Could Sovereign Money offer a solution to the housing crisis?

Britain is facing a mounting housing crisis amid a shortage of supply.

In the ten years up to the start of the financial crisis, house prices tripled. And house prices rise much faster than wages, which means that houses become less and less affordable.

As Frances O’Grady, general secretary of the TUC said at the London housing rally:

“This is a country where people are homeless while mansions and penthouses stand empty.The property market has become a giant casino where a generation of young people grow up without a hope whatsoever of getting a council house or buying their own home.”

But why have house prices gone up so quickly? 

And can the answer to that question reveal the solution to the problem of unaffordable houses?

Where does the money to fund these ever-larger mortgages actually come from?

If you – as most people – assumed that banks are taking money from savers and lending it to borrowers, here’s a surprising fact:  When we borrow from a bank, we’re not borrowing money from someone else’s life savings. It’s actually newly created money. In fact, brand new money is created by banks every time somebody takes out a loan, overdraft or credit card. (Proof)

In the 10 years running up to 2007, the banks had collectively created over £417 billion of new money in the form of larger and larger mortgages, with every new mortgage creating an equivalent amount of new debt and new money.

There are many factors contributing to this increase, but the 300% increase in house prices in the UK between 1997 and 2010 would never have happened without the creation of £417bn of new mortgage credit by the banking system.

The key fundamental driver of rising house prices is the ability of banks to create money when they make loans. Watch our video “Why are house prices so high”

Building affordable housing

According to Cambell Robb, chief executive of Shelter, successive governments have failed to build the affordable homes that this country needs. Now the shortage has reached crisis point and the only solution is to build more affordable homes.

Consensus opinion is that the UK is currently building far fewer homes than it needs to every year. Unfortunately, the private sector is unlikely to meet the demand for new houses. As the market is failing to provide the UK with the optimum number of new houses, there is “a clear case for government intervention, at least in the short term”.

However, an increase in house building financed from usual government budgets would require the diversion of funds from elsewhere. But there’s a solution whereas this need not be the case:

In our report Sovereign Money Creation, we have outlined how the Bank of England could create money in a similar way to Quantitative Easing, but whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, Sovereign Money Creation would inject new money directly into the real economy.

This idea is advocated by many prominent economists.

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