The government can solve the home affordability problem through any or all bank lenders while at the same time increasing the lenders’ home loan margins and increase their number of accounts.
Ask one of the fractional reserve bank organisations to create a special home loan product with an interest rate of say 3% fixed forever. (Note if no bank can be found then the Reserve Bank can create the low cost loan money through a designated lender of whom their would be many put up their hands). The 3% is to cover the cost of default loans and the administration costs of looking after the accounts.
The loan money before being spent must be deposited in an account in the same bank and it must have an interest rate of zero while on deposit.
The loan money can ONLY be used to either purchase an existing house or to pay for the building of a new house.
If the loan money is used to buy an existing house then the money must still not attract interest – that is the seller receives constrained money which does not attract interest.
Interest free money in deposit accounts can be transferred to other zero interest accounts and can be sold for unconstrained money.
If the money is used to pay for the construction of a new house or a house extension it “loses” its restriction and can be deposited in any account. It does this because it has created an asset that has value.
What will happen.
Anyone wishing to purchase or build a house will take out a low interest loan.
The money created from the low interest loan will rapidly be used to pay for building a new house as it is of no use sitting in a bank account at zero interest.
People who want to pay for or build a new house will either get low interest loans or will purchase zero interest money. The discount on the price of the money will reflect how inflated the house prices are in relation to their rental value.
House prices overall will fall but banks are still protected because they still get their 3% margin.
The losers will be existing house speculators – that is people who purchased houses anticipating that the prices would rise relative to other prices.
Existing house owners are unlikely to sell their houses for constrained money unless they are going to build a new house in which case the constrained money does not matter.
Where can this system go wrong?
It will go wrong if house money becomes high interest bearing without increasing the value of the total asset pool. People, like builders architects etc, are all registered and if they or their companies do not use the money to build increase the asset pool size then they are banned from doing it as is the person who used the money inappropriately is banned from ever getting a low interest loan for housing.
A person purchases a new house with a low interest loan. If they later sell the house then they receive the unpaid loan part as house money. This money goes into a bank account that attracts zero interest and can only be used to buy or build another house. They cannot use the money they receive to pay off the loan. They can sell their zero interest money to someone who wants to buy or build a house or they can use it themselves on another house.
Who will pay for the system?
If it was announced that the government wanted such a system deployed then companies would soon offer to supply the system for no cost to the government.
The cost of the system would be covered by charges to suppliers who get paid for their services through the system.
The government could announce that they were going to implement the system as part of their strategy for producing low cost housing. It could be initially introduced through a group such as chc affordable housing who are likely to welcome the chance of offering their buyers fixed 3% low cost loans. If it proves successful there then the banks will soon extend the system themselves.
Why it works
It works because we create special money that while it is in bank accounts attracts zero interest. In other words the cost of money is just the cost of the risk of the loan and the administration of the loan or 3% or less. Interest rates on house loans are high because banks pay high interest on deposits. This special money is of no use when it is an account and so people will tend to quickly use it to build a house.