It’s the lever­age, stu­pid

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So I’m walk­ing to Kosciusko–now that the ABS Estab­lished House Price Index has cracked its Sep­tem­ber 2008 peak of 131 to reach an all-time high of 134.4 (as of Sep­tem­ber one year later). This renewed bub­ble reversed the trend of falling nom­i­nal house prices that had dropped the index to a low of 123.8 in March 2009.

This level of price volatility–down 5.5% in 6 months, only to rise 8.5% in the sub­se­quent six months–almost matches the stock market’s manic-depres­sive per­for­mance.

Though you’d see no men­tion of it if it you only read Chris Joye (“Keen con­cedes defeat”), the main fac­tor behind the revival of the bub­ble is what is for­mally known as the  First Home Own­ers Boost (FHOB), but what is more accu­rately described as the First Home Ven­dors Boost. As at the end of September–the date of the lat­est ABS house price data–171,000 appli­cants had received this $7,000 bribe. Since many are cou­ples, more than 1 per­cent of Australia’s pop­u­la­tion has leapt into the prop­erty mar­ket pool at the behest of a gov­ern­ment stim­u­lus.

So how has a mere $1.2 bil­lion injec­tion of gov­ern­ment money dri­ven the aver­age house price up by 8% in six months? By the “magic” of lever­age: the typ­i­cal First Home Buyer (FHB) took that $7,000 to the bank and lever­aged it up to another $40–50,000, which then was handed over to the First Home Ven­dor (FHV) as cold, hard cash.

The FHV then took that extra $40–50,000 and lever­aged it to an addi­tional $200,000-$250,000, which meant that that new place which had been just out of reach prior to the FHOB was now well within range. Com­pet­ing with other lucky recip­i­ents of gov­ern­ment and bank largesse, he drove up the price of that mid­dle to upper tier house by an addi­tional $100,000 or more.

The aggre­gate impact of this gov­ern­ment entice­ment into pri­vate debt was that Aus­tralian house­holds reversed the delever­ag­ing process that had begun in late 2008, and as a result the mort­gage debt to GDP ratio, which had been falling, began to rise once more. The FHOB has led to Aus­tralians tak­ing on an addi­tional $50 bil­lion of mort­gage debt. That “demand” fac­tor, far more than any other, is why I’ve lost the sec­ond half of Rory’s bet with me.

Nor­mally I regard the “ceteris paribus” assump­tion of con­ven­tional eco­nomic the­ory as a copout–in a mar­ket econ­omy every­thing is con­nected to every­thing else, and you can’t assume that, for exam­ple, a firm’s out­put can change with­out affect­ing the mar­ket price. But I think I’m enti­tled to ask the “ceteris paribus” ques­tion here: what would have hap­pened to house prices had the gov­ern­ment not spiked the mar­ket with the FHVB? I some­how doubt that Rory would be crow­ing today had that irre­spon­si­ble pol­icy move not been made.

In fact, there’s a good argu­ment that we wouldn’t be hav­ing a prop­erty bub­ble here at all, were it not for the First Home Buy­ers pol­icy. I’m not one for mak­ing argu­ments solely on sta­tis­ti­cal correlations–I’m only too aware of the “cor­re­la­tion isn’t cau­sa­tion” argument–but I think I can also spot a smok­ing gun when I see one.

Prior to the FHB, though real house prices were ris­ing, so was real house­hold dis­pos­able income. Then add two dollups of the FHB–one its intro­duc­tion as a “tem­po­rary” mea­sure to get us over the shock of the GST in 2000, the other its dou­bling to boost the econ­omy dur­ing the brief 2001 recession–and off go real house prices rel­a­tive to real house­hold dis­pos­able income.

Last year, as the mar­ket starts to head back towards par­ity between house prices and incomes again, Rudd throws in another tem­po­rary dou­bling (of this tem­po­rary mea­sure that is now almost a decade old), and off goes the house price bub­ble once more.

In the main, I’ve been a critic of bank­ing prac­tices as the under­ly­ing cause of the Global Finan­cial Cri­sis. But I also believe that the cri­sis would have occurred long ago (in 1987) and been far less severe if gov­ern­ments and Cen­tral Banks hadn’t attempted to res­cue the sys­tem from its own fol­lies. The First Home Own­ers is a clas­sic gov­ern­ment folly, and its dou­bling last year is the main rea­son I’ll be walk­ing to Kosciusko some time in April 2010.

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  • Thanks Hal­cyon,

    That was my guess but I wasn’t sure.

  • Shadow

    Steve, you were very pub­lic with your pre­dic­tions, appear­ing repeat­edly in the main­stream media claim­ing that a mas­sive col­lapse was immi­nent. Why didn’t you men­tion that it might not hap­pen in an envi­ron­ment of fis­cal and mon­e­tary stim­u­lus? Low inter­est rates and gov­ern­ment stim­u­lus are stan­dard prac­tice when there is a risk of reces­sion. Any­way, house prices are ris­ing across the board, not just in the First Home Buyer mar­ket but also at the upper end of the mar­ket. To claim this is all the ‘fault’ of the FHOG boost is a bit silly. The rea­son why house prices in Aus­tralia are still ris­ing is because we have an incred­i­bly high pop­u­la­tion growth rate of 2.1% per annum, low inter­est rates (though ris­ing, as dur­ing the 2002–2007 boom), a strong econ­omy, rel­a­tively low unem­ploy­ment lev­els, and a short­age of prop­erty in close prox­im­ity to infra­struc­ture and employ­ment hubs (due to gov­ern­ment red tape and taxes on devel­op­ment). Do you regret sell­ing your unit just before this new surge in prices? Cheers, Shadow.

  • Philip

    Steve, per­haps you should put up those graphs and data that I sent you con­cern­ing the prop­erty bub­ble. It would be an effec­tive answer to those who claim that the rapid increases in prop­erty prices are due to the ‘laws’ of sup­ply and demand.

    In response to Shadow, I would point out that none of the typ­i­cal expla­na­tions can explain a real prop­erty price increase of 220% from 1996 to 2009 (Sta­ple­don and ABS indices).

    - Every year between 1956 and 2005, the year-on-year growth in pri­vate dwellings was greater than that of pop­u­la­tion growth.

    - Since 1901, the aver­age occu­pancy ratio has been steadily falling. In 1901, it was 5.2. In 2008 it was 2.7. Per­form­ing an extrap­o­la­tion, Aus­tralia will have an aver­age occu­pancy ratio of 1 in 2060. This means one pri­vate dwelling per per­son. If this sounds insane, it is but that is the way the trend is head­ing. How­ever, it will never get like that once our mas­sive prop­erty bub­ble bursts.

    - Low inter­est rates can’t be con­sid­ered a fac­tor as the RBA did not lower rates to the lev­els in the US under Greenspan. Extremely low inter­est rates can be con­sid­ered a fac­tor, but not the pri­mary one in the US. In Aus­tralia, inter­est rate changes doesn’t even seem to be a fac­tor from 1996 onwards.

    - Real con­struc­tion costs have remained fairly con­stant from 1945 onwards. There are no colos­sal increases that could explain the jump in prop­erty prices since 1996.

    - A short­age of hous­ing near employ­ment hubs is non­sense. The excel­lent inves­tiga­tive work of Earth­shar­ing Aus­tralia clearly shows vacancy rates of 4–7% in and around Mel­bourne (other cities should be no excep­tion), as opposed to the offi­cial vacancy rates of 1–2%. Spec­u­la­tors (‘prop­erty investors’) hold­ing onto empty prop­er­ties wait­ing for cap­i­tal price appre­ci­a­tion is the answer here.

    - Ris­ing incomes cer­tainly can’t explain it. It would take a mas­sive jump in indi­vid­ual and house­hold incomes to pro­duce a 220% prop­erty price increase since 1996. Yet, clearly none occurred.

    - Employment/unemployment: same as above.

    The same non­sense rea­sons were given in the US before the bub­ble burst in 2006 Q2: pop­u­la­tion increases, gov­ern­ment restric­tions on land, taxes, ris­ing incomes, etc.

    Some­thing is wrong when econ­o­mists in the US from the IMF to the Trea­sury to the Fed to Har­vard say there is no prop­erty bub­ble and yet looked what hap­pened.

    As J. K. Gal­braith pointed out, approx­i­mately 10–12 out of 15,000 econ­o­mists in the US saw it com­ing. Same goes for Aus­tralia, but it appears the num­ber of econ­o­mists equate to 1: Steve Keen. If there are oth­ers, I don’t know about them.

    We in Aus­tralia are so lucky because it is dif­fer­ent here as we have kan­ga­roos…

  • home­s4aussies


    Enjoy read­ing Garnaut’s new book? Got a lit­tle quip for him, too??

    And why do you reckon house prices were tank­ing so fast back 18 months ago? Lehmans was still a “going con­cern”, and inter­est rates hardly peaked at a high his­tor­i­cal level.

    The Rudd/Stevens put has worked, thus far, but the jury is very shakey on how long you can count on that.…

  • Hack­tu­ary

    @Steve and oth­ers:
    Ok, I’ve learned a bit of a les­son — I re-checked and I made a mis­take about whether FHOB can be used as part of the 20% deposit. “Non gen­uine sav­ings” is excluded from the banks’ cal­cu­la­tion of loan ser­vi­ca­bil­ity, how­ever unless this is already maxxed out it is usable (in effect) as part of the deposit. That is partly because these ser­vi­ca­bil­ity ceil­ings are very gen­er­ous when inter­est rates are low.

    My main point — that there are other fac­tors at work (on the sup­ply side as well) is still valid.

    The 200% increase you’re talk­ing about is hap­pen­ing because Aus­tralians invest in their homes by about 2%-3% a year, that is above and beyond the cost of sim­ple main­te­nance. We have got used to think­ing in this way and to pay­ing more for big­ger and bet­ter houses every time we move. As long as it works, it works, but of course it is unsus­tain­able. It will stop when the ready sup­ply of new cash into hous­ing stops — in other words when house­holds realise they have maxxed out their hous­ing spend.

    It has been sus­tained by social fac­tors — namely pat­terns of par­tic­i­pa­tion in the work­force — over the past egn­er­a­tion and a half. Mov­ing from sin­gle to dou­ble income familites, we have been happy to spend most of that sec­ond house­hold income on our hous­ing.

    The Chief Econ­o­mist of the Bank of Eng­land pre­sented recently in Exeter on “house­hold bal­ance sheets” in the UK.
    ( Here’s what he said:

    But the largest asset owned by most peo­ple is not mea­sured at all. It is the value of what they expect to earn in the future or, what econ­o­mists refer to as ‘human cap­i­tal’. Most esti­mates sug­gest the value of future earn­ings is sig­nif­i­cantly greater than the sum of net finan­cial wealth and gross hous­ing assets which typ­i­cally forms the basis for bal­ance sheet mea­sures.”

    Yeah but no but yeah but…

    In his oth­er­wise rosy view he com­pletely missed the fact that it was household’s choos­ing to spend the dis­cre­tionary com­po­nent of this “great­est asset”, their sec­ond income, on houses which caused the bal­ance sheet to become so lop­sided in the first place. Con­se­quently, the fac­tors that he point to to restore baal­nce — peo­ple work­ing harder and cut­ting spend­ing — will be com­pletely inad­e­quate to keep the ball rolling on indef­i­nitely.

    We could of course develop some unusual fam­ily struc­tures in the next 30 years, otehrwise I would guess we have just about reached the end of this phe­nom­e­non with this rate rise cycle “maxxing out” many house­holds in terms of repay­ments.

  • sj

    Hi Shadow and Home­4Aussies
    Believe we need to debate this more both make very good points.
    First home buy­ers grant help to keep the mar­ket up,but the real kicker was inter­est rates below the real rate of infla­tion.
    Infla­tion is hap­pen­ing please check your lat­est electricity,water,insurance and gro­cery bill.
    Savers and pru­dent investors are bail­ing out spec­u­late debt feul junkies through false low inter­est rates.
    Gov­ern­ment cen­tral plan­ning to keep inter­est rates low is dan­ger­ous and if we had a real free mar­ket inter­est rates would be alot higher and home afford­able would hap­pen.
    Quote Hayek
    The only tastes which are sat­is­fied are the taste for power as such, the plea­sure of being part of a well-func­tion­ing and immensely pow­er­ful machine to which every­thing else must give away.
    Gov­ern­ment will try every­thing to keep the prop­erty mar­ket up,they want to win the next elec­tion.
    Steve Keen under­es­ti­mate that very pow­er­ful machine and now has to walk.

  • Abdul Kalam

    Shadow and Bret­t4Aussies… always you rais­ing very good point. You shall con­sider debat­ing it more on AP forum? On AP forum they debate this long time no resolve any­thing. They ben­e­fit with you both input.

    Goto select Aus­tralia Prop­erty Forum link above! Thank you!

  • Kat

    Hi guys,

    Just read this arti­cle writ­ten by Alan Kohler. He rec­om­mends that peo­ple should be able to access their super in order to buy a house. I thought the whole point of super was to fund one’s retire­ment. How is this fea­si­ble for young Aus­tralians who don’t even have that much (if any) super?? It just seems that the very same peo­ple who say that our houses are expen­sive due to a lack of sup­ply, are the ones who sug­gest addi­tional financ­ing options should be made avail­able to enable peo­ple to buy a house. How does that address the lack of “sup­ply”? What hap­pens when houses keep going up due to all this freely avail­able money? Is it going to get to the point where peo­ple end up spend­ing their entire super­an­nu­a­tion port­fo­lio just to have a stu­pid house? Then what? 

    It seems to me that the spruik­ers keep look­ing for extra excuses.
    ’lets have shared equity’…‘must allow super to be used for mort­gages’.. None of this will fix any of the prob­lems.

    I am really dis­ap­pointed that Alan Kohler has jumped on the same band­wagon. But I guess I should not be sur­prised.

  • home­s4aussies

    Me too, Kat. His Busi­ness Spec­ta­tor col­league Robert Got­tlieb­sen also seems to have done a bit of an about face.

    And watch­ing CNBC today, Roger Mont­gomery was fairly quiet in his views — seemed per­haps a lit­tle embarassed to have been “wrong” on hous­ing, thus far — while it’s clear he still thinks it’s a bub­ble, he’s not pre­pared to say much more on the issue.

    I think it has a great deal to do with rep­u­ta­tional risk at play.

    As I said ear­lier, a use­ful deriva­tion of Keynes would be the mar­ket can remain irra­tion for longer than an ana­lyst or com­men­ta­tor can main­tain their repu­a­tion and/or job.

    More­over, I’ve heard Plibersek say a num­ber of times words to the effect that “Australia’s pros­per­ity depends on house prices remain­ing in a bub­ble” — of course she said “not falling”, but that just plays a bit bet­ter when they’re spend­ing our $$$s to ensure that kids con­tinue to pay the world’s high­est mul­ti­ple of their salary for a home. (And, after­all, Gar­naut is highly respected by Labor — they wouldn’t have got him to take the run­ning on cli­mate change if not — and now he’s come out unequically call­ing it a mas­sive bub­ble.)

    So I also think that Gov­ern­ment has put a lot of polit­i­cal cap­i­tal into it, and they will be exert­ing as much pres­sure as they can pos­si­bly bring to bare behind the scenes to ensure that media out­lets and chan­nels carry the line that they want.

  • Pingback: Feeling sorry for Steve Keen « Karmaisking's Blog()

  • noah cross

    Kohler has changed his tune a lot in the last 6 months from some­one who under­stood the GFC and its force to becom­ing more pos­i­tive cheer­leader of stim­u­lus and its con­se­quent panacea effects. Some­how all that insight was jet­ti­soned. While con­spir­acy or orga­nized PR seems the cause, the main­stream media work in a short time peri­ods and know the pub­lic are switched off by end­lessly cycled depress­ing sto­ries.

    Pro­fes­sional media peo­ple must move with the mood and use the topline num­bers
    (espe­cially from author­ity – RBA, IMF — hence the issue with Steve’s sta­tus to under­mine his argu­ments) to endorse the view that it only gets bet­ter.

    Fair­fax jour­nal­ists resent the alle­ga­tion of writ­ing for a pay­mas­ter but the organization’s rev­enues are in part made from the prop­erty sec­tor. Con­tent cre­ates adver­tis­ing and users/readers.

    Like politi­cians, they under­stood how they must but­ter the loaf.

  • noah cross
  • noah cross
    A very good arti­cle and one that I sus­pect is true to what is really hap­pen­ing World wide-espe­cially in Aus­tralia.
    It also ties in with restraint and the denial fac­tor. I find with a major­ity of peolpe that are in real finan­cial and irre­versible stife, denial is prob­a­bly the biggest fac­tor.
    This can be demon­strated by their accep­tance of more debt (credit cards or per­sonal loans) entered into when they “know” that there is no hope of repay­ment. They bor­row this money and take an expen­sive hol­i­day 9often over­seas) or buy a new car or wait, an invest­ment prop­erty.

    The rea­son and logic are not fath­omable, nor prob­a­bly is the amount of debt to equity nor income to expenses a ratio that a lot of peo­ple would deny was work­able in the first place.
    What­ever it is the Banks in new home lend­ing are putting the new bor­rower at risk by allow­ing oth­ers lever­ag­ing on the results of the lat­est realised sale price.
    I would think small busi­ness dis­trees will be in full flight by March next and full cognition(closer to every day peo­ple with every day debt)by a major­ity of cit­i­zens that the party is over and the REAL World is just begin­ning (for them any­way)

  • Hello all

    Just a quick com­ment. I have to pack my house since I am being evicted. I wish I could fol­low this blog reg­u­larly.

    I am always trav­el­ing around the local area (pop­u­la­tion of maybe 10,000 peo­ple) about once a week and over the last few months, I have seen an increase in prop­er­ties going onto the mar­ket. Since the FHOG has fin­ished, strangely this increase has jumped sub­stan­tially. Some of the newly listed prop­erty that I seen (remem­ber­ing I have been view­ing each week) have already been sold.

    I have not seen such con­di­tion since around 2003 or bet­ter put, I have never seen so many houses going up for sale in such a short period. I ben­e­fit by assets since peo­ple throw out valu­able things when they move or are hav­ing mov­ing sales. See­ing what Steve said above, when to many peo­ple enter the mar­ket at once, the gen­eral value of hous­ing goes down. I pre­sume that the lower priced hous­ing, best hous­ing, or best neigh­bor­hoods for hous­ing is being sold quickly.

    From my small view, half of the hous­ing is sold within a week where at the other extreme, some hous­ing have been listed for months on end. I am won­der­ing if there is online sta­tis­tics which shows such mar­ket con­di­tions?

  • Chris

    If one is going on a pen­i­tent walk, Kosciusko is a fine place to go.

    How­ever still, increased debt leads to increased prices and increased per capita debt is unsus­tain­able.

    But even though this is unsus­tain­able, cap­i­tal­ist pol­icy mak­ers will do every­thing they can to pro­tect cap­i­tal­ists includ­ing first home buy­ers schemes, astro­nom­i­cal eco­nomic stim­u­lus, arti­fi­cial pop­u­la­tion growth, min­i­mum wage cuts, social wage cuts, intro­duc­ing cheap-labour imports, and so on.

    By focussing on debt (a symp­tom) Steve, like Aarons, has mis­un­der­stood the real con­tra­dic­tion within cap­i­tal­ists polit­i­cal econ­omy. he should drag Aarons along with him.

    He should realise that as he tramps up the side of Kosciusko, Karl Marx from his grave is laugh­ing his head off.

    Chris War­ren

  • UNIVERSITY of West­ern Syd­ney aca­d­e­mic Steve Keen made a name for him­self with fore­casts of eco­nomic doom, pre­dict­ing a 40 per cent decline in Aus­tralian house prices. Keen put his money where his mouth is, sell­ing his unit in Surry Hills in Syd­ney in Octo­ber last year for $526,000.

    How­ever, as always, no com­ments allowed in The Oz? Scared that peo­ple may agree with Keen and not believe the myth, the spruik­ing and bull***t sur­round­ing Oz prop­erty prices?

    I still back Steven Keen, why?

    There are many knowns which are unknown by the media, ana­lysts etc. or sim­ply ignored, e.g. bogus pop­u­la­tion growth fig­ures.

    Long post see

  • new­south­swell

    Enjoyed lis­ten­ing to you on the Green New Deal panel.
    Sure, the FHOB was a nice kick in the pants.
    How­ever with immi­gra­tion rates increas­ing
    and build­ing approvals late 2008- early 2009 decreas­ing
    + ultra-low inter­est rates, house prices had to turn upwards at some stage

  • can­cer­ward

    Hi Steve, I enjoy read­ing your blog. 

    There’s a PDF of a speech yes­ter­day by Ric Bat­tellino up at He com­ments that lower health costs mean we can spend more of our income on hous­ing than the Yanks. Also, that those under 35 years of age have expe­ri­enced a notice­able decline in home own­er­ship over the past 10–15 years and that this “may” (!) be “finan­cially dri­ven”. How ridicu­lous. What was the idea of this speech, is he try­ing to prop up the bub­ble?

    There are some dia­grams but noth­ing scary like the ones on your site, in fact his Graph 8, Hous­ing Loan Repay­ments as a per­cent­age of house­hold income makes it look like things were much worse in 1989 than now. I’d be inter­ested to see your response to this speech on this blog.

    Though a house, there­fore, may yield a rev­enue to its pro­pri­etor, and thereby serve in the func­tion of a cap­i­tal to him, it can­not yield any to the pub­lic, nor serve in the func­tion of a cap­i­tal to it, and the rev­enue of the whole body of the peo­ple can never be in the small­est degree increased by it.” — Adam Smith