economy will shrink this year, whereas its GDP had been projected to rise by 11%.

Would 11% growth in GDP have been a real measure of the countries economic strength?  We know from frequent news reports that the country does not haGraph of somethingve anything like the health care that we (in an ailing economy which cannot manage 3% GDP growth) take for granted.

So do we really want to compare GDPs or are there better measures available?  Should we care about these financial measures at all, or would it be better to measure happiness (as they do in Bhutan) or what should we measure.

Perhaps we could look at some social measures – education, employment, quality of housing stock, health care – but these might be difficult to quantify.

But if we are going to look at financial measures, we need to get away from GDP.  Economic analysis says that another way of looking at GDP is that most of it comes from  bank lending and government deficits (government borrowing).  See my previous post Steve Keen visits solvent land (2) for more detail on this.

Some may say that this is fine, but recent experience of debt shows us that some, if not a lot of, debt is an illusion – it cannot be repaid and is therefore of no value.  As a result we have written off debts of countries (under the HIPC initiatives);  we have bailed out banks who lent too much to people who could not pay.  So if neither bank borrowing nor government borrowing are secure, GDP, the main economic measure we use, is overstated.

So let’s look for something which better reflects what is important – and the size of our mortgages – personally or as a country – is not the right place to start.

IMF warns of Swedish housing bubble

Since looking at debt, I have always thought that working out how to replace mortgage lending on houses was going to be the most difficult issue. But it looks as though it is one of the most important issues to sort out otherwise, as with Sweden, we risk another crisis just because we can borrow to buy our own houses.


A new IMF report warns of rising financial instability and unsustainabe household indebtedness in Sweden:

Financial instability is an increasing concern. House price increases have picked up again, exceeding 71⁄2 percent annual growth for single-family homes and 121⁄2 percent for tenant-owned apartments in April. Household credit growth also remained strong, pushing household indebtedness to almost 175 percent of disposable income in 2013, and over 190 percent if debt from tenant- owned housing associations is included. Recent data indicate that household debt ratios are high across all income groups, but particularly so for indebted lower-income households who are especially vulnerable to income, interest rate, and house price shocks. The aggregate net asset position of households is solid, but a large share of assets is illiquid and has limited value as a buffer. As a consequence, a large and sudden drop in house prices would lower consumption, employment, and growth, and ultimately…

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Why is a house important to my economy?


Another way of looking at how the 2008 banking crash happened


How did the crash in 2008 happen?

The complexity of the system makes dialogue on the subject difficult but we will try to describe what happened that resulted in the housing and financial crisis by focusing on the key players.

( When you see a link it’s there to offer more information and sometimes links to an explanation of other important parts of the system.)

Player 1: A teacher named Paul gets married to Phillipa in the summer. They decide after the honeymoon a house is needed as the family is growing so they apply and are granted after much paper work a mortgage for a house in a leafy suburb an hour outside the city. The house is worth just 1 million but Paul and Phillipa are both working teachers and have a joint yearly income of 75000. Phillipa works out that with yearly repayments of 20000 it will take them 50+ years…

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Keen on mortgages

The day before my post on house borrowing, Steve Keen posted this article.  In summary he is saying that in Australia there is a much closer link between the availablility of finance and house prices (his view) than between earnings and house prices (the main view held before the global debt crisis.

I have linked to his summary blog – if you want more detail he links through to a more detailed article in the Australian Business Spectator, which includes more figures and graphs.

Debt is a bad thing – but what about mortgages

If I have understood the situation correctly, one of the root causes of the global financial crisis was to do with house lending (which is what I will call mortgages in this post).  I have added a separate post explaining how.

If we are to get rid of commercial debt, this will include mortgage lending.

So the question is what effect will this have.

I do not support the government’s Help to buy scheme because in my view it perpetuates the problem of inflating house prices by making borrowing too easy.  However, I do recognise that people do want to buy houses.

By taking away the ability to borrow to buy houses, house prices will go down.

Lower prices will mean that people will (at least to start with) feel poorer, because they no longer have the same equity in their houses.  And initially there may be problems over negative equity (owing more on the mortgage than the value of the property).

But my plan of phasing out commercial lending over an extended period (probably set at the length of the longest commercial debt plus a little) should mean that, when the day comes, mortgages will already be a thing of the past.   Over that period the mortgage should have been repaid anyway.

House-building companies with large land banks may find it more difficult to make a profit.  But again the time taken to phase out commercial lending should provide a period to come to terms with a new way of operating.  As with private landowners, the biggest problem might be negative equity – if the land bank is financed by significant borrowing.  This is going to be more difficult than private borrowing as the finance is short-term rather than long-term which means that the drop in value will need to be dealt with sooner.  This could lead to company failures so is there a need for some form of government support?

Might landlords have a similar problem?  They should not as borrowings should be covered by rental income, but a fall in the underlying property value might create problems with some lenders.

Looking at the situation positively, lower house prices will mean that they are more affordable for everyone.

And in the long term, the absolute price of a house is meaningless.  What is more important is the ability to buy and sell – and pay a higher price if you are moving “up” the market or withdrawing money to spend on something else if you are moving “down” market.


Is there something we would need to do to replace mortgages?  This is a really difficult question and I have not come up with a workable answer.  I have tried to imagine a system of “instalment payments” being available to house-buyers but the mechanism seems to be far too complicated.

If someone has an idea please post it here so I can incorporate it in my white paper.  I will check all posts before they appear on the site so I can keep it anonymous if you tell me to.

The problem with mortgages


As I understand it the problem with mortgages which lead to the global financial crisis was not that people were borrowing money on mortgage.

The mortgages themselves were “high risk” – the amount lent was very high compared to the value of the property and the people who were borrowing had poorly paid jobs, which meant they were less likely to be repaid in full – but that was not the problem either.

The problem was that the mortgages were wrapped up as a package to be sold on to other banks – but that was not the problem.

The problem was that the package was rated as “lower risk” by the clever people who work out risk for financial institutions.