Is the Global Housing Market on a Collision Course? An Economist’s Unconventional Warning
Have you ever wondered why house prices seem to defy gravity, relentlessly climbing higher year after year, despite fluctuations in other economic indicators? The common wisdom often points to simple supply and demand dynamics. Yet, as the accompanying video featuring economist Dr. Steve Keen highlights, this mainstream explanation may be dangerously obscuring the real causal factors at play. Dr. Keen, known for his critical analysis of conventional economic thinking, argues that the global housing market is currently in a precarious state due to mechanisms rarely acknowledged by traditional economists.
For decades, the global housing market has exhibited trends that challenge easy explanations. A young woman in the video notes that “something strange is happening,” with the average property in the UK now costing nine times the typical salary. Similarly, Australia has seen prices rising at their fastest rates, and the United States has experienced its own cycles of booms and busts. Understanding these profound shifts requires looking beyond surface-level explanations.
Challenging the Orthodoxy: Beyond Supply and Demand
Mainstream economics frequently attributes rising house prices to an imbalance between housing supply and demand. However, Dr. Keen posits that this perspective misses the fundamental driver. He points out a stark historical divergence: from 1850 to 1980, UK house prices doubled, a period spanning 130 years. What is truly remarkable, however, is that over the subsequent 40 years, prices tripled. This accelerating growth suggests a powerful new force entered the market around the 1980s, fundamentally altering its trajectory.
The Role of Inequality and Speculation
One significant change Dr. Keen identifies from the 1980s onwards is the increase in wealth inequality. As wealth disparities widen, housing increasingly transforms from a basic human service—accommodation—into a speculative asset. This shift encourages wealthier individuals and investors to acquire multiple properties, viewing them as vehicles for capital growth rather than solely as residences. Such speculative activity can artificially inflate demand and drive up house prices.
The Overlooked Engine: Irresponsible Bank Lending and Mortgage Debt
The core of Dr. Keen’s argument centers on the critical role of private debt, particularly household debt. He asserts that modern banks are allowed to create money, fundamentally altering the economic landscape. When individuals purchase a house, they typically borrow a substantial portion—often 80% to 90%—of the funds. This means that the monetary demand for housing is predominantly “borrowed demand,” directly linked to the level of new mortgage debt being issued.
This dynamic creates an amplifying feedback loop. As banks extend more credit, the demand for housing increases, leading to higher prices. These higher prices, in turn, encourage more borrowing as individuals seek to enter the market or invest further, perpetuating the cycle. Dr. Keen contends that economists who ignore this mechanism are “obscuring the real causal factors in the economy,” to the detriment of economic health.
Data-Driven Insights: The United Kingdom’s Housing Trajectory
To substantiate his claims, Dr. Keen utilizes extensive data from sources like the Bank of International Settlements (BIS), which tracks debt levels and house prices across approximately 50 countries, dating back to the 1970s.
1. **Long-Term Real Price Surge:** In the UK, the real house price index (adjusted for consumer price inflation), set at 100 in 1968, was relatively flat until 1971. By 2025, it is projected to reach five times its 1970 level relative to consumer prices. This signifies a massive increase in housing affordability challenges over 55 years.
2. **Volatile Inflation:** While UK consumer price inflation peaked at around 25% in 1975, house price inflation has seen far greater volatility and higher peaks. For instance, in 1973, house price inflation soared to 50%. Other peaks included 31% in the late 1970s and 32% in 1988. Over most of this period, house price inflation consistently outpaced consumer price inflation.
3. **Household Debt Correlation:** Real house prices in the UK (indexed to 100 in 1970) have soared to nearly 700 today. Concurrently, household debt, as a percentage of GDP, rose dramatically from roughly 30% to nearly 100% before seeing some decline. While a superficial correlation exists between rising debt and rising prices, Dr. Keen delves deeper to reveal the true causal mechanism.
The Causal Link: The “Change in the Change” of Household Debt
Dr. Keen’s more nuanced and critical argument is that it’s not simply the *level* of household debt, nor even the *annual change* in household debt, that drives house prices. Instead, it is the “change in the change” of household debt—essentially, the *acceleration* or *deceleration* of new mortgage lending—that directly correlates with changes in real house prices.
Despite the inherent “chunky” and survey-based nature of economic data, Dr. Keen found a remarkably strong correlation. For the UK, the correlation coefficient between the change in the change in household debt and the change in real house prices was a substantial 0.89 (though he clarifies this can be artificially high if data isn’t de-trended). More importantly, rigorous causal analysis, such as Granger Causality tests, demonstrated a causal link 15 times stronger from the change in the change of household debt to house prices than in the reverse direction.
This statistical evidence powerfully supports the contention that new bank lending, specifically the rate at which mortgage debt is accelerating, is the primary force behind rising house prices. This insight fundamentally challenges economic models that do not account for endogenous money creation by banks and its impact on asset markets.
Global Echoes: United States and Australian Housing Markets
The patterns observed in the UK are not isolated. Dr. Keen presents similar findings for other major economies:
1. **United States:** The US experienced a period of dramatic house price rises, peaking before the 2008 global financial crisis, driven by a surge in household debt from around 40% to nearly 100% of GDP. Even currently, with household debt falling in some periods while house prices rise, Dr. Keen’s “change in the change” argument holds. The correlation for the US data is still a significant 0.63, undeniably linked to the subprime housing bubble and subsequent recovery.
2. **Australia:** Interestingly, in Australia, where many believe a housing bubble has not yet crashed, Dr. Keen finds an even higher correlation than in the US, using the same “change in the change” methodology. This suggests that Australia’s housing market is subject to the same underlying pressures and risks, despite the narrative that it has avoided a significant downturn.
Across these nations, the core message remains consistent: irresponsible bank lending fuels a feedback loop, amplifying demand and driving up house prices to unsustainable levels. This is a systemic flaw that, as Dr. Keen puts it, “any engineer would say, this is a bad system, you’ve got to get it out of your system.”
Implications and the Path Forward for Housing Affordability
The implications of Dr. Keen’s research are profound. If bank lending is the primary driver of escalating house prices and subsequent market instability, then relying on conventional supply-side solutions alone will prove ineffective. The current system, where banks are largely unchecked in their ability to create credit for mortgages, directly contributes to both unaffordable housing and the social breakdown that accompanies such financial stress.
Dr. Keen argues that for the “health of capitalism” itself, neoclassical economics, which often overlooks the role of private debt creation, must be re-evaluated. His research suggests two critical policy directions: either government intervention is needed to “get banks out of the mortgage market” entirely, or stringent controls must be imposed to limit their lending practices. Without such measures, the cycle of unsustainable house price booms and crashes, exemplified by the US subprime crisis, is likely to continue, exacerbating economic instability and housing unaffordability globally.
Navigating the Crisis: Your Housing Market Questions Answered
What is the main problem discussed regarding the global housing market?
The article highlights that house prices have been rising unusually fast for decades, making homes increasingly unaffordable in many countries.
Who is Dr. Steve Keen and what is his main argument about rising house prices?
Dr. Steve Keen is an economist who argues that rising house prices are primarily driven by irresponsible bank lending and growing mortgage debt, rather than just basic supply and demand.
How does bank lending contribute to higher house prices, according to Dr. Keen?
According to Dr. Keen, when banks create new money by extending more credit for mortgages, it directly increases the demand for housing, which then pushes up property prices.
Why does Dr. Keen’s perspective differ from common economic explanations?
While common explanations focus on supply and demand, Dr. Keen emphasizes that these overlook the crucial role of private banks’ ability to create new money through mortgage lending, which fundamentally changes the housing market.