ChainWhat it assumes · how to break it
Start
Banks expand mortgage and consumer lending rapidly and relax their lending standards, as many did in the years before 2007.
1
As a result, more mortgage lending raises demand for housing, and because supply is price inelastic, house prices rise sharply.
PES · asset prices
PES · asset prices
Assumes: Housing supply cannot respond quickly.
But: Where planning rules allow building to respond to higher prices, extra supply limits the rise.
2
This means existing homeowners and shareholders gain wealth, while renters and those with few assets do not.
wealth inequality
wealth inequality
Best link to attack
Assumes: Asset ownership is concentrated among the better-off.
Assumes: Asset ownership is concentrated among the better-off.
But: Easier mortgage lending also lets some lower-income households buy for the first time and share in rising prices.
3
Consequently, house prices rise faster than incomes, so younger people and renters find it harder to buy, widening the gap between owners and non-owners.
affordability · intergenerational inequality
affordability · intergenerational inequality
Assumes: Incomes do not keep pace with house prices.
But: Easier credit can keep homes affordable for buyers who are willing to take on larger mortgages, at the cost of higher debt.
4
In addition, when the boom ends, the most stretched borrowers are most likely to default and lose their homes, because they borrowed most relative to income.
default · negative equity
default · negative equity
Assumes: The bust leads to widespread repossessions.
But: Low interest rates and lender forbearance can keep repossessions down, as in the UK after 2008.
End
Wealth inequality widens as asset owners gain from rising prices while renters and stretched borrowers lose out.
Evaluation chain
- E1However, the effect on inequality depends on who owns the assets whose prices rise.
- E2If easier credit lets lower-income households become homeowners, they share in the rise in house prices.
- E3As a result, home ownership spreads and the wealth gains are less concentrated at the top.
- E4So a credit boom may widen wealth inequality less than expected while it lasts, although those who bought last with the largest loans lose most when prices fall.
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Questions this answers
- Assess the impact of rising house prices on the distribution of wealth.
- Evaluate whether easier access to credit reduces or increases inequality.
- Discuss the effects of a credit boom on different groups in society.
Diagram
Lorenz curve for wealth moving further from the line of equality. A housing market diagram with demand shifting right against inelastic supply shows the price rise.
Reverse and related
Credit crunch → house prices fall, reducing homeowners' wealth, though the most stretched borrowers may face negative equity.