Separating Spin from Fact on Australian House Prices Steve Keen University of Western Sydney Debunking Economics

Dr Doom on House Prices? How I am normally seen… Financial Review December 2010 Some context: –Rebel economist (since 1972) –Specialist on “Financial Instability” (since 1987) –Expert Witness “Predatory Lending” case (in 2005)

Economic context Saw this data while preparing caseNormal economist thinking on this? –“No Problem” Rebel economist? –Crisis coming when exponential growth of debt stalls –Have to raise the alarm… Logic behind normal “Neoclassical” economist thinking –“Debt doesn’t matter” Transfer spending power from creditor to debtor No “macro” impact

Economic context Rebel “Minksian” economist logic: Debt does matter –Spending = Income plus Change in Debt –Demand collapses when Change in Debt falls –Must fall because exponential increase in Debt to Income (GDP) ratio can’t continue… Example: GDP growth 10%, Debt growth 20% (2006) –GDP $1,000 bn –Debt $1,250 bn, Change in debt = $250 bn Total spending $1,250 bn Next Year: GDP same, Debt growth slows to 10% p.a. –GDP $1,100 bn –Debt $1,500 bn, Change in debt = $150 bn Total spending $1,250 bn—same as year before Slowdown in debt growth can cause recession

+28% -14% Economic context Slowdown duly arrived globally: the “Great Recession” FromFrom adding 28% to demand ToTo subtracting 14% from it SteepestSteepest fall ever

Economic context But not so bad in Australia… +23% +2% FromFrom adding 23% to demand ToTo still adding 2% to it WeWe didn’t “de-lever”…

Economic context 3 questions –How bad is private debt today on the “Richter Scale” –What could entice people into this much debt? Debt like having a tooth pulled –Undesirable for own sake To market it, has to have side benefit –“You look sexy with less teeth…” –How come Australia didn’t “delever”? Answers –Worst in History (twice Great Depression) –Speculation on Asset Prices (especially housing) –“First Home Vendors Boost”

1890s Depression Great Depression “GFC” /Great Recession Economic context Biggest debt bubbles ever…

Economic context Biggest asset bubbles ever… especially in housing Borrow to gamble on rising asset prices—a Ponzi Scheme Fortunately, Australia doesn’t have a housing bubble, does it?... KeepKeep in mind how big US housing bubble looks on this chart…

Economic context US bubble doesn’t look so big any more… But US prices driven by Subprime Debt Aussie banks have been more responsible, haven’t they?

Economic context Depends how you define responsible… SinceSince 1990, Australian mortgage debt has risen 3 times faster than US FromFrom 23% below to 13% above US peak But Australian houses are affordable, aren’t they? Glenn Stevens says so…

Economic context Reserve Bank of Australia (RBA) chief Glenn Stevens says he is not “terribly troubled” about the level of house prices in Australia. Mr Stevens said the ratio of income to house prices in Australia was “not exceptional by global standards“… “There is quite often quoted very high ratios of price to income for Australia, but I think if you get the broadest measures country-wide prices and country-wide measure of income, the ratio is about four and half and it has not moved much either way for ten years. "That is higher than it used to be but it is actually not exceptional by global standards.” (SMH March 16 th 2011)SMH March 16 th 2011 Four and a half?...

House Prices to Incomes: “Four and a half?...” Median Price to Average disposable income per dwelling –House Prices: ABS House price series (2002-Now) ABS House price index to extend back to 1986 Stapledon long term prices back to 1960 –National Disposable Income RBA Table G12 data from 1960 –Population ABS ABS 32220ds10 for projections –Housing stock ABS for flow of housing ABS 4012 for housing stock Average income 28% higher than median income

House Prices to Incomes: “Four and a half?...” And the answer is… 8 times household disposable income MedianMedian house 3 times as expensive as 1960s 6times average average income 8times median income “has“has not moved much either way for ten years” –Because –Because government scheme has kept prices up

House Prices to Incomes: No change in 10 years? Most recent bubble began in 1997 MortgageMortgage debt started bubble FHOGFHOG boosted & sustained it

The FHOG: Distorting house prices since 1983 Quarterly Change in House Prices after Inflation BeforeAfterAll DataDuringBetweenDoubled Mean0.07%0.94%0.47%2.17%0.25%3.10% Min-5.53%-3.73%-5.53%-2.26% -0.92% Max3.91%7.86% 2.95%4.93% Std. Dev.1.73%2.17%1.99%2.71%1.26%1.83% No trend in real prices before FHOG; 1% p.q. after it How it works: Buyer takes FHOG to Bank Levers it up via LVR (70% in 60s, 97% now) Bids up price by (say) 5 times FHOG Vendor takes cash to Bank Levers upgrade purchase by (say) another 5 times… A double bubble

But what about population growth? Dwelling growth exceeded population growth –Did prices fall? CorrelationCorrelation trivial (-0.06) & wrong sign WhatWhat about recent immigration surge?

What about recent immigration surge? Dwelling growth below population growth, & prices rose… CorrelationCorrelation significant (-0.56) but wrong wrong sign –What –What about “underlying demand”?

“No bubble” - “Underlying demand”? Price rise explained by shortage of housing relative to projected demand? –‘... the Council estimated a gap of around 85,000 dwellings between underlying demand for and supply of housing at 30 June The Council developed a methodology for measuring the gap based on selected measures of homelessness… The measures used in the 2008 report were: 2008 gap size = additional private rental dwellings required in 2008 to increase the number of vacant private rental dwellings to 3 per cent of the total private rental stock + dwellings required to accommodate people who are homeless and sleeping rough or staying with friends and relatives + dwellings required to house marginal residents of caravan parks.’ National Housing Supply Council 2010, pages 65-66

“No bubble” - “Underlying demand”? Price rise explained by shortage of housing relative to projected demand? –“Gap between underlying demand & supply” might explain need for housing –But doesn’t explain monetary demand for it Homeless people driving up house prices? Illicit use of measure of need as basis for demand IfIf you think he’s driving up house prices, I have a bridge I’d like to sell you…

Real driver of house-price bubble? Mortgages Lending: New loans from 5% of GDP to 25% in 2000s 0.51 correlation between new lending & change in prices –0.53 correlation when rising trend accounted for

Real driver of house-price bubble? Mortgages Number of buyers rose with rising debt:

Real driver of house-price bubble? Mortgages House prices follow mortgage debt

Real driver of house-price bubble? Mortgages Lead is about 9 months

Real driver of house-price bubble? Mortgages Rise in debt far greater than rise in prices House prices up 15 times since mid-1970sHouse prices up 15 times since mid-1970s Debt per house up 55 timesDebt per house up 55 times Divergence began in 1990Divergence began in 1990 When mortgage debt to GDP began to growWhen mortgage debt to GDP began to grow

What goes up must come down? Longest time series shows no trend to real house prices Source:  Herengracht Canal Amsterdam price data Long periods of rising or falling real prices But no trend over 350 years Implies real house prices roughly constant  Deviations reflect bubbles/collapses rather than sustained trends

What goes up must come down? Prices already falling (SMH Today, Residex Figures):SMH Today Trigger? Same as for rises—change in mortgage debt Indicator: The “Credit Impulse” (Biggs, Mayer, Pick)Biggs, Mayer, Pick –Since aggregate demand = income + change in debt –Change in aggregate demand = change in income + acceleration of debt Credit Impulse = (Change in Change in Debt) / GDP HousesMedianMonth of FebruaryFebruary QuarterFebruary Year ACT$537, %-0.68%7.24% Adelaide$408, %-0.46%2.05% Brisbane$450, %-1.29%-3.86% Darwin$514, %-0.98%2.62% Hobart$385, %-2.29%6.30% Melbourne$598, %-0.19%9.24% Perth$480, %-2.17%-0.26% Sydney$674, %-0.23%6.32% Australia$443, %-1.30%4.27%

Credit Impulse & Unemployment Major driver of economy ignored by neoclassical economics Negative for 40 months in 1990s recessionNegative for 40 months in 1990s recession Only negative for 26 months in GFCOnly negative for 26 months in GFC

Household Debt On Upside Business Debt On Upside Household Debt On Upside Business Debt On Upside Future Prospects? Economy: –Business credit impulse positive but petering out China boom big positive… Housing Market: –Credit Impulse turning negative –Sharply so in latest data

Future Prospects? Mortgage Credit Impulse driving prices down LendingLending Finance data yesterday (ABS 5671) implies sharp falls in near future: OwnerOwner occupied housing -4.6% on month PersonalPersonal -9.5%, Commercial -5.8%

Future Prospects? Deleveraging reversed by FHOG now returning 8.2% GDP=$100bn FHVB’s $100bn boost to economy now overFHVB’s $100bn boost to economy now over Sixth trick unlikely…Sixth trick unlikely…

Future Prospects? Falling debt likely future scenario, as in USA Falling demand for mortgagesFalling demand for mortgages And therefore falling house pricesAnd therefore falling house prices