November 23, 2014

With no ​​jobs to pay mortgages or utilities, at least we are living in great houses. Thank you bank regulators!

Sir, I refer to Tim Harford’s “Why a house-price bubble means trouble” November 22.

In it Harford writes “Booming housing markets attract bankers like jam attracts flies, sucking money away from commercial and industrial loans. Why back a company when you can lend someone half a million to buy a house that is rapidly appreciating in value?”

That is far from being the whole story.

Regulators, because they thought or wanted to think about the financing of houses as something absolutely safe, also allowed the banks to do it against very little bank capital, meaning very little equity… especially if someone managed to dress up the mortgages in AAA ratings.

And that allowed banks to earn much higher expected risk-adjusted returns on equity when financing houses than when financing the “risky” small businesses and entrepreneurs, those who could create jobs, and for which their regulators required them to hold much more equity.

And so here we now find ourselves… living in expensive houses with too few good jobs to allow us to pay the mortgages and the utilities. Is that not sort of bad planning?