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Separating Spin from Fact on Australian House Prices
Steve KeenUniversity of Western Sydney
Debunking Economicswww.debtdeflation.com/blogs
www.debunkingeconomics.com
1985 1990 1995 2000 2005 2010 201550
100
150
200
250
300
AustraliaUSA
Real House Price Indices
Year
June
198
6 =
100
B E
1600 1650 1700 1750 1800 1850 1900 1950 20000
50
100
150
200
250
300
350
400
IndexMean 1628-1973 (198)
Herengracht Canal Real Price Index
Year
Index
1628 =
100
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 case• Normal economist
thinking on this?– “No Problem”
• Rebel economist?– Crisis coming
when exponential growth of debt stalls
– Have to raise the alarm…1975 1980 1985 1990 1995 2000 2005 2010
40
50
60
70
80
90
100
110
120
130
140
150
RatioExponential Fit
Australia's Private Debt to GDP Ratio till December 2005
• 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%+28%
-14%-14%
Economic context• Slowdown duly arrived globally: the “Great Recession”
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150
1 106
2 106
3 106
4 106
5 106
6 106
7 106
8 106
9 106
1 107
1.1 107
1.2 107
1.3 107
1.4 107
1.5 107
1.6 107
1.7 107
1.8 107
1.9 107
2 107
0
10
20
GDPGDP plus Change in DebtUnemployment
Aggregate Demand in the USA
US
$ b
illion
Year 2008
• From adding 28% to From adding 28% to demanddemand
• To subtracting 14% from To subtracting 14% from itit
• Steepest fall everSteepest fall ever
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150
1 105
2 105
3 105
4 105
5 105
6 105
7 105
8 105
9 105
1 106
1.1 106
1.2 106
1.3 106
1.4 106
1.5 106
0
10
20
30
GDPGDP plus Change in DebtUnemployment
Aggregate Demand in Australia
US
$ b
illi
on
Economic context• But not so bad in Australia…
+23%+23%+2%+2%
• From adding 23% to From adding 23% to demanddemand
• To To still adding still adding 2% to it2% to it• We didn’t “de-lever”…We 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”
Economic context• Biggest debt bubbles ever…
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20200
25
50
75
100
125
150
175
200
225
250
275
300
USAUS ex. FinancialAustralia
Debt to GDP Ratios since 1860
Economic context• Biggest asset bubbles ever… especially in housing
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20200
25
50
75
100
125
150
175
200
225
250
275
300
SharesProperty
American Asset Price Indices
Case-Shiller & Irrational Exuberance Data
Inde
x 19
00=
100
100
• Borrow to gamble on rising asset prices—a Ponzi Scheme
• Fortunately, Australia doesn’t have a housing bubble, does it?...
• Keep in mind how big Keep in mind how big US housing bubble looks US housing bubble looks on this chart…on this chart…
Economic context• US bubble doesn’t look so big any more…
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20200
50
100
150
200
250
300
350
400
450
500
USAAustralia
Real House Price Indices
Case-Shiller; Stapledon + ABS
Inde
x 19
00=
100
100
• But US prices driven by Subprime Debt
• Aussie banks have been more responsible, haven’t they?
Economic context• Depends how you define responsible…
197619781980198219841986 198819901992199419961998 200020022004200620082010 20120
10
20
30
40
50
60
70
80
90
USAAustralia
Mortgage Debt to GDP
• Since 1990, Australian mortgage Since 1990, Australian mortgage debt has risen 3 times faster than debt has risen 3 times faster than USUS
• From 23% below to 13% above US From 23% below to 13% above US peakpeak
• 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 16th 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 310101 + ABS 32220ds10 for projections
– Housing stock• ABS 87520037 for flow of housing 1952-2010• ABS 4012 for housing stock 2003-09
• Average income 28% higher than median income
House Prices to Incomes: “Four and a half?...”• And the answer is… 8 times household disposable income
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20150
1
2
3
4
5
6
7
8
SydneyMelbourneFHOS
Median House Price to Average Disposable Income per Dwelling
• Median house 3 times as expensive as Median house 3 times as expensive as 1960s1960s
• 6 times 6 times averageaverage income income• 8 times median income8 times median income
• ““has not moved much either way for ten has not moved much either way for ten years”years”– Because government scheme has kept Because government scheme has kept
prices upprices up
House Prices to Incomes: No change in 10 years?• Most recent bubble began in 1997
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 201580
90
100
110
120
130
140
150
160
Index: Peak 150.6, 146 nowMean 101 (till 1997, Mean = 95)+ 3 St. Dev.- 3 St. Dev.First Home Owners Grant
House Price Index to GDP Per Head
Jun
e 1
95
3=
100
• Mortgage debt started bubbleMortgage debt started bubble• FHOG boosted & sustained itFHOG boosted & sustained it
The FHOG: Distorting house prices since 1983
Quarterly Change in House Prices after InflationBefore After All Data During Between Doubled
Mean 0.07% 0.94% 0.47% 2.17% 0.25% 3.10%
Min -5.53% -3.73% -5.53% -2.26% -2.26% -0.92%
Max 3.91% 7.86% 7.86% 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 1975-2006
– Did prices fall?
1975 1980 1985 1990 1995 2000 2005 2010 2015
20
15
10
5
5
10
15
20
25
30
35
40
2
1.5
1
0.5
0.5
1
1.5
2
2.5
3
3.5
4
House Price ChangePopulation Per Dwelling Change
Population Density Change & Nominal House Price Change
Nom
inal
Hou
se P
rice
Cha
nge
Pop
ulat
ion
per
dwel
ling
chan
ge
• Correlation trivial (-0.06) & wrong signCorrelation trivial (-0.06) & wrong sign• What about recent immigration surge?What about recent immigration surge?
What about recent immigration surge?• Dwelling growth below population growth, & prices rose…
2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011
10
7.5
5
2.5
2.5
5
7.5
10
12.5
15
17.5
20
1
0.75
0.5
0.25
0.25
0.5
0.75
1
1.25
1.5
1.75
2
House Price ChangePopulation Per Dwelling Change
Population Density Change & Nominal House Price Change
Nom
inal
Hou
se P
rice
Cha
nge
Pop
ulat
ion
per
dwel
ling
chan
ge
Corr X1 X2 0.562
• Correlation significant (-0.56) but Correlation significant (-0.56) but wrongwrong signsign– What about “underlying demand”?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 2008. 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
• If you think he’s driving If you think he’s driving up house prices, I have a up house prices, I have a bridge I’d like to sell bridge I’d like to sell you…you…
Real driver of house-price bubble? MortgagesLending: 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
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
10
5
5
10
15
20
25
30
New Lending % GDPAnnual Change in Price
Quarterly Change
New Lending and Change in Nominal House Prices
Year
Perc
ent p.a
.
Real driver of house-price bubble? Mortgages• Number of buyers rose with rising debt:
1975 1980 1985 1990 1995 2000 2005 2010 20150.1
0.2
0.3
0.4
PercentAverage 75-90Average 90-10
New Home Loans Number as Percent of Population
Year
Per
cent of
popu
lation w
ith n
ew loan
Real driver of house-price bubble? Mortgages• House prices follow mortgage debt
1975 1980 1985 1990 1995 2000 2005 2010 2015
10
10
20
30
40
Mortgage debtReal house prices
CPI-deflated Mortgage Debt and House Prices
Year
Per
cen
t ch
ang
e p
.a.
Real driver of house-price bubble? Mortgages• Lead is about 9 months
12 10 8 6 4 2 0 2 4 6 8 10 12
0.1
0.1
0.2
0.3
0.4
0.5
Change in Real Mortgages & House Prices
Lag in months
Co
rrel
atio
n c
oef
fici
ent
Real driver of house-price bubble? Mortgages• Rise in debt far greater than rise in prices
1975 1980 1985 1990 1995 2000 2005 2010 20150
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
PriceDebt
Nominal Price and Debt per Dwelling
Year
Ind
ex J
uly
197
6 =
10
0 • 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 When mortgage debt to GDP began to growgrow
What goes up must come down?
Longest time series shows no trend to real house prices
Source: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=598
Herengracht Canal Amsterdam price data 1628-1973
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
1600 1650 1700 1750 1800 1850 1900 1950 20000
50
100
150
200
250
300
350
400
IndexMean 1628-1973 (198)
Herengracht Canal Real Price Index
Year
Ind
ex 1
628
= 1
00
What goes up must come down?• Prices already falling (SMH Today, Residex Figures):
• Trigger? Same as for rises—change in mortgage debt• Indicator: The “Credit Impulse” (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
Houses Median Month of February
February Quarter
February Year
ACT $537,500
1.27% -0.68% 7.24%
Adelaide $408,000
-0.48% -0.46% 2.05%
Brisbane $450,500
-0.34% -1.29% -3.86%
Darwin $514,500
-0.66% -0.98% 2.62%
Hobart $385,500
1.48% -2.29% 6.30%
Melbourne
$598,000
0.80% -0.19% 9.24%
Perth $480,000
-0.11% -2.17% -0.26%
Sydney $674,000
0.35% -0.23% 6.32%
Australia $443,000
0.92% -1.30% 4.27%
Credit Impulse & Unemployment• Major driver of economy ignored by neoclassical economics
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 201515
10
5
0
5
10
120
80
40
0
40
80
Credit Impulse & Change in Unemployment
Cre
dit
Im
pu
lse
Ch
ange
in U
nem
plo
ym
ent
0
• Negative for 40 months in 1990s Negative for 40 months in 1990s recessionrecession
• Only negative for 26 months in GFCOnly negative for 26 months in GFC
HouseholdHouseholdDebtDebt
On UpsideOn Upside
BusinessBusinessDebtDebt
On UpsideOn Upside
HouseholdHouseholdDebtDebt
On UpsideOn Upside
BusinessBusinessDebtDebt
On UpsideOn Upside
Future Prospects?• Economy:
– Business credit impulse positive but petering out• China boom big positive…
2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5
10
0
10
YearlyQuarterly
Private Credit Impulse
2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.515
10
5
0
5
10
BusinessMortgagePersonal
Quarterly Private Credit Impulse by Sector
• Housing Market:– Credit Impulse turning negative– Sharply so in latest data
Future Prospects?• Mortgage Credit Impulse driving prices down
2007 2008 2009 2010 20113
2
1
0
1
2
ImpulseFHOG
Credit Impulse from Mortgages by Quarter
• Lending Finance data yesterday (ABS Lending Finance data yesterday (ABS 5671) implies sharp falls in near 5671) implies sharp falls in near future:future:• Owner occupied housing -4.6% on Owner occupied housing -4.6% on
monthmonth• Personal -9.5%, Commercial -5.8%Personal -9.5%, Commercial -5.8%
Future Prospects?• Deleveraging reversed by FHOG now returning
5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11 11.5707172737475767778798081828384858687888990
ActualTrend before FHVB
Mortgage debt to GDP
Years since 2000
Perc
en
t o
f G
DP
FHVB Peak
• FHVB’s $100bn boost FHVB’s $100bn boost to economy now overto economy now over
• Sixth trick unlikely…Sixth trick unlikely…
Future Prospects?• Falling debt likely future scenario, as in USA
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20120
10
20
30
40
50
60
70
80
90
MortgageBusinessPersonalGovernment
Debt to GDP by Sector
• Falling demand for Falling demand for mortgagesmortgages
• And therefore falling house And therefore falling house pricesprices