The British housing market is emerging as the most crazed in the world. Would-be homeowners, with minimal deposit, now need to earn more than £100,000 a year to buy an average house in much of London and the south–east. Elsewhere in the country, according to Guardian analysis earlier this month, you would need household income of more than £60,000. The scale of unaffordability is among the highest in the industrialised west, reports the OECD. Yet prices are still rising.

Unable to buy, people – especially the young – are turning to rent as the only option. Private rents are exploding: the UK average monthly private rent is now £900, up 10% on last year. This is a dog-eat-dog world of large deposits, six weeks’ rent paid in advance and stunning agents’ fees. So for just a moderate flat the renter has to find more than £2,000 even to cross the threshold.

Hence, social housing has never been more important – yet last year only 1,230 new council houses were built to offset an estimated 10,000-15,000 that are sold each year. More than 1.5m council homes have been sold since 1980.

Now in a further turn of the screw, the government proposes to force local government to sell even more council houses – as many as 113,000, calculates Shelter. This is to compensate housing associations for the discounts – reaching up to £104,000 in London – at which they are going to be compelled to sell their houses to sitting tenants under new legislation.

Charities such as Peabody, which for more than a century has built homes to be lived in at moderate rents, are to be forced to sell to the tenants who occupy them at a big discount. But as Stephen Howlett, CEO of Peabody, remarks, these houses are not the government’s to sell. They are owned by private charities to deliver a declared charitable purpose: the provision of affordable rented housing. The government’s proposal is state power exercised in flagrant abuse of private property rights. Imagine the outcry if a government of the left ever compelled private schools to be sold to local government: it would rightly be condemned as a gross and illegitimate exercise of state power, infringing the right of a charity to develop assets for its charitable purpose.

Yet this is what is now proposed for housing associations. Even if the compensation comes through, they will be gravely weakened. It is because they seem financially rock-solid that banks are willing to lend to them so readily to build new homes. Suddenly all of that is in doubt. Inevitably, their new build rate will fall – and they have 1.8 million people on their books waiting for a home. The proposal is pernicious.

The government’s defence is that it is helping those with aspirations achieve an otherwise impossible dream – home ownership. It further argues that since council house tenants already have the right to buy, it is unfair not to give all social housing tenants, including those in housing associations, the same huge discounts. And, after all, most housing associations have been helped by public grants along the way so their assets are in part publicly created.

For all their apparent reasonableness, these are arguments insulated from reality. The reason why home ownership is an impossible dream is that residential property prices are absurdly high, creating desperate housing need. To respond by offering huge bungs to sitting tenants of both council and social housing is perverse.

Everything has its roots in unaffordable property prices. As Adair Turner, former chair of the Financial Services Authority, argues in his remarkable new book Between Debt and the Devil, banks in every country are diverting an ever higher share of their loans to real estate. That amounts to now 60% of all lending across 17 countries, doubling over the last 50 years.

It is real estate lending that is the principle cause of the increase in private sector debt, rising in the UK from 50% of GDP in 1960 to 170% today – a much more concerning figure than public sector debt. Individual banks like lending against real estate: it is such good collateral that they rarely lose money, so they – and their regulators – judge that they can allocate less of their capital to underwrite any risk, making it especially profitable. The more they lend, the higher the prices and the more secure the collateral.

But this truth, says Turner, interacts with the capacity of today’s banks to create money. Because they have to hold such tiny reserves of their own capital, modern banking has become a debt creation monster – churning out mortgages and naturally inflating real estate prices because real estate is in fixed supply. This is a global phenomenon, but is particularly acute in densely populated Britain with tight planning laws and property largely untaxed. British banks have become an acute exemplar of a global trend, directing as much as 85% of all their lending to real estate, and driving property prices to incredible levels.

To change this, Britain will need to tax property more, relax planning laws, build much more and, above all, strike at the debt creation process described above. As property became more affordable, so the whole crisis would unwind: there would be a more natural passage from renting, either in the private or social housing sector, to owning. And conservative politicians would feel less need to pillage social housing for opportunities for home ownership because the whole structure would work better.

None of this is likely to happen in the foreseeable future. Consequently, prices will carry on rising. Already people in their early 30s owe twice as much debt as their parents; the next cohort of 30-year-olds will owe even more – facing the prospect of servicing a mortgage until they die Ultimately, there will simply be too much debt in relation to income, and like any Ponzi scheme, the whole edifice will unravel – generating yet another banking crisis while real estate prices fall back, but not before an epidemic of housing distress.

Small wonder so many young Labour voters opted to elect Jeremy Corbyn, who both sees the roots of this crisis – and potential solutions – more clearly than more mainstream Labour politicians. It is a commentary on our times that mainstream Labour could not dare to say what is obvious when it comes to housing. National debate, the Labour party and the country are the poorer as a consequence