Transcription
So you think with all certainty that this will be the worst housing crash that we've seen in the history of America?
>> Yeah, there's no way it cannot be the worst. This is a once in a lifetime, a once in two lifetimes thing. This won't be repeated for so long because it will hurt so bad.
>> Realtors have hit the panic button.
>> Prices, they are slowing down quickly and in several major markets, they are now lower compared with a year ago. People can't afford the mortgages. Prices are too high.
>> There's downside risk in this market. Prices can fall. What's causing this level of house prices when the vast majority of people simply can't afford to buy a house? How do house prices keep on rising when that's the situation? The answer is simple. The banks did it.
NPR recently reported that United States house sales are down in volume, but at the same time, prices are at the highest level ever. And indeed, they are. This is Bank of International Settlements data showing the house price index for America from 1970 through to today, 2025. And you can see that over the period that 50 plus year period real house prices have risen by 2.5 times in real terms as they were back when the very first baby boomers were buying their houses in the 1970s.
Now what's going on? What's rigging this? The main factor that's made housing unaffordable in the United States and most of the rest of the world is too much mortgage lending by banks. This is a common phenomenon to any country which has deregulated its financial sector because of the dynamics of household debt. Gen X's and millennials can't afford housing not because the supply is inadequate which is the excuse that'll be given by conventional economists and politicians but because banks have been allowed to lend too much money for housing. So if the average income is ever going to have a chance of affording to buy a house, bank lending has to be controlled. And I'll suggest a scheme for that at the end of this video.
Now, what I want to show is why bank lending causes house price bubbles. And the reason is actually quite simple. The monetary demand for housing is fundamentally new mortgage debt. The rich can afford to buy a house in cash, but anybody normal income levels has to borrow money to be able to buy a house. Therefore, the monetary demand for housing is fundamentally new mortgage debt.
Now, if you divide that monetary demand by the average price level for the average house, you get how many physical houses can be purchased each year. That's your demand. And it's extremely volatile because the mortgage debt swings around like crazy. But the supply of housing on the other hand is fundamentally fixed. Houses are not like ordinary goods and services where production can be ramped up at will by running factories at higher capacity. They take ages to build and it's a craft industry still rather than an industrial one. And furthermore, you can build new houses. You can't build new land. The main thing you're paying for when you borrow money from a bank to buy a house is actually the land on which the house is built. So therefore, the overwhelming determinant of changes in house prices is changes in the level of new mortgage debt.
Now, this gets quite hairy because it's not the level of household debt that matters or even its rate of change. It's the rate of change of its rate of change. And that's often too curly a concept for most human minds to get their heads around. We can understand distance, we can understand velocity, but acceleration has crazy effects. So, that's my hypothesis. How does it fit against the data? Let's take a look.
Well, this is the raw data. This is what you initially get from those statistical services. The level of house prices as an index has risen over time as I've shown from 100 in 1970 to 250 plus today. And the level of mortgage debt has risen from about 40% of GDP back in 1970 to a peak of 100% at the top of the subprime bubble and it's down to 70. So they've both risen most of the time, but there are periods, you can see in the data that there's been rising household debt and rising house prices, but there also periods where you have falling household debt matched with rising house prices. So you can't get the information just from the original data about the level of household prices and the level of household debt.
But if you go on to the next level and look at the rate of change of house prices and the rate of change of mortgage debt, you get a more obvious link. So that period that I showed on the total level chart a moment ago where there was falling mortgage debt and rising house prices, when you look at that period, the rising house prices coincide with a rising level of change in the level of mortgage debt. It's negative at the beginning there, but it ultimately goes positive. So this whole period now makes a bit more sense, but it's still not the full answer.
As I said, it's not the change in the level of mortgage debt that matters, but it's the acceleration. That's on the next chart here. You can see something seriously correlated here. When the acceleration of mortgage debt is positive, house prices. When that acceleration is falling and turning negative, house prices fall. Those two series are tightly correlated from 1970 right through to today. And the correlation coefficient is quite substantial when you've got data which is as they call first and second difference. So you've got no time trend over time in the data itself. Change in house prices requires not change in mortgage debt but acceleration of that level.
And this result is remarkable for a number of reasons. The first is that this is quite chunky data. You've got data quarterly house price index, quarterly levels of household debt, and you're looking at the change between one year and the next in the house price level and the change in the change in the level of mortgage debt. Now, that was such a degree of processing of the data that when I first came up with this concept back in 2006, frankly, I was afraid the data wouldn't support it. I thought that I'd find that it's just too detailed, too chunky. need much more finely refined data to actually find this turning up. Fortunately, somebody who read my analysis on my blog and checked out of curiosity actually found that the data did support this. This was Michael Begs and colleagues and then 2010 called credit and economic recovery demystifying Phoenix miracles. And these were data covering not just house prices but also level of economic activity which found rising economic activity even though the level of credit was falling at the same time. So it's not just house prices. In other words, it's actually the whole level of economic activity.
Now another factor that makes this extremely unlikely to find is that causation runs both ways. When mortgage debt is accelerating, house prices rise. When house prices rise, people are more willing to go and take on mortgage debt. So the causation works both ways and it's nonlinear. Now that makes it very difficult to apply the standard test that economists use to say what variable causes another which is called Granger causality because it's not designed for nonlinear feedbacks like this. It's designed for something happens at one time something happens after the one that happens before causes the one that comes after. So we didn't expect to find this would be confirmed by the standard way that economists try to explain causation. But I wrote a paper with Paul Omarand and Rickard Nyman back in the early 2010s and we found and I quote this is Rickard's work that found this. There is strong evidence for grantial causality from mortgage debt to house prices but not vice versa. In other words, even though there's nonlinear feedback going here in both ways, the overwhelming causal process goes from mortgage debt to change in house prices.
Now finally this data applies to all countries in that database. The BIS has 15 countries which the data goes back to 1970. So I'm just using those 15. And you can see here for the UK the same strong trend of rising household debt and rising house prices. And there's not quite the same deviation you saw in the American dough. So the correlation coefficient is quite high. But again most of the correlation comes from the fact that they're both rising. Come down and take a look at the change. same sort of pattern as the American data and then even again the strongest correlation is with the acceleration in mortgage debt and change in house prices.
Now the UK had a housing bubble and burst back in the global financial crisis just like America. Not as big but the same sort of story. But one of the countries that likes to pat itself on the back for not having a housing bubble burst is Australia. And you look at it and there's only a couple of periods of falling house prices in Australia's history since 1970. and they're rapidly reversed. You don't have the serious downturn at the time of the global financial crisis. So, hooray, the kangaroo economy is different. But it's not. Take a look here at the correlation of change in house prices and the change in household debt. It's of the same scale or smaller than for the UK and America. But the correlation of acceleration in household debt and change in Australian house prices is actually higher than both America and the UK even though those two countries had a housing price crash and Australia didn't. So Australians think that they don't actually have a house price bubble. Nonsense. They do. Australian politicians have kept the foot on the accelerator to make sure that whenever a house price starts to fall, they reverse it by dragging first home buyers back into the market through things like the first home owners grant. I nicknamed that the first home vendors grant because it's actually the vendors who benefit from that government money not the buyers who've got to pay a much higher price because the money they get from the government they then take to a bank lever it up by a factor of 10 and give much much more money to the vendor than they would have done if they hadn't got the so-called helping hand from the government.
Now this even applies to the country with the lowest level of increase in price over the last 50 years and that's Germany. You can see that Germany's house price started at 100, reached a 20% rise over the period of the 1970s, fell back down again, plunged way down to below the prices back in 1970. So at this stage, late baby boomer is doing pretty well. Then it spiked up again. Now it's back down again, but over the whole period, house prices have gone from an index of 100 to an index of less than 110. And you notice the correlation is actually negative unlike the positive correlations for the levels in the other two countries. You get a small correlation here between house price change and household credit. But you still get a significant correlation between house price change and the acceleration of household debt. Credit is the change in the level and credit change is the acceleration of the level. And that correlation still turns up even in a country that hasn't had a particularly serious house price bubble.
So this is something which is global. Equally as bad as the American house price rise has been, it's only in the middle of the pack when you look at the global data. This is why I say it's actually a global phenomenon. When you take a look at the level of house price change from 1970 through to 2024, the outright winner for a house price bubble is the UK, where house prices are five times what they were in real terms back in 1970 and they're even higher at the peak of the global financial crisis and during co Australia comes in number two. The United States sits down the bottom here at number seven. These are countries which had a smaller bubble than the United States had. But it it shows that this is a global phenomenon. All countries which have deregulated their financial systems, that does not include Germany, have done very badly in terms of houses becoming unaffordable for the people who want to buy the houses.
Now, in the remainder of the video, I'll show you what can be done to stop banks making houses unaffordable. And you won't learn this from mainstream economists because they live in an imaginary world in which bank lending can be ignored. Which is why they haven't seen this obvious unaffordable housing. And this is why I'm giving an online course in realistic economics that I call the 7we rebel economist challenge. You can apply for it at steveken.com. Let's go back and see what we can do to make housing affordable once more.
Now, we certainly can't fall for the simplistic idea that the market should decide and let banks continue what they're doing. This makes some sense when you're talking about ordinary commodities where price and quantity are arguably set by bargaining between sellers and buyers. But houses are not ordinary commodities. They're very expensive services that most people can only buy with borrowed money. And that borrowed money drives up the prices as well. Banks don't build houses. They're not the suppliers in the way that manufacturers are the suppliers of ordinary commodities. So letting them pour more and more borrowed money into the housing market has barely moved the supply of housing and the huge increase in mortgage debt over the last half century from 40% in 1970 to 100% of GDP at the peak of the subprime bubble simply drove prices higher. Bank lending creates money and that again is something that the mainstream economists ignore. The beneficiaries of higher house prices aren't the people who actually need homes. Instead, it's the banks themselves, the real estate agents, and the wealthy who treat housing as speculative assets rather than who it should be, people who need houses to live in and to raise families inside.
So, how can we get out of this? Well, one way is rather than letting banks claim that they're providing lending based on the income of the buyer of a house, make them limit the level of lending to some factor of the income earning potential of that house. If the house is going to be rented, we know what the rental income is going to be. and even where statistitians produce what are called imputed price services. So we could say that the bank can lend no more than say 10 times the annual rental income for a property.
Now what that would mean when you take a look at the rental data is a much much lower level of mortgage debt because you can see that even though rents have risen dramatically in recent years you can see the upturn in prices there. This is when Black Rockck is becoming a major landlord. Over time, it's a very smooth increase in the price of houses and it's comparable to the rate of change of ordinary commodities as well. On the other hand, the house prices bubble up and crash and bubble up again. If this was the basis of the amount of money that banks could lend for a mortgage, we wouldn't have these sorts of effects happening in house prices.
So I call this proposal to limit the amount that banks can lend against a house. The pill used to be very clever when the pill was a common form of contraception. But pill here stands for property income limited leverage. Now if this rule was in place then the bubble growth of mortgage debt would cease and therefore so would house price bubbles. houses would cease being what they've been turned into by the financialization of our economy, speculative assets, and become again what they should be, longived providers of that essential consumption good called shelter.
Now, banks could no longer gain this either by encouraging borrowers into more leverage because there'd be an absolute limit based on the rental income expected for the house. My father was a bank manager back in the 1950s to the early 1980s and in those days you couldn't get a mortgage with anything less than a 30% deposit and that made it incredibly hard to get started in the market. But with those lower house prices that applied at the same time, an average income earner and in those days that was normally a male breadwinner so-called with a wife who took care of the family and several children, they could afford to buy an ordinary suburban home. And in 1981, the average age of a first home buyer was 29. So you're buying a house when you're starting a family. Then the enticement of a mortgage debt began when we deregulated finance and let bankers decide everything. We dropped the required deposit from something of the order of 30% to 5% or even lower, allowed more leverage in and house prices exploded, as the charts I've shown earlier point out. And these days, two working millennials with no children stand very little chance of scraping together even a 5% deposit and servicing the mortgage debt that they have to get into to buy a house. And consequently, the average age of the first home buyer is now 38.
If you're like many other truth seekers and want to learn 50 years of real economics from me in only 7 weeks, you'll love my new 7we rebel economist challenge as well. If you qualify, you can attend my lectures, ask me questions personally every week, and make friends with a great group of like-minded people. So again, like many others, go to obstac.com to apply as well for the 7-week Rebel Economist Challenge. Good luck.