Friday, September 27, 2024

#AI #OpenAI #ChatGPT: What would be the availability of affordable houses/homes without Basel risk weighted bank capital requirements?

I asked ChatGPT:

"If since 1988, with Basel I, banks had not been required to hold more capital/equity against loans to small businesses and entrepreneurs, than against residential mortgages, compared to now, what would be the availability of affordable houses/homes?"

ChatGPT answered:

If since 1988, banks had not been required to hold more capital against loans to small businesses and entrepreneurs compared to residential mortgages, the availability and affordability of housing might look quite different today. Let’s break down why:

1. Capital Requirements and Loan Pricing

The Basel I Accord, introduced in 1988, set different risk weightings for different types of loans, requiring banks to hold more capital for loans considered riskier, like small business loans, compared to relatively safer loans, such as residential mortgages. The result of this was:Cheaper mortgage financing: Banks could issue mortgage loans more easily and at lower interest rates because they were required to hold less capital against them.

Costlier business loans: Since small business loans carried higher capital requirements, they became more expensive and less accessible for entrepreneurs.

If the capital requirements for small business and mortgage loans had been more balanced, banks might have allocated more resources toward business lending rather than predominantly focusing on the housing market. This could have had several long-term effects:

2. Less Emphasis on Mortgage Lending

With fewer regulatory incentives to prioritize mortgage lending, banks might have directed more funding toward small business loans or other productive investments. This might have led to:

Slower growth in housing demand: Without easy access to cheap mortgages, the demand for residential properties may not have increased as rapidly as it did.

Fewer housing bubbles: Looser lending standards for mortgages contributed to housing bubbles in many markets (most notably in the mid-2000s, leading to the 2008 crisis). With tighter control on mortgage lending, housing prices may have grown more slowly and sustainably.

3. More Balanced Economic Growth

If small businesses and entrepreneurs had easier access to credit, the broader economy might have diversified its growth sources. Instead of an overreliance on housing, there could have been:Greater job creation in sectors outside real estate: Small businesses are key to job creation. If they had better access to financing, there might have been more innovation and employment opportunities, possibly reducing reliance on housing as a primary source of economic activity.

Less speculative real estate investment: When credit is too focused on housing, speculative investment in real estate becomes more likely. If more resources had been available for business creation, some of that speculative pressure might have been diverted.

4. More Affordable Homes?

Moderated Housing Prices: With fewer mortgages being issued and a slower rate of price appreciation, housing prices might have remained more affordable over time.

More demand for rental housing: If fewer people could easily access mortgage loans, the demand for rental properties might have been higher, possibly increasing rents but keeping homeownership more selective.

5. Impact on Housing Availability

The availability of homes might have been influenced in two key ways:

Less speculative home building: With more balanced lending practices, developers may have built fewer homes purely for speculative purposes, leading to a more rational supply-demand balance.

Higher business growth leading to more balanced urbanization: A stronger small business sector might have led to more evenly distributed economic growth across regions, reducing pressure on housing in urban centers.

Summary of Housing Affordability and Availability Impacts: 

Less pressure on housing markets could have kept prices from rising as fast as they did, making homes more affordable for many people.

A slower rise in housing prices would likely have resulted from less aggressive mortgage lending practices.

A better-diversified economy with more resources for small businesses might have reduced the economy’s over-reliance on housing, leading to more sustainable economic growth overall.

In this alternate scenario, housing availability might have increased at a steadier rate, and prices could have been more affordable due to less speculative activity and more focus on productive investments in the broader economy.

I said: Thanks!

It said: You're welcome! Feel free to reach out if you have more questions anytime!