McKeen unpacks just how dramatic this change is: since the Thatcher years, house prices have doubled every 23 years. Before 1960, the house prices rose so slowly that they would have taken *280 years* to double (which is to say, the fate of most houses was to turn to rubble, not to double).

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So what did Thatcher do to make homes so eye-wateringly expensive? The high-level explanation is that the UK - like much of the world - transformed its housing stock: not a way provide the basic human right to shelter, but rather, an *asset*:

pluralistic.net/2021/06/14/eut…

Transforming a human necessity into an asset is a *terrible* idea. Governments work to increase the price of assets owned by actors in their economy.

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But increasing the price of housing only benefits the minority who own houses, while everyone else - everyone who needs a roof over their head - suffers. For a comparison, imagine if our governments instituted a policy of making some *other* necessity as expensive as possible, say, *food* or *water*. Transforming shelter into an asset class was always going to end badly.

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McKeen is an econ prof, and the point of this piece isn't merely to observe this remarkable shift in the economics of having a home, but also to trace the policy choices that led us to this moment, and to propose policies that could change things so that everyone can have a home.

So what did Margaret Thatcher do to destroy the chances of everyday Britons to have a home? Well, this is Margaret Thatcher, so if you guessed the answer was "deregulation," you'd be right.

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Prior to Thatcher's deregulation, home loans in the UK mostly originated with "building societies," a specialized lender whose operations are fundamentally different from the operations of a bank.

Here's the difference: when a building society makes a home loan, it withdraws money from a regular bank account at a regular bank, much like your savings account.

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In order for your building society to credit your mortgage account by £100k, there must be a corresponding decrease of £100k in its savings account (just like when you send £10 to a friend, you have £10 less and they have £10 more).

But that's not how it works when a bank originates a loan. Banks are "fiscal agents" for the UK's central bank, the Bank of England. That means that banks can create new money, simply by crediting one of its depositors' accounts.

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When a bank loans you £100k to buy a house, £100k in new money is created. Banks don't raid other depositors' accounts for your loan - they make new money, out of thin air.

So after the bank originates your loan, your account has £100k more in it, and the bank has an IOU from you for £100k, which sits on its books as an asset. In the moment the money is created, the bank makes £100k in new money for its balance-sheet.

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Every time a bank issues a new mortgage loan, the money supply increases - more is added to the economy. Thatcher deregulated mortgage lending, and after that, the majority of UK mortgages came from banks, not building societies. Every new mortgage increased the supply of money in circulation in the UK.

As Keen writes, this precipitated an "explosion" in house prices - and in household debt, which rose from 20% of GDP to 80% of GDP by the time of the Great Financial Crisis.

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Since Thatcher, house price have risen by 350% more than consumer prices.

Thatcher's deregulation "set off a vicious cycle": the existence of more mortgage debt made house prices rise (when banks supply more bidding money to buyers, buyers bid higher sums). As housing prices went up, housing could be used as collateral for still more loans, which encouraged homeowners to stake their homes to borrow money in order to buy more homes to rent out.

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Because they have so much collateral (an overpriced home), they can borrow so much (from banks that can create money) that they are able to outbid people who don't have a home yet and just want to buy a home so they can live in it.

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This is Keen's diagnosis, but the real question is, what do we do about it? The UK housing situation has been vapor-locked, because there's a powerful voting and donating bloc of homeowners who want to keep house prices high, both to maintain their personal net worth, and to avoid having their "chained mortgages" collapse when prices fall and they suddenly no longer have enough collateral and the banks demand repayment.

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This is where Keen's proposal gets really interesting. In this part, he proposes two policies that break the deadlock, offering a glide-path out of the housing crisis, rather than a crash.

The first of these policies is *deflationary* - it will lower prices. It's called the "PILL" ("Property Income Limited Leverage").

With the PILL, the most a bank could offer a housebuyer for a mortgage loan would be some multiple of the rental income from the property they're buying.

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Say that multiple is 10, and the home you're trying to buy would rent out at £50k/year: the largest mortgage you'd be allowed to take would be £500k (even if you're not buying a home to rent it out, you'd still be subject to this cap, since *potential* rental income is a large determinant of the price of a home).

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Keen notes that UK rents are *really* high, but property prices are *even higher* - property prices (and mortgages) have risen faster than rents. The average London home price is about 25x the annual rent it generates, and London mortgages are about 20x the annual rent for the properties those mortgages cover.

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The PILL would cap mortgage issuance at the current multiple (so in London, about 25x annual rent), but that number would be gradually reduced, a few points per year, until it reaches about 10x annual rent. This will have the effect of making homes a much less attractive asset-class for speculators, gradually driving "investors" out of the market, so that the majority of homebuyers would be people who were in the market for somewhere to live.

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This will make houses cheaper over time, and the majority of Britons (who can't afford to buy a home) would like this. But house-rich Boomers would *not*, and for good reason: the austerity-starved UK state has slashed benefits for everyone, and older people rely on selling or borrowing against their homes as a way to remain sheltered, fed, and cared for as they age.

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How do we win those Boomers over and stop them from scuttling affordable housing (again)? That's where the second proposal kicks in: AHA (the "Affordable Housing Authority"). This is a system for making homes *more* valuable, offsetting some of the reductions from the PILL, but without denying homes to people looking for somewhere to live.

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The biggest barrier to buying a home isn't the price of the home - it's the price of the home *and* the price of the mortgage. Decades of mortgage interest *vastly* increase the total cost of a home, and the interest on a monthly mortgage can make the difference between an affordable home and one that makes you "house poor" (where the cost of your home eats up so much of your income that you struggle to pay for heating, groceries, transportation, etc).

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Here's Keen's math: say you're a median UK household (£37k/year in disposable income) and you buy a median house (£270k) with a 10% deposit (what Americans call a "down-payment"), at 7% interest. Over a 25-year mortgage, your monthly payments will be £20.6k/year, more than half of your disposable income.

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Not only is this more than you can afford - it's also so much that you just *won't get a mortgage* from a bank. They'll look at those numbers and decide that you can't afford to pay back this loan (they'd be right, too).

But what if we trim that interest rate to zero? At 0% interest, the annual payments for your mortgage go from £20.6/year to £9,300 per year - an easily affordable sum for the median household.

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So the question is, why do we pay so much to the banks in interest? The Econ 101 answer is that banks take a risk when they loan out their depositors' funds, and they need a reward and incentive to take that risk. But banks *don't* lend out deposits: they *create* deposits. When you take out a £100k mortgage, the bank adds £100k to your account, *without* taking it from anywhere else.

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Banks are "fiscal agents" of the national bank, and they are permitted to create money this way - and then charge you rent (interest) on that money they can create for free.

Keen's AHA is a different kind of lender, a publicly owned one that creates money in exactly the same way as banks do, but *without charging interest*. The AHA is charged with offering loans solely to people trying to buy a home who have been priced out of the market.

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These loans will drive property prices up (by putting more buyers into the system), offsetting some of the price declines created by the PILL.

Other than the fact that AHA loans won't come with interest, these loans will work like regular mortgages: the borrower will pay them off every month, until they have paid back the entire principle. If they default on the mortgage, AHA can foreclose on the house and sell it off to get its money back.

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AHA always gets its money back and costs nothing - on balance - to operate.

Do interest free loans sound like a communist plot to you? Keen asks us to consider such noted socialist proponents for this ideas as Henry Ford and Thomas Edison, who railed against financing the Muscle Shoals hyrdroelectric plant with bank loans, instead insisting that the national bank should simply create the money to make those loans:

timesmachine.nytimes.com/times…

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Here's Edison:

> [Ford] thinks it’s stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000—that is what it amounts to, with interest. People who will not turn a shovel of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest.

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As Keen points out, it's not merely that the banks that currently issue mortgages don't "turn a shovel of dirt or contribute a pound of material" - they simply *will not issue a mortgage to a median buyer.* The median buyer can't get a mortgage, so the system is rigged to make them pay *someone else's mortgage* through their monthly rents, every month until they die.

AHA cuts the banks "out of a market they won't even enter."

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Now, it's true that current financial rules (foolishly) ban the Treasury from having a negative balance at the Central Bank. But we don't have to repeal those rules to make this work: the Treasury can offset AHA loans by offering bonds to private banks.

These two policies create "winners all round." New home buyers can afford a home. Banks get interest from AHA bonds to offset losses from limits on mortgage lending.

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Current homeowners get a cushion for their net worth even as homes get more affordable.

The loser is the investment sector, City boys who buy and sell mortgage debt. And you know, fuck those guys.

Keen finishes by teasing one more policy that he thinks will tie this all together: the intriguingly named Modern Debt Jubilee, a way to "to reduce private debt, but in a way that doesn’t cause an economic collapse," which he says he'll cover in his next post. Can't wait!

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I'm on a tour with my new book *Enshittification*!

Catch me next in #Chicago, #LosAngeles and #Calgary!

Full schedule with dates and links at:

pluralistic.net/tour

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