Housing crisis: Keynesianism is to blame

Headlines announcing record housing prices or demonstrations for affordable housing are no longer surprising. The cacophony of suggestions and finger-pointing often stems from poor urban management, landlord greed, licensing issues, and/or a lack of construction. While many proposals stem from good intentions, none address the root of the problem, which is structural and often goes unnoticed: our monetary system.

Since the 20th century, states have operated under a fiat currency regime, sustained by debt monetization and legitimized by an economic doctrine known as Keynesianism. Inspired by the ideas of British economist John Keynes, the model advocates state intervention as a stabilizing, and therefore artificial, force in the economy.

This approach provides intellectual legitimacy for the state to expand the monetary base through central banks. Promising to stimulate the economy, governments go into debt, issuing public debt that is acquired, directly or indirectly, by the central banks themselves, based solely on the expectation of future returns.

This process, known as debt monetization, is only possible because our current monetary system allows—and even encourages—promises of future payment to be treated as money in the present. This creates a fusion between debt and capital: credit becomes the basis for liquidity, and as a result, both creditors and debtors are able to record, on their balance sheets, nominal increases in value that do not correspond to the real wealth created.

It then becomes clear that, far from creating real wealth, debt issuance merely creates new claims on existing capital. In other words, it merely increases the perception of wealth.

This monetary expansion is only possible because the risk of debtor insolvency is socialized—transferred to all users of the currency, that is, to the common citizen. Each new euro works like pouring water into wine: the glass fills, but the contents lose strength. Confidence in the currency is maintained not by the solidity of the system, but by the constant promise of further intervention.

Furthermore, the costs of issuing debt—interest rates—are set by central entities such as the European Central Bank or the US Federal Reserve, which operate outside the pressures of the free market. Commercial banks, close to these issuing sources, obtain liquidity at preferential rates, later profiting from the systemic inflation that these same practices help generate.

Each mortgage is added to the banks' balance sheets with just a few clicks, and if something goes wrong, the system steps in to protect them: the famous "bailouts" or "liquidity injections."

With privileged access to cheap liquidity, banks channeled credit to the most resilient, intuitive, and accessible asset for the population: real estate. In this context, housing credit became an instrument of monetary creation, incentivized by a system in which risk is diffused and profits concentrated.

The cycle is vicious and without real incentive for change – prices rise, individuals and investors resort to more credit, and this same credit continues to fuel the rise in prices.

A look at the official figures reinforces this argument and exposes the chasm between political rhetoric and monetary reality. Between 2014 and 2024, the Portuguese monetary aggregate M2—which allows us to estimate the currency in circulation and the liquidity of an economy—grew, on average, 7% per year, resulting in a cumulative increase of 96%. However, at the "desirable" annual inflation rate of 2%, it would take about 34 years to achieve the same monetary expansion. Instead, we got there in a decade.

However, during the same period, with the exception of the years between 2022 and 2024, the Bank of Portugal reported the Consumer Price Index consistently below 2%. The mathematical alchemy of the CPI is adept at diluting the true impacts of monetary expansion, resulting in an indicator that masks the loss of real purchasing power and protects the official narrative of stability.

This excessive growth in the money supply systematically devalues the money in Portuguese wallets. Faced with this erosion of purchasing power, citizens turn to assets that can preserve value. And this is where the self-fulfilling prophecy of real estate comes in: not out of greed, but out of survival logic. Housing has become a shield against inflation, with the average price per square meter, according todata from Idealista , nearly tripling in the same decade in which the monetary base nearly doubled.

This problem cannot be solved with more construction, as the speed at which we expand the monetary base exceeds any real estate construction capacity. Controls and restrictions can reduce supply, increase prices in other segments, and act as a temporary buffer in a pressure cooker. State guarantees further inflate prices. All of these are responses to symptoms, not the disease.

The true solution requires questioning the monetary system itself. The monetary base must be based on a truly scarce asset, immune to arbitrary inflation and resistant to political manipulation. An asset whose value resides in trust in a predictable, transparent, and immutable protocol, not in faith in volatile institutions. Saving in a regime of constant expansion and difficult to audit is mathematically absurd.

In the 21st century, as I discussed in this article , the only viable alternative to this asset is Bitcoin. By enabling savings and accumulation outside of the inflationary system, Bitcoin offers a legitimate monetary escape and, in doing so, is the only asset with the real potential to alleviate pressure on real estate—which would then cease to be the only safe haven for capital preservation.

Portugal has an opportunity for diversification: recognizing Bitcoin as a strategic asset, studying ways to incorporate it into national reserves, or even creating tax incentives for its adoption. It could become the first European country to ask the essential question: aren't we all paying too much for a system that no longer serves us?

Ignoring the root of the problem only postpones it—for the next administration, for the next generation, and, inevitably, for the poorest. A home should be for living in, not a safe deposit box. But as long as money is designed to lose value, affordable housing will remain a mirage in the inflationary desert.