Breaking the housing–finance cycle: Macroeconomic policy reforms for more affordable homes

Abstract

This paper argues that the housing affordability and wealth inequality crises facing advanced economies are driven by the emergence of a feedback cycle between finance and landed property. The cycle has been created by the increasing policy preference for private home ownership coupled with the liberalisation of bank credit and accompanying financial innovation. Under such conditions, landed property becomes both the most attractive form of collateral for the banking system and the most desirable form of financial asset for households and investors. The housing-finance cycle emerged in Anglo-Saxon economies in the 1980s but has since spread to most advanced economies. Demand-side reforms, more than supply-side reforms that dominate policy discussion, are required to break this cycle. Two reforms are discussed: 1) structural and institutional reforms to banking systems, including central banks; and 2) land policy reforms targeted at reducing the potential for rent extraction and speculative profits from property ownership.

Assetization: The Chinese Path to Housing Financialization

“…Whilst house prices have been on an upward track, and prohibitively high compared to local household incomes (Chen, Hao, and Stephens 2010;Wu 2015a;Deng and Chen 2019), the country has achieved a high level of homeownership over the last two decades without a rapid acceleration in mortgage lending. Much international literature cites financialization achieved through the securitisation of mortgage debt as a key driver of increased domestic credit and housing demand, producing rising prices and reduced affordability through a 'housing-finance cycle' (Ryan-Collins 2019). But what has propelled house price inflation in Chinese cities given the relatively lower levels of mortgage lending?…”

When homes earn more than jobs: the rentierization of the Australian housing market

“…Households use newly created credit to bid up prices via leveraging their incomes and more money flows into a limited supply of desirably located housing. 4 As is common in asset markets, this home price growth itself attracts more demand for home buying as an investment, leading to higher leverage and larger mortgages as house prices accelerate away from incomes in a positive feedback cycle (Ryan- Collins, 2018Collins, , 2019. Since banks collateralise their mortgages against the property being purchased, collateral values rise in parallel with debt, providing confidence to continue lending.…”

“…As a result of this consolidation, the Australian mortgage market came to be dominated by one particular model of bank: the large, shareholder-owned national bank. Shareholder banks typically operate a transaction banking model characterised by a preference for centralised and automated credit-scoring techniques to make loan decisions; a need for high quarterly returns on equity; and a strong preference for collateral, with landed property as the preferred form of collateral (Collins, 2012;Ryan-Collins, 2019). Increasingly, the model favours the generation of profits through residential mortgage debt and mortgage-backed securitisation issuance (Berger and Udell, 2002).…”

“…More generally, supplyside factors cannot explain the growing divergence between the cost of housing as a service (rents) and the price of housing as a financial asset. Demand-side factors that make investment into housing for the purpose of securing financial returns -both capital gains and rental income -would appear to be an important alternative explanatory basis for this observed divergence (Goodhart and Hofmann, 2008;Duca et al, 2011;Jordà et al, 2015;Aalbers, 2016;Rolnik, 2019;Ryan-Collins, 2019).…”

The institutional logic of property inflation

“…These more subtle interrogations suggest that any assessment of property price inflation should situate credit liberalization as just one element within a policy configuration, that is, as one component within a complex institutional formation. The authors in this Special Issue contribute to this project by analyzing house price inflation in relation to fiscal policy (Ryan-Collins, 2021); shifting methods of urban planning (Weber, 2021); neoliberal narratives focused on supply shortages (Phibbs and Gurran, 2021); the ways in which new elite alliances have gained hold of urban policy and development (Rogers and Gibson, 2021); cultures and policies of tenure (Christophers, 2021); and the growth of specific constituencies that tend to lock in patterns of policy making (Adkins et al, 2021).…”