Currently our "equity" investment in our homes is not actually an "investment" - loans are not investments -it's secured credit created through mortgage loans. This credit created by Banks and Building Societies - over 70% of money supply - isn't actually circulating, but is "locked up" / invested in land and Bricks & mortar.
Considering how much of the US and UK is spending money that doesn't exist, this can't be true.
Mortgages are considered investments for the simple and rather obvious reason that property values increase steadily. Even when there's a bust, most people don't lose money on property, even when the total value of the repayment on a mortgage is considered. Some people, and lose badly. But considered across the market as a whole, they're a minority.
Traditionally people didn't remortgage much. Now it's much more common, and people are effectively asking for some of the value of their property as cash before the mortgage expires.
Since the advance equity is spent rather than saved or invested, it ends up in the retail market. It's hard to be sure if it pushes up retail prices there. But considering we're talking about a significant proportion of GDP, it seems unrealistic to assume that it can't have an influence.
Some of that retail expenditure will end up as profit, which will either be reinvested by shareholders or will be used to justify a higher lending amount on an existing mortgage by company owners and possibly also company employees.
So I'd suggest the effect is clearly inflationary. In fact I suspect that a significant driver of the recent boost in UK inflation has been the property bubble, which has not only pushed up prices, but also create a lot of imaginary liquidity which is being spent like there's no tomorrow. (And financially, for people with 5-6 times mortgages, there may well not be.)
That is true.
And to that extent - through the "Equity Release" mechanism - money is created which goes into circulation and potentially could be "inflationary" if it were not the case that most consumer prices, courtesy of outsourcing to China, have been consistently declining.
Property prices only increase because they are being "bid up" by "Money" backed only by an 8% capital cushion.
The practice of fractional reserve banking therefore leads directly to asset price inflation and indirectly - in relatively small part, I would say - to retail price inflation.
But when such an asset price bubble bursts - as it has in the US - stagflation is the inevitable result. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
