A new working paper from the Dutch central bank shows that subsidizing people’s home mortgages mostly helps wealthier-than-average people buy bigger houses than they would’ve otherwise. It also drives up the price of land and exacerbates income inequality. Business lending, on the other hand, reduces income inequality.
The authors wondered why income inequality is greater in countries where it’s relatively easy to get loans than in countries that feature less “financial development.” Since lending moves capital from the wealthier to the ambitious-but-less-wealthy, you might think more lending would result in greater equality. After all, if the loans are paying off then the lenders are getting richer but the borrowers even more so. The theory was that “Financial development decreases income inequality, by enabling a larger share of the population to save, invest, manage risk and smooth consumption, resulting in more equitable wage distributions,” the authors write.
And it turns out that lending to non-financial businesses does indeed reduce income inequality. The lender makes some money and the entrepreneur makes even more. Everyone wins. Inequality decreases.
But lending to people to buy houses has the opposite impact.
This kind of lending inflates real estate prices, increasing landowners’ profits without providing anyone else any more value. To the extent that an economy rewards people for owning things instead of building or doing things it will become less equal, dynamic, and prosperous over time. And that’s exactly what we’ve seen as the developed world has moved bank credit allocation from investments by non-financial firms towards financializing real estate markets.
“Household mortgage credit increases income inequality, while credit to non-financial business decreases income inequality,” the authors write.
Home mortgage lending can only be profitable as long as home prices rise. As long as home prices keep rising, the nationwide housing affordability crisis only deepens.
Profiting from home mortgage lending is a zero-sum game. Housing can’t be both affordable and a safe, high-return investment. Home mortgage lending acts as a wealth transfer from on-average poorer renters to higher-income lenders and landowners. This, definitionally, exacerbates income inequality.
Even the way banks lend for mortgages exacerbates income inequality. Poorer families end up paying higher interest rates and losing their homes to foreclosures at higher rates than wealthier families.
And what happens to those homes?
During the Recession the federal government gave huge bailouts to banks that had made gobs of money buying and selling distressed mortgages. Meanwhile these banks foreclosed on so many families that housing prices dipped. The Obama administration offered no help to most of the families who’d lost their homes. Housing prices were on track to dip, which would have been a great help to the displaced families. But rather than let that happen, the administration boosted home prices by encouraging private investors to buy up foreclosed homes and rent them out at a profit.
Underbuilding in high-demand areas has created a nationwide housing crisis, which causes more and more families to pay half their salaries or more in rent. Megacorporations like Invitation Homes take advantage of the situation by raising rents on low-income families while cutting back on maintenance and repairs. With inadequate supply of new homes and apartments, renters have nowhere else to go. While shareholders get rich, renters in Georgia get burned by scalding hot water bursting from pipes. Property administrator Shanell Hanson reported Colony American Homes to OSHA. The homes were in such disrepair that she feared for maintenance staff safety. The company fired her in retaliation.
The federal government chose to help consign American renters to a rapacious, dangerous rental market that moves American wealth upwards from renters to homeowners and investment bankers.
It’s common wisdom that homeownership is the primary wealth-building tool for the middle class. What’s left out of that conversation is that in order for a home to build a family wealth it has to rise in price. If houses rise in price, renters end up paying more for shelter. Every dollar a middle-class family “earns” by sitting in their house must be taken from a renter or future buyer.
The good kind of wealth building makes everyone richer. Building wealth from land value appreciation is a zero-sum game. If the government is going to encourage any kind of wealth building it should favor non-financial entrepreneurship over land-hoarding. Programs that encourage profits from landowning such as the mortgage interest tax deduction are immoral and inefficient.