Everyone's borrowing more. So why can't anyone afford a home?
- Why cheap loans work like a stadium where everyone stands up.
- How every buyer bidding more pushes the same home's price up.
- Why nobody is the villain, and what that means for you.
Picture a stadium. One fan stands up to see better, and it works. Then the person behind him has to stand too. Soon the whole stadium is on its feet, nobody sees better than before, everyone's legs hurt, and the one person who stays seated sees nothing at all. Housing works a lot like that, and the thing that makes everyone stand is cheap credit.
Let's make it concrete
Leo and Nadia both want the same apartment, and each can afford $2,000 a month. When mortgage rates are 6%, that payment covers a loan of about $330,000. When rates drop to 3%, the same $2,000 covers about $475,000.
Great news for Leo, until he realizes Nadia can now borrow that much too, and so can every other buyer. They don't get a nicer apartment. They bid against each other, and the same apartment now costs more. Lower rates didn't make homes affordable. They made them more expensive.
Where does all that loan money come from?
You've probably heard of "fractional reserve banking." The name is right, but the usual explanation isn't. Banks don't lend out your savings. A bank keeps only a small fraction of its customers' money in reserve, enough to cover the withdrawals it expects on a normal day. That's a safety cushion, not a lending limit.
The lending works differently. When Leo signs his mortgage, the bank doesn't take $475,000 from someone else's account. It simply types $475,000 into his. That money didn't exist a minute before. Most people think central banks create money. They do create some, but most of the money sitting in everybody's bank accounts was created by ordinary banks making loans.
In the US, the reserve requirement has been 0% since 2020. In the eurozone, it's 1%. So reserves aren't what limits lending. The real limits are capital rules and how many people want to borrow, and when rates are low, that's a lot of people. That's why debt matters so much. Most new money comes into the world as someone's loan. When lending speeds up, the money supply grows. When it slows down, the money supply slows too.
Each mortgage makes sense on its own. Together, they push prices up for everyone, including the next buyer, who then needs an even bigger loan.
Isn't this a bit unfair?
Partly, yes. When cheap loans push prices up, people who already own homes get richer without doing anything. People who are still saving for one watch the finish line move further away. We saw this with Priya and Lukas in "I avoid debt like I was taught": the one who borrowed early came out ahead.
Nobody's a villain here. Banks lend because people ask for loans. Buyers borrow because that's the only way to get in. Central banks lower rates to help the economy. Each choice makes sense on its own, and together they leave everyone standing in the stadium.
The good news is that once you see how it works, you can decide how you play. You can't sit this game out, but you can stop playing it blind.
Not bad luck, and not your fault
Rising house prices aren't just bad luck, and they're not your fault. They're what happens when a whole society runs on borrowed money. It doesn't make buying a home easy, but it does make it understandable, and understanding it is where better choices start.