During the mortgage boom, credit is easy, prices are rising, people are working in and around the housing sector and governments are collecting taxes and expanding services.
After a mortgage boom, the bust shows up and if there was a rapid ramp-up in mortgage creation, a deep and prolonged recession subsequently unfolds.
Notice in the chart (left) that mortgage creation in bank portfolios increased:
Post WW2 and 1970's inflation, Canada has been late to the party and the ongoing Canadian mortgage creation boom relative to total bank lending which includes business and structural expansion financing, is 2x that of the U.K. and 3x that of the U.S.
We are building a leaky condo economy.
SUMMARY of Jordà, Schularick, and Taylor's 2014 long-run dataset covering disaggregated bank credit (examining mortgage loan leverls) for 17 advanced economies from 1870 to 2014
When prices stop rising, the boom collapses and because there has been no increase in business investment other than supplying the housing trade, unemployment goes up and spending and tax collection goes down. Then the boring business of converting debt into equity unfolds by the long process of debt repayment amortized over decades or the short process of liquidation.
The first important insight from our data collection effort is that the sharp increase of credit-to-GDP ratios in advanced economies in the 20th century has been first and foremost a result of the rapid growth of loans secured against real estate – i.e. mortgage and hypothecary lending. (A hypothec is a right linked to property.) The share of mortgage loans in banks’ total lending portfolios has roughly doubled over the course of the past century –from about 30% in 1900 to about 60% today, (U.S.).
In other words, banking today consists primarily of the intermediation of savings to the household sector for the purchase of real estate. The core business model of banks in advanced economies today resembles that of real estate funds: banks are borrowing (short) from the public and capital markets to invest (long) in assets linked to real estate.
By contrast, nonmortgage bank lending to companies for investment purposes and nonsecured lending to households have remained stable over the 20th century in relation to GDP. Nearly all of the increase in the size of the financial sectors in Western economies since 1913 stems from a boom in mortgage lending to households and has little to do with the financing of the business sector.
Household mortgage debt has typically risen faster than asset values, resulting in record-high leverage ratios that potentially increase the fragility of household balance sheets and the financial system itself.
Mortgage lending booms were only loosely associated with financial crisis risks before WW2, but since then real estate credit has become a significant predictor of impeding financial fragility in the postwar era.
Since WW2, it is only the aftermaths of mortgage booms that are marked by deeper recessions and slower recoveries. Both in normal recessions and in financial crisis recessions, the slump is deeper and the recovery slower if mortgage growth was rapid in the preceding boom.
In the second half of the 20th century, banks and households have been heavily leveraging up through mortgages. Mortgage credit on the balance sheets of banks has been the driving force behind the increasing financialisation of advanced economies. Our research shows that this great mortgaging has been a major influence on financial fragility in advanced economies, and has also increasingly left its mark on business cycle dynamics.
Source & HatTip to: http://pragcap.com/the-great-mortgaging
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July 31, 2021
History, Charts & Curated Readings
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