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.
THE BIG QUESTION
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.