WHAT'S HAPPENING TO HOUSE PRICES?

     

Many of us were told that house prices are so high because there are too many people và not enough houses. While this is true, house prices have also been pushed up by the hundreds of billions of pounds of new money that banks created in the years before the financial crisis.

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1. Banks created hundreds of billions of pounds & put it into property

In the ten years up to lớn the start of the financial crisis, house prices tripled. Many people think this is because there were not enough houses around, but that is only part of the picture. A major cause of the rise was that banks have the ability khổng lồ create money every time they make a loan. During the period in question the amount of money banks created through mortgage lending more than quadrupled! This lending was a major driver of the massive increase in house prices.

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2. House prices rise faster than wages

House prices rise much faster than wages, which means that houses become less và less affordable. Anyone who didn’t already own a house before the bubble started growing ends up giving up more và more of their salary simply khổng lồ pay for a place khổng lồ live. & it’s not just house buyers who are affected: pretty soon rents go up too, including in social housing.

This increase in prices led lớn a massive increase in the amount of money that first time buyers spent on mortgage repayments. For example, while in 1996 the amount of take home salary that a first time buyer would spend on their mortgage was 17.5%, by 2008 this had risen khổng lồ 49.3%. In London the figures are even more shocking, rising from 22.2% of take home pay spent on their mortgage in 1997 khổng lồ 66.6% in 2008.1

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3. House price bubbles benefit almost no-one

Asset price bubbles and the speculative behaviour associated with them tend khổng lồ cause financial crises, which lead to lớn lower growth, higher unemployment & higher government debt. High house prices also act as a mechanism for transferring wealth from the young lớn the old, from the poor lớn the rich, & from those that don’t own their own home to those that do. Even those with housing don’t benefit massively from higher house prices – after all, we all need somewhere to lớn live, and anyone selling their trang chủ will find that on average other house prices will have risen by the same amount, leaving them no better off. In reality, only the banks and those with many properties benefit from high house prices: high prices mean that people will have khổng lồ take out larger mortgages for longer periods of time, which means more money in interest payments for the banks.

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Adelino, M., Schoar, A., & Severino, F. (2012). Credit Supply & House Prices: Evidence from Mortgage Market Segmentation (No. W17832). National Bureau of Economic Research.

Duca, J. V., Muellbauer, J. And Murphy, A. (2011), House Prices & Credit Constraints: Making Sense of the US Experience. The Economic Journal, 121: 533–551.

Fitzpatrick, T., & McQuinn, K. (2004). House Prices & Mortgage Credit: Empirical Evidence from Ireland. Central ngân hàng and Financial Services Authority of Ireland

Goodhart, C., & Hofmann, B. (2008). House prices, money, credit, and the macroeconomy. Oxford đánh giá of Economic Policy, 24(1), 180-205.

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Imbs, J., và Favara, G. (2011). Credit Supply và the Price of Housing. Available at SSRN 1555404.