Houses Stopped Being Homes

Houses are expensive for two reasons at once, and most of the public argument is about the smaller one. The smaller reason is supply. Britain doesn’t build enough homes where people want to live, and that matters at the margin. The bigger reason is the money. The pound is built to lose value, and the system that creates new pounds channels them into property through mortgage lending. So a house stopped being just shelter a long time ago. It became one of the main places this country stores its savings. When you bid on a house, you’re bidding against people who need a home. You’re also bidding against everyone trying to protect the value of work they’ve already done, using borrowed money, in a unit that loses value.

Two opposite directions

Housing is where the whole thesis becomes something you can feel. Your phone replaced a camera, a map, a stereo, and a filing cabinet, and now does all of it for close to nothing. A television costs less every year and gets better. Under a money nobody can add to, that’s the natural direction of a free market, because as tools improve, the same goods take fewer inputs to make, and competition passes the saving on as lower prices. That holds for everything technology has changed the making of. It doesn’t hold for housing, care, teaching, or building. Better tools haven’t made a house cheaper to build.¹ Houses went the other way. They ran far ahead of pay.² Same economy, same decades, two opposite directions. That gap is the tell that something other than the cost of bricks and the scarcity of land is setting the price.

How the money reaches the house

1.Money is loaned into existence

Most new money is created through lending.³ When a bank approves your mortgage, it creates a new deposit in your account, and that deposit is new money.⁴ No box of other people’s savings gets handed over. Of all the loans an ordinary household takes, the mortgage is by far the largest. So when banks lend, the mortgage is the main door new money comes through into ordinary hands.

2.Debt needs rising prices

Debts are fixed in pounds. Your mortgage says the same number whatever prices do. A system built on debt can take a slow fall that comes with better tools. In that fall it’s the cost of making things that drops, and pay drifts down slowly behind it, so the money to meet a fixed payment is still there. What it can’t take is a sudden fall in the prices credit pushed up, houses first, because then the losses spread through the banks. In that fall it’s the lending that has stopped, so incomes and the house fall together and at once, and the fixed payment is hit from both sides in the same year. Houses come first because people buy them with borrowed money. The debt takes a bigger bite of every income. And where the loan was written against a house, the house is worth less too, so the bank stands to lose more on that loan. So every time a sudden fall in those prices threatens, the system is rescued with new money, and the rescues keep getting bigger.

In between, policy targets rising prices of about 2% a year, forever.⁵ Central banks publish why they aim there. They want room to cut interest rates in a downturn, they know wages resist falling, and they say the official measure of prices overstates the rise. Those are the reasons they give, and the debts aren’t among them. The debts show up in the rescues, not in the everyday 2%. And because technology keeps pushing prices down, hitting that target takes a continuous expansion of money and credit, and the debt it leaves behind keeps growing. Between 2000 and early 2018 the world added roughly 185 trillion dollars of new debt to buy about 46 trillion dollars of growth.⁶ The scale of the effort tells you how hard technology is pushing prices down.

3.The new money reaches assets first

New money doesn’t land evenly. It usually enters through lending and financial markets, so it reaches assets before it reaches wages.⁷ Cheaper borrowing lets buyers bid more for the same house.⁸ The higher price becomes higher collateral, which is what the bank can take if the loan goes bad. Since 2014 the rules for an ordinary home loan have put an income test in the way, so a dearer house doesn’t by itself raise what an ordinary buyer can borrow.⁹ But the lending still grows with the price, through remortgages and equity release, through loans to landlords, and through the extra lending a bank can do once the houses behind its existing loans are worth more. That lending feeds the next round of bidding. Your pay moves slowly by comparison, because wages are renegotiated once a year while assets are repriced every day. Asset owners run ahead, wage earners fall behind, and the first rung moves further out of reach each time round.

4.The house takes money’s job

Under a money built to lose value, cash in the bank has lost value in most years, so money fails at one of its basic jobs, storing the work you’ve already done.¹⁰ People need somewhere to put that stored work, so the house takes the job. Demand for housing is two demands added together, one for shelter and one for a savings vehicle. That second demand is large and fed by policy, and it has nothing to do with the cost of building a house. What that second demand adds to the price has a name, a monetary premium. It’s the extra price an asset carries because people use it to store savings, on top of what it’s worth to use.

Put those four together and the rise in house prices reads the other way round. The money lost value, and houses were the sponge that soaked up the difference. You saved for years toward a house deposit, and then a round of money creation pushed prices further away from you. The house didn’t get better. Your stored time shrank.

The same house, measured in bitcoin

Measure the same house in a money nobody can add to, and over several years the trend has usually reversed. A house that rose from 1.4 million to 2.1 million measured in dollars fell from roughly 300 bitcoin to roughly 40 bitcoin over the same few years. The same reversal holds for a house priced in pounds, because the pound loses value the same way. Any single example is noisy, and this isn’t a suggestion about what to buy, only a measurement. The answer depends on the window too. Start at bitcoin’s late-2021 high and run to late 2022, and you get the opposite answer. The whole of the fall from 300 bitcoin to 40 is bitcoin strengthening against the dollar, not the house getting cheaper. In the short run, how many dollars a bitcoin buys moves with how much new money and credit the central banks are creating, and with the appetite for risk that comes with it. Over several years, a bitcoin buys more because more people have moved the work they’ve already done out of cash and property and into bitcoin. The house rose in dollars over those years. Bitcoin rose far more. So what you’re watching is a money that can finally hold savings taking the job on. The house letting go of it comes later.

Why the fixes keep disappointing

Blaming landlords or boomers goes nowhere, because there’s no villain here, only buyers, landlords, and banks all doing what a leaking money pays them to do. Stop the money leaking and the behaviour changes.

The leak also explains why the fixes aimed at the buyer keep disappointing. Schemes that top up a buyer’s deposit hand them more to bid with, and the price absorbs it, because the buyer is still bidding against stored savings and cheap credit while the money keeps losing value. Rent caps and stamp duty tweaks fight symptoms, and the cause goes on. And house prices are now hostage to policy, because prices this far ahead of what people earn only hold while borrowing stays supported. A young couple who stretch to buy carry that policy risk personally.

For owners, the paper gain is mostly illusion unless you sell down the ladder or leave, because you still need an equally inflated house to live in, and the council tax, insurance, and upkeep climb too.¹¹ Most of the “wealth” is a transfer from those who don’t own to those who do, not new value created.¹²

The common replies

“It’s just supply. Fix planning and this goes away.”

Supply is real, and I’d never argue against building. But scarcity alone can’t explain when house prices surge, or why they surge in country after country in the same years. The number of homes doesn’t change suddenly. The terms people can borrow on do. Prices jump in waves, and the waves line up with how easy it was to borrow, not with sudden changes in land. After the money expansion of 2020 and 2021, house prices and rents jumped across many countries at once, with wildly different planning regimes.¹³ Land didn’t get scarcer everywhere in twelve months. The money got bigger everywhere at once.

“Cheap mortgages are what make ownership possible.”

I think the cheap mortgage is a cause of the high price more than a cure for it. Cheap credit is the bigger reason the price is high in the first place.¹⁴ Buyers bid the falls in rates into the price, so the loan a buyer had to carry grew with it. The affordability didn’t arrive. What arrived was a bigger debt, and a buyer stretched to carry it. Mortgages at this scale exist because money fails at saving. Cheap debt was needed because the money lost value, so the deposit a saver put aside was outrun by the price of the house. With money that held its value, saving toward a house would actually work, and a starter home would be something you buy from savings rather than a debt that runs for decades.

“Falling house prices would be a catastrophe.”

Under a money nobody can add to, prices fall as tools improve, for everything technology has changed the making of. That’s the natural state, and it’s how the gain from better tools reaches you without anyone having to grant it. A house price can fall in a way that’s good for you too. When savings leave houses for a money that holds value, the price drifts toward what a home is worth to live in. What can’t survive a sudden broad fall in the prices credit pushed up is a system loaded with debt.¹⁵ That’s an argument about the design of the debt, not about what’s good for you.

Banks lean heavily on loans backed by houses, so a large fall in house prices is a threat to them, and the record shows British policy acting on that threat again and again. That’s a pressure on the system, though not one that stops house prices falling. When a sudden broad fall threatens, the losses would spread through the banks, so policy pushes house prices back up through credit. House prices have been allowed to fall, and the official tests of the banks assume a fall of about a third and still find every bank able to take it.¹⁶ Where prices were supported, the support served the lenders and the owners, and the cost fell on savers, whose interest didn’t keep up with prices, and on buyers, who paid more to get in.¹⁷

Bricks didn’t get harder to make. Pounds got easier to make. Housing is doing a job money should do, storing value, and the whole country pays for that service in the price of a home. Money that holds its value takes the savings job back, and a house drifts toward what it’s worth as a place to live. Measured in the hardest money we have, the savings job has already started to move.