Oct 29, 2021Liked by Jan Nieuwenhuijs

Jan, as per usual quality analysis.

One point of constructive criticism though.

From your conclusion, "Finally, in the Netherlands, and I suppose elsewhere, the most mentioned solution for unaffordable housing is to simply build more houses. This approach fails, because banks can always print money faster than anyone can build houses. The solution is to be found on the demand side, not the supply side.

I agree what you are saying here, but I think any solution is neither about demand or supply. Instead, I would suggest a solution is of a legal nature.

As you write, banks are able to create credit on the basis of their own balance sheet -- which in itself is not restricted by any deposits or other external funding (and so banks create credit 'out of nothing') -- yet the key understanding this accounting process is that banks always need a borrowers balance sheet to take collateral from. The question for banks is always about the collateral of borrowers.

Now, if you ask me, high bubbly prices are a consequence of <<future income>> having become the collateral basis for extending credit. This is what changed during the 90s.

When banks extend credit with houses as collateral, what happens when a mortgagee defaults? The house is sold and the mortgagee's debt is cancelled. Consequently, all financial risk are contractually borne by both debtor and creditor. Especially because banks will insist mortgagees put personal equity in the mortgaged house so that this equity functions as a buffer for banks to limit losses. (See Luigi Zingales Plan B for more how exactly so). Banks then are naturally inclined to refrain from over-crediting because at some point, they create future losses.

Plus another big benefit would be that all private contracts of credit, necessarily become self-liquidating by means of legal stipulation. Instead, they are shifted off to unrelated third parties, be it taxpayers due TBTF, not-so-savvy buyers of securitizations (pension funds and alike), or central banks printing ad infinitum to prop up markets.

What we have now in the Netherlands and elsewhere is very different because when mortgagees default, their houses gets auctioned off ('how many cents on the dollar..?') and the residual losses are entirely borne by mortgagees. Why? Their income has been taken as collateral. The house and its price, under this legal regime has always been beside the point when banks extend credit.

Because banks do not face a legal obligation of mutual risk-bearing, naturally, they maximize their profits by over-crediting, because "see, house prices can only rise", right?

...and you won't hear any Lawmaker complain about this in public, because this very same principle of collataralizing future income is exactly how they (mis)manage our public finances...

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Excellent article! I am shocked at Amsterdam's rate of increase in the last decades! But it reflects the same rate of increase that happened in my American town. Values more than doubled here since Covid.

I have good friends who live in a suburb of Amsterdam who watched as I struggled during the Great Financial Crime Spree of 2008. They couldn't understand why I was fighting so hard, nor did they understand what was happening to me. I should send them this article, but I think they may resent me for pointing out the same thing is building within their own country.

The banks should have been punished for their behavior in the lead-up to the Great Financial Crime Spree. Because they weren't, we see the same phenomenon happen all over again. It is so disheartening.

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Excellent. Why not be more transparent? Good point. It helps quash the doubters which is important.

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"Not only did the mortgage revolution “crowd out” credit for productive businesses"

That's not really true - banks don't lend existing deposits when they make loans. They create new deposits instead - which is how money gets created. The increase in mortgage loans is necessary from the ECBs perspective to generate enough new money to have a chance to reach the 2% inflation target.

In the US for example M3 grows 8% a year to reach 2% inflation. That's a lot of debt to add - and mortgages have the advantage of having good collateral. It does have its limits though. Private debt to GDP doesn't like to get much higher than 200%.

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