Wednesday, October 27, 2010

Good Reform Idea: Mortgages based on value not income

Steve Keen is an Australian economist who has written a great book on the errors of mainstream neoclassical economics.  Along with Paul Krugman, Dean Baker, and James K. Galbraith, he is one of my favorite economists (and remember, economics is religion and not science, regardless of what they tell you, so it's very important to select the best guides).

Here he has an idea wrt keeping housing prices from inflating out-of-sight as they did just before the Global Economic Crisis of 2008.

If we instead based the level of debt on the income-generating capacity of the property being purchased, rather than on the income of the buyer, then we would forge a link between asset prices and incomes that is currently easily punctured by rising debt. It would still be possible–indeed necessary–to buy a property for more than ten times its annual rental. But then the excess of the price over the loan would be genuinely the savings of the buyer, and an increase in the price of a house would mean a fall in leverage, rather than an increase in leverage as now. There would be a negative feedback loop between house prices and leverage. That hopefully would stop house price bubbles developing in the first place, and take dwellings out of the realm of speculation back into the realm of housing, where they belong.
The original article is here:

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