May 25, 2018

The regulatory subsidy of house financing has caused much of the financialization of property markets.

Sir, Gillian Tett writes that since some investors are treating housing more like a tradeable asset, chasing yields around the world… [the] housing market is more “financialised”, [and so] a decade of ultra-loose monetary policy in the west has lifted so many geographically dispersed real estate boats” “New York property jitters herald declines elsewhere” May 25.

Since decades regulators allow banks to leverage much more their equity when financing the purchase of a house than for instance financing an entrepreneur. That means that compared to when banks held the same capital against all assets, which it did during most of its history, they now earn higher expected risk adjusted returns on equity when financing the purchase of a house, than for instance financing an entrepreneur.

Anyone who does not think this directly influences house prices should not be writing about finance.

What could the price of houses be in the absence of this regulatory subsidy? It’s hard to say. A static analysis would clearly yield the answer of much lower (30%?), but a dynamical one could perhaps yield higher prices, as a result of so many more affording houses because of more jobs created by entrepreneurs.

How do we get rid of the distortion? The sad fact is that for the redistribution profiteers it is much more interesting to offer affordable houses than to have more people affording their houses, which of course c'est pas la même chose. 

PS. One question I often ask myself is: nowadays when we finance someone’s purchase of a house how much of its price do we need to finance just because of the subsidized financing?