House Price-Credit Feedback Cycle

Overview

The house price-credit feedback cycle is a self-reinforcing loop between mortgage lending and land prices, named and diagrammed by Josh Ryan-Collins, Toby Lloyd, and Laurie Macfarlane in Rethinking the Economics of Land and Housing (2017, Ch. 5, §5.2). The mechanism runs: (1) mortgage lending outpaces the supply of new dwellings, pushing up the price of the fixed input, land; (2) higher prices require larger loans, which boosts bank profits and capital; (3) banks respond by issuing still more credit, pushing prices up further; (4) the cycle continues until property prices are many multiples of incomes; (5) an economic shock or interest-rate rise triggers defaults, falling prices, and financial crisis.[1] The authors quote former UK Financial Services Authority chair Adair Turner's description of the underlying dynamic: "Lending against real estate generates self-reinforcing cycles of credit supply, credit demand and asset prices."[1]

Because land is fixed in supply, the authors argue, credit expansion aimed at existing land cannot call forth more of it — it can only bid up its price, which is then re-lent against as collateral, so "the supply of bank credit can be seen to create its own increased demand for even more credit" (Ch. 5, §5.1).[1] This is consistent with — though not identical to — the independent, non-Georgist finding by Jordà, Schularick & Taylor that the mortgage share of bank lending across 17 advanced economies roughly doubled over the twentieth century and became the dominant predictor of post-WWII financial crises; that paper documents the credit-side mechanism without singling out land, as distinct from structures, as the driver.[2]

See Also

• Rethinking the Economics of Land and Housing — the book page for the source text
• The growth of modern banking is largely mortgage credit against land — the outcome page on the same land-credit linkage
• The Great Mortgaging — the mainstream empirical paper on mortgage credit's dominance and crisis prediction
• Josh Ryan-Collins — lead author of the book that names this mechanism
• Boom-Bust Cycle — the general concept, including the land-cycle and credit-cycle readings
• Objection: property cycles are driven by credit, not land — the steelmanned case that credit, not land per se, is the causal engine

Sources

1. Josh Ryan-Collins, Toby Lloyd & Laurie Macfarlane, Rethinking the Economics of Land and Housing (London: Zed Books, 2017), Ch. 5, "The Financialisation of Land and Housing," §§5.1–5.2. Book page — used for the named mechanism, its five-step structure, and the Adair Turner quotation.
2. Òscar Jordà, Moritz Schularick & Alan M. Taylor, "The Great Mortgaging: Housing Finance, Crises, and Business Cycles," NBER Working Paper No. 20501 (September 2014). PDF (NBER) — used as the independent, mainstream (non-Georgist) empirical documentation that mortgage credit's share of bank lending rose sharply and became a significant predictor of financial crises; this paper does not itself identify land, as opposed to real estate generally, as the causal driver.