Delinking Housing Cycles, Banking Crises, and Recession

The nexus of housing boom-busts, banking crises, and economic cycles is not unique to the last crisis and has been increasingly present in each of the major banking crises since the break-up of Bretton Woods in the early 1970s. Housing is a politically charged issue. A safer housing market, via planned fiscal intervention to steady supply, would do more to make the financial system safer than all of the other recent initiatives put together. Cheaper finance without cheaper homes only deepens housing inequality.

Housing booms and busts lie behind the biggest economic and financial crises in recent decades. Between 2006 and 2009, the Organisation for Economic Co-operation and Development (OECD) countries that suffered the largest declines in household spending (Denmark, Ireland, Norway, Portugal, Spain, United Kingdom or UK, and United States or US) were those that had the greatest increase in household debt over the preceding 10 years (Glick and Lansing 2010). Most of this debt was collateralised on residential homes in one way or another. When house prices collapsed, the net worth of these indebted consumers and their banks followed suit, credit lines were cut, consumption fell and a fire sale of assets ensued. Personal consumption fell by 20% or four times the national average in the one-fifth of US counties that suffered the highest decline in housing net worth during the same period. The collapse of house prices deepened the recession, not the other way around.¹

An Old Association