Housing: Bubble or Boom? Steve Keen

“Great Debate”, or talking past each other? House price debate a welter of confusing stats –Prices high relative to incomes? –Or prices reflect supply & demand? Each side supports case with selective statistics My approach: Housing a side-issue –Main issue: what’s driving the economy –House prices a symptom of this… Economic growth debt-dependent –Debt-induced downturn caused GFC –Housing market main target of Ponzi Lending –Australia avoided crisis by piling on yet more debt –Housing will suffer fate of debt-dependent economy

The global debt bubble Global economy carrying more debt than ever before:

The global debt bubble Ditto Australia: lower debt than USA, but same pattern:

What’s wrong with debt? Debt for productive purposes good –Working capital for firms –Loans for new technology, factories, markets… But debt for speculation on asset prices –Drives up asset prices “Positive feedback loop” between debt & price –Doesn’t add to capacity of economy to service debts –If debt high relative to GDP, change in debt dominates economy Crash inevitable when debt stops growing Above ignored by conventional “neoclassical” economics Main explanation of Great Depression by mavericks Irving Fisher & Hyman Minsky…

What’s wrong with debt? Aggregate Demand equals GDP plus the change in debt Debt-based demand & unemployment in Great Depression: Reduction in debt made the Great Depression “Great”

What’s wrong with debt? Change in debt explains 77% of 1930s unemployment:

What’s wrong with debt? Same factor only just begun today:

What about Australia? Half US private debt levels Benefit from China Huge government stimulus (10% increase in household income during recession) BUT –Same deleveraging processes afoot here: HOWEVER – –Deleveraging reversed by “First Home Owners Boost”…

House prices & mortgage debt FHVB definitely boosted house prices Worked because reversed fall in mortgage debt to GDP

What about Australia? Mortgage debt trend reversed by The Boost Australia increasing private debt while USA delevers “Hair of the Dog” cure for a hangover…?

What about Australia? Fastest turnaround in debt ever… But only mortgage debt rising Is this sustainable? 5-fold increase in mortgage debt in 20 years…

House prices & mortgage debt Aim of House price speculation is unearned income Sources of unearned income are –Someone else’s income –Increased debt If everyone tries to do it… –Either offshore income (Chinese buyers?) or –Increased debt House prices rise so long as debt rises faster… Real problem with economy is it is debt dependent –Continued prosperity now dependent on ever-rising debt

House prices & mortgage debt It’s worked so far… But can debt keep rising forever? In our debt- dependent economy, it has to if we are to avoid recession…

The real problem with Deleveraging Hypothetical economy Year 0 –GDP $1 trillion, growing at 10% p.a. –Debt $1.25 trillion at start of year Increase in debt in $250 billion –Total spending on all markets: $1.25 trillion Hypothetical economy Year 1 –GDP $1.1 trillion –Increase in debt zero –Total spending on all markets $1.1 trillion –$150 billion fall in demand because debt stabilises Markets must “take a hit” from fall in turnover Similar but smaller effect even if debt grows 10% –No growth in nominal demand—rise in unemployment

The real problem with Deleveraging Problem with large debt isn’t just servicing it When debt –Grows faster than economy for many years –Becomes much larger than GDP Then debt has to keep growing faster than GDP to sustain economy –Servicing crisis inevitable –Then slowdown in debt growth causes recession –Turnaround in debt causes Depression Deleveraging delayed by government policy here to date When it hits, all markets will suffer—including housing For more information, see