We have a banking crisis - not a housing crisis
Updated: Sep 9, 2020
Homeownership is something many of us aspire to. In fact, it’s so common that it has come to be viewed almost as a right, rather than just an aspiration.
But the reality is that today, for many it remains a distant dream.
According to Halifax's latest figures, the average mortgage deposit for those buying their first home in 2019 was a staggering £41,099. Twice as much as in 2009.
In London, the situation is even worse with first-time buyers putting down an eye-watering £101,389. Again that’s almost double what it was in 2009 (£50,944).
So how did prices get so out of control?
Common answers found in the media or among politicians is that we’re not building enough homes. Or that immigration and foreign investors are to blame. The truth, however, is something only a few people recognise. And even fewer want to talk about.
In his 2018 book ‘Why Can't You Afford a Home?’, Josh Ryan Collins, Head of Finance and Macroeconomics at University College London’s Institute for Innovation and Public Purpose, highlighted the fundamental problem:
Banks create new money in the act of lending. When a bank makes a loan, it creates both an asset (the loan) and a liability upon itself in the form of a new deposit in the bank account of the borrower. No money is borrowed from elsewhere in the economy. The main limit on bank money creation is the bank’s own confidence that the loan will be repaid. If mortgage lending supports the building of new homes, this new money can be absorbed into the economy. However, in most cases mortgage finance enables people to buy existing property on existing land. As households, supported by banks, compete to purchase, the result is increasing land and house prices. Higher prices lead to more demand for mortgage credit, which further pumps up prices, and so on.
A common misconception about banks is that they take money from all their depositors and lend it to their borrowers. In reality, banks create money each time they lend and are primarily real estate lenders. This is true in the UK, and across the world, however inconvenient it may be.
According to the Bank of England’s own estimates around 80 percent of the money in the UK is created when commercial banks make loans. And as more money gets created for housing, the prices inevitably go up.
The graph below illustrates this showing how closely tied mortgage credit and real house prices are.
Unfortunately, this isn't just an issue for wannabe homeowners either, but renters too. Landlords also tend to buy property using mortgage credit. Managing a property and its tenants is a legitimate business, but landlords will always need enough rent to cover their mortgage payments and still make a profit.
The price of rent, therefore, is directly affected by the cost of property and the cost of borrowing. With everyone buying on credit, prices continue to trend up. New landlords then have to borrow more and pass these costs on to renters. As homeownership declines, rent becomes unaffordable too.
Today we are seeing these systemic issues come to a head. Yet with the power to create money and charge interest on it, banks really have little incentive to solve this problem.
Luckily new technology means we can solve the problem for them.
Bitcoin and other cryptocurrencies are already disrupting the banks by creating alternative stores of value and methods of payment.
At PropBloc we are going a step further by creating a cryptocurrency designed to help people buy their homes.
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