Most of the Western economies, particularly the Anglo-sphere, have run into a dilemma. For decades home ownership was promoted as the primary avenue to middle-class wealth accumulation. However as homes are fundamentally not productive assets, that policy eventually turns into an economy-wide Ponzi scheme. Particularly when population growth rates are stagnant.

In the post-war period governments have continuously pursued policies to keep the returns to housing as an investment high and low-risk. This includes buildings restrictions and zoning laws to cap supply, subsidized and guaranteed mortgages, price supports during downturns and a plethora of favorable tax treatments. That's made residential property produce returns at or near public equities with much lower drawdowns.

The problem is that it's propped up housing prices far above the levels you'd see in a free market. And herein lies the dilemma. New generations buy housing expecting similar wealth-building returns as previous generations. Yet if any of the artificial supports were removed, prices would not only stagnate but significantly contract. The economy has become heavily adapted to the maxim that real estate prices never fall. We're simply not equipped to handle a 25% decline in housing prices, without causing downstream distress, default and panic. Witness the 2008 crisis.

So the government keeps pumping more and more support, particularly every time a recession rolls around. Which distorts housing prices even further, which in turn makes the market even more fragile. Price to income ratios get stretched even further, at which point the only solution is to make credit looser and interest rates lower. Yet that pushes the average homeowner to be even more leveraged and less equipped to handle any rough patches in the market.

The only real solution I see is a protracted soft-landing, where the housing market is gradually deflated over two or three decades. We should be aiming for housing prices to stay fixed in nominal returns, so people stop using their home as an investment vehicle. Mortgages, tax policy, and particularly building/zoning restrictions should be steadily moved in the direction of cheaper housing and more renting over home ownership.

In particular, during recessions policymakers should let home prices fall by 10-15% and not recover. It's a good level that creates pain for the property investor, without pushing mortgages underwater. This will start to acclimate consumers to the idea that housing is not a risk-free investment.