Land titles are not weath. They are a claim on wealth. The difference is not a mere matter of semantics.
The underlying value of land is its annual rental. Land title purchase is the purchase of the stream of rental income. At the start of an economic cycle, as around 1995, the price is about 20 times the rental ie 5%, so that the return on land is about the same as the return from a bank deposit. But expectations of a rising rental value means that the price increases to about 25 times rental in the early stages of an economic up-cycle. (the figures are illustrative). At this point, about three years on into the cycle, land/asset titles start to be traded in their own right on the expectation of capital growth. Of course houses are purchased primarily as placed to live, but the prospect of rising prices gives credence to the notion of a "housing ladder" which people have to get on to. The market becomes increasingly "buoyant", with lenders increasingly willing to lend, safe in the knowledge that their loan is secured on the collateral of an asset whose value is on a rising trend.
But this willingness to lend is itself driving up prices, and now, a self-feeding bubble is developing. In the latest cycle, this was happening around 2004. But rents are rising only with the general increase in prosperity, and the percentage yield is now on a falling trend. There comes a time when loan repayments are significantly higher than rental incomes, and at this point the bubble is primed to burst, which happens as soon as an event occurs to disturb the trend.
Borrowers start to default, and properties are repossessed and sold. This halts and then reverses the rising price trend and lenders find themselves with collateral that is worth less than the amount lent. The bubble then collapses.
These cycles have occurred since about 1800, with a periodicity of around 18 years, disturbed only by the two world wars.
On this analysis, the behaviour of the banks is a secondary phenomenon. It is the operation of the land market that is the underlying cause, and there is only one way of preventing these cycles - to collect, as public revenue, almost the entire rental value of land through an ad valorem tax on its annual value. Such a charge would enable governments to get rid of most other taxes, and possibly pay out a dividend as well in the form of a "reverse poll-tax".But it is not going to happen because small but powerful vested interest groups will not allow it.
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