Res­cu­ing the Econ­omy or the Bub­ble?

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Many ele­ments of the recently announced pack­age are jus­ti­fied. When the econ­omy is about to go into a debt-induced reces­sion, gov­ern­ment spend­ing both boosts demand, and pro­vides the pri­vate sec­tor with cash flow needed to meet its debt repay­ment com­mit­ments.

Equally vital was the guar­an­tee of all bank deposits. A run on the banks would be dis­as­trous, and this guar­an­tee ensures that this will not hap­pen.

But yet another increase to the First Home Buyers Grant???

Is this because, um, house prices are, like, maybe too low?

Oh please, some real­ity here: the root cause of this cri­sis is exces­sive debt that drove house and share prices to unsus­tain­able lev­els. Times appeared rosy as the house (and stock­mar­ket) bub­ble con­tin­ued, but this was only because bor­rowed money was adding to demand.

No-one wor­ried about this when it was easy to flog a house for a higher price. But unfor­tu­nately, this game had to come to an end, because debt ser­vic­ing became pro­hib­i­tive as house prices rapidly out­stripped incomes. The bub­ble burst first in the USA, and the car­nage it has wreaked there should warn us all that asset price bub­bles are dan­ger­ous.

And how does the Aus­tralian gov­ern­ment respond? By pro­vid­ing yet another stim­u­lus on the demand side.

A col­laps­ing hous­ing bub­ble may be a scary prospect, but the more it is inflated, the scarier the final bust. And Australia’s, on any mea­sure, is big­ger than America’s.

A sim­ple com­par­i­son of the ABS Estab­lished House Price Index (ABS 641601 and 641603) to the CPI shows just how large the Aus­tralian house price bub­ble is (see Fig­ure One).

Fig­ure One

Figure One: House Prices vs the CPI

House Prices vs the CPI

Since 1987–hardly a time when Aus­tralian house prices were low by his­tor­i­cal standards–house prices have increased two and a half times as fast as con­sumer prices (see Fig­ure Two). Median incomes have fared lit­tle bet­ter than the CPI, so that houses are 60 per­cent less afford­able now than in 1987.

Fig­ure Two

Ratio  of House Prices to the CPI

Ratio of House Prices to the CPI

That’s also true even when we take into account lower inter­est rates. Yes, rates are about half what they were in 1987 (see Fig­ure Three); but debt is six times larger as a per­cent­age of house­hold dis­pos­able income than it was then (see Fig­ure Four)–so that merely pay­ing the inter­est on out­stand­ing mort­gage debt con­sumes 13 cents in the house­hold dol­lar, ver­sus a mere 3.5 cents back in 1987.

Fig­ure Three

Mortgage rates and payments

Mort­gage rates and pay­ments

Fig­ure Four

Mortgage debt to disposable income

Mort­gage debt to dis­pos­able income

Increas­ing the amount of money that first home buy­ers can slap down on a home may help those who can’t afford to get into the mar­ket do so–great. It will also increase com­pe­ti­tion for houses, and poten­tially sus­tain the Great Aus­tralian Hous­ing Price Bub­ble. 

Not great. As the USA shows us, the pain of a burst­ing house price bub­ble can be pretty immense–especially since it’s fuelled by exces­sive lev­els of debt.

But that pain will only get worse if the bub­ble is dri­ven any higher. The higher up you are when you fall off a moun­tain, the more it hurts when you hit the ground. The Aus­tralian house price moun­tain, on any mea­sure, is sub­stan­tially higher than the USA’s was when it began its long, painful descent (see Fig­ure Five).

Boost­ing the First Home Buy­ers Grant is a mis­take, just as it was when Howard did it. It will merely delay the day of reck­on­ing.

Fig­ure Five

Australian vs US Housing Bubble

Aus­tralian vs US Hous­ing Bub­ble

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Jonothoan Far­ru­gia

    peo­ple on here are say­ing prices have started to fall, I am sim­ply say­ing that is a firthy- house prices have merely not con­tin­ued to rise. In fact, in the quar­ter to June this year in Mel­bourne, actual house (not units/townhouses etc) prices actu­ally rose by 4.9%. Hardly a stat that empha­sizes that prices will sud­denly fall by lev­els like 40% !

    All I am say­ing is that as inter­est rates fall, more mort­gage hold­ers will be able to cope with the repay­ments, and thus hold onto their homes. Which means there will be less prop­er­ties on the mar­ket.

    I actu­ally thought the best situation/chance we had for prop­erty prices to fall was; if inter­est rates had been left alone or fallen only slightly, that with the next cou­ple of months over spring/summer always pro­duc­ing a annual rise in the num­ber of prop­er­ties put on the mar­ket (don’t over-intel­lec­tu­alise the point- it’s a fact), that both those con­di­tions would’ve gen­uinely pushed prices down.

    But with less prop­erty on the mar­ket to chose from than what there nor­mally is this time of the year (and here its this sit­u­a­tion I agree with blueinca(Paul) — it allows Real-Estate agents to arti­fi­cially push prices up by using such prac­tices as Ven­dor Bids at auc­tions, because they know some­one will be keen enough to pur­chase (maybe begrudg­ingly) at the auc­tion or nego­ti­ate after­wards. And I tell you- they are still sell­ing.

    I do hope prices fall sig­nif­i­cantly, they have been ridicu­lously high in my opin­ion for a decade now, I am just not sure they will do so, by the lev­els peo­ple are pre­dict­ing here. That’s all.


  • Gavin B

    Hi Steve

    Just a quick com­ment to say I sup­port your pub­li­ca­tions. Whether you are proven right or wrong, or whether you sell your house is irrel­e­vant, though my gut feel­ing is that much of what you say is on the money.

    You don’t need to sell your house to “put your money where your mouth is”, putting your­self out there & being sub­ject to pub­lic scrutiny is suf­fi­cient in my view.

    It is refresh­ing to hear inde­pen­dant eco­nomic com­men­tary, I am a bit sick of lis­ten­ing to the usual econ­o­mists rep­re­sent­ing their vested inter­ests (usu­ally prop­erty, shares and lend­ing).…. you know the ones, the bank econ­o­mists, the prop­erty devel­op­ers and realestate com­pany econ­o­mists, and share broking econ­o­mists.

    The media inter­view them, intro­duce them as econ­o­mists and never ques­tion their inde­pen­dence, all the while treat­ing their views as that of sages.

    Why is it that Bank econ­o­mists were call­ing for an increase in the GST rate rather than an increase in RBA rates a few months back? could it be that inter­est (a Bank’s stock in trade) is input taxed and not sub­ject to GST thereby usng the rest of the coun­try to prop up their indus­try? Yet no-one made this obser­va­tion!

    Bank CEO’s were telling us 12 months ago with hand on heart that they had no ‘direct’ expo­sures to the sub-prime mar­ket yet their investor’s have all lost around 40% of their value in 12 months.

    Prop­erty econ­o­mists are con­tin­u­ally telling us that the mar­ket has bot­tomed and it is now a buyers/bargain hunters mar­ket, I’m yet to see this bot­tom that they keep call­ing yet they aren’t held to account.

    Mar­ket economists/analysts etc were telling us 12 months ago that aus­tralia was on a never end­ing resources boom and had no expo­sure to sub-prime, 6 months ago they were say­ing we are ‘decou­pled’ from the USA, 2 months ago Com­sec (Craig James I think) called the bot­tom only to see another 10% sliced off the mar­ket since then. 

    These peo­ple hold them­selves out as experts giv­ing inde­pen­dant advice. When is the media going to look back over the last 12 months and rein­ter­view these peo­ple about the var­i­ous fore­casts they made and why were they so wrong?

    Enough of a whinge, keep up the­good work Steve.

  • anon

    Given Aus has a big­ger hous­ing bub­ble than the US, read­ers might find last weeks New York Times graphic inter­est­ing.

    It shows the val­u­a­tions of hous­ing when a house was just a home (and not a vehi­cle for spec­u­la­tion).

  • Jonothoan Far­ru­gia

    It would be handy if you stated your sources. 

    As I stated in my research paper “Bris­bane House Price Fore­cast” at

    It is impor­tant to note, how­ever, that these changes [char­ac­ter­is­tic of a soft­en­ing hous­ing mar­ket] may not become clear in the widely pub­lished data until late 2008 or early 2009 for a num­ber of rea­sons. Firstly, the organ­i­sa­tions that typ­i­cally pub­lish
    these data ben­e­fit from turnover, and there­fore strong mar­kets, of estab­lished and new hous­ing, and pub­lish­ing data is meant to be a pos­i­tive influ­ence on that, as well as free pro­mo­tion. And sec­ondly, most of these data are based on mov­ing aver­ages over 6 to 12 months, which have the affect of smooth­ing out the data so that the early stages of booms and busts are not imme­di­ately evi­dent. Most likely, the first data to con­firm the burst­ingg of the bub­ble will be the quar­terly ABS data house price data.”

    Note that all of this has come to fruition (see my com­ment above on 21 Oct). I would add that I reg­u­larly see writ­ten the annual growth data, and it is now very rare to see monthly or quar­terly data in media reports.

    Per­haps, Jonothoan, you may be inter­ested to take a more detailed look at the lat­est RP Data fig­ures at

    Note that the RP Data-Ris­mark Hedo­nic Index Results (all houses) shows a decline in all Aus­tralian cap­i­tal cities in the lat­est finalised quar­ter (end­ing July 08) with Brisbane’s rate of fall the fastest at 3.8% (roughly twice that of the next city). This trans­lates to an annual fall of over 14%.

    I expect house price falls to accel­er­ate from cur­rent lev­els.

    The analy­ses back­ing my views are stated here, on my web­site, in my research papers, and in my com­ments made on the “prop­erty 2009” debate.

  • blueinca(Paul)

    Auc­tions are where it starts. A com­bi­na­tion of real-estate tac­tics & stu­pid pur­chasers con­tribute to this prob­lem. You can over-intel­lec­tu­al­ize all you want. But the Legal­i­sa­tion of Vendor’s Bids at auc­tions, and lets just be reminded they can make as many as they want dur­ing an auc­tion.

    In Mel­bourne yes­ter­day there were a high per­cent­age of auc­tions where mul­ti­ple Vendor’s Bids pushed the price higher.… way higher than the mar­ket thought was appro­pri­ate (some auc­tions I went to as many as 5 vendor’s bids were used, some­times with bids of as much as $50,000) (that’s more than a years wages for some peo­ple!).

    Bid­ders then bid above this inflated price, to either buy, or be the first to nego­ti­ate at the arti­fi­cially inflated price.….. = high over inflated prices = debt. 

    Thank you Mr.Real Estate Agent, Thank you Hun­gry Greedy Ven­dor, Thank you Stu­pid ‘Post Ven­dor Bid’ Bid­der, Thank you Gov­ern­ment for allow­ing this to be OK in law

  • anon

    Found the fol­low­ing arti­cle with use­ful links that sup­ports Steve’s work here:

    Keep­ing hous­ing afford­abil­ity debate on track

  • James Haughton

    New Matilda has an arti­cle “Is there a reces­sion brew­ing in our hous­ing bub­ble?” which quotes Steve Keen here:

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  • I just posted a piece on the First Home Buy­ers Grant, and then realised that I have to edit it some­what. I should have those changes done by Sun­day. Please don’t quote or dis­cuss it in the mean­time.

    Thanks All, Steve

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  • mikes place

    Being inspired by the other GetUp! cam­paigns… I have started my own, to see if we can get rid of this ridicu­lous grant once and for all

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  • niel­s550

    Looked at Fig­ure Four. It is labeled wrongly and is mis­lead­ing. Dis­ap­point­ingly ama­teur­ish.

  • Fig­ure 4? When I approved your com­ment on my Black­berry, I thought you’d be com­plain­ing about the S&P cap­tion on Fig­ure 2. What’s wrong or mis­lead­ing about Fig­ure 4?