The Departments of Political Science and of Economics at the University of Helsinki recently held a seminar entitled “Economics: Challenges for Political, Philosophical and Historical Research”. The motivation was a reorganisation of the University that will combine these two Departments. The flyer for the seminar advertised it in the following manner:
This seminar, organized jointly by the Department of Political Science, Department of Economics and Centre of Excellence on Global Governance Research, will start with reflections on the role of economics and economic studies.
- Can we combine economics and politics through political economy?
- Have political and economic studies neglected history?
- How can different methodological tools be combined?
One of the contexts for the seminar is the creation of the new Department of Economic and Political Studies at the University of Helsinki. More generally, we hope to contribute to theoretical and political debates on how to explain recent and future changes in global capitalism.
I was invited to put the perspective of economists who are critical of neoclassical economics, while the perspective of those favourably disposed to this school of thought was put by Professor Vesa Kanniainen from the Department of Economics at the University of Helsinki. The other speakers were:
- Isabella Bakker, Professor of Political Science, York University;
- Susanna Fellman, Professor of Economic History, University of Helsinki;
- Uskali Mäki, Academy Professor of Philosophy, University of Helsinki; and
- Heikki Patomäki, Innovation Professor of Human Security, Globalizations and Global Institutions, RMIT University.
The seminar was chaired by Teivo Teivainen, Professor of World Politics, University of Helsinki.
I videotaped the talks, and also made an audio recording–the latter includes about an hour’s discussion that was not recorded on video (since my camera’s battery ran out). The presentations and the discussions should be of interest to anyone who is curious about the capacity of economics to reform itself in the light of the global financial crisis, and the failure of neoclassical economics to anticipate this event.
The recording is in three segments: from the introductions and opening address by Vesa to most of the way through my talk:
Steve Keen's Debtwatch Podcast
From the end of my talk to that by Uskali Mäki:
Steve Keen's Debtwatch Podcast
And from Uskali Mäki till the end of the speeches
Steve Keen's Debtwatch Podcast
Discussion then followed for roughly an hour; all the preceding speeches and this last hour of discussion is recorded in the following audio file:
Steve Keen's Debtwatch Podcast
The Powerpoint file for my presentation is available here.
MechanicalEngineer,
I have studied the chart to which you referred.
Unless I’m mistaken (which is quite possible), the big assumption behind these charts is household balance sheets are static. I do not beleive this is true.
I could borrow 200% of my income and it would be totally sustainable – so long as I invest all proceeds into government debt (and cover the spread with 6% of earnings).
I could borrow 50% of my income and be wiped out (if I invested in BrisConnect).
This is the guiding principle of the Basel Accords – debt is no homogeneous.
Compared to 1990, Australian households have accumulated significant amounts of Superannuation which (i beleive) is one of many reasons which makes debt/GDP charts difficult to compare over long periods of time.
http://www.rba.gov.au/Statistics/Bulletin/B15hist.xls
For those interested in Canada’s housing bubble:
http://thetyee.ca/Opinion/2009/10/22/BubbleWillBurst/index.html
Australia’s current housing bubble resembles others in shape and force. In fact it is not related to availability and construction price. For example the availability of housing, mainly units in the area south of city in Sydney (Redfern, Moore Park, and Alexandria etc) has grown by several thousand units in the last 5 years as light factories have
closed and large blocks of units have been built. Prices have increased at very high rates after a settling back in the Sydney bubble post 2003.
The current period in Australia is quite similar to Britain in 1989, ie after the 87 crash monetary policy was eased and a new asset bubble inflated prices. People thought they had cheated the recession but then in 1990 and into 1991 it hit savagely and destroyed property for 8 years.
Much commentary in Australia on its housing market is characteristic of small markets: it is different here, the fundamentals are different; all the while ignoring the trend and analytical similarities. Anybody with international research/consulting experience would recognise this trait where all the small market deceives itself.
bb,
“Until someone can explain to me how it is possible to have a bubble when price = cost of production, I simply can never accept the notion Aust housing prices have been soley determined by the credit creation process.”
I see your point. But, the “bubble” is not in the property per se. The bubble is in the head of many property owners, who have borrowed to the limits of their ability to obtain the property they desire. It is a bubble in dreams and perceived affordability. The news this morning that Australians have beaten the US for the largest average house size I think points to this.
Lower interest rates in reality have not really spurred on a property “boom” like in prior low interest eras because people have realised how much better life is without the burden of onerous mortgages. So more than anything, I see popular mood being the driver at the margins for house prices.(Can we not live quite well with smaller debt?) My take is that there will not be a house price crash, more a steady sideways type decline, up down up etc, over many years.
Up to this point however, there is no doubt in my mind that house prices have been pumped up by the willingness of banks to lend. Under any circumstances- LEND. This has been blessed by Govts and the RBA.
The aim of our Govt and Banks now is to manage a relative improvement in the affordability gap that does not see a decline in house prices. So, time must pass, lots of time, as wages/incomes pick up to fill that gap.
“Australians have the biggest homes”
http://www.news.com.au/business/money/story/0,28323,26418362-5013951,00.html
“According to CommSec, while the houses are getting bigger, so too are the families with the number of people in each household rising from 2.51 to 2.56, the first such rise in at least 100 years.”
“NSW has the biggest houses in Australia and by a large margin. The size of the average new house built in NSW in 2008-09 was 262.9sq m, followed by Queensland 253sq m.”
Bobbel? … Bobbel? … we don’ need no steenkin bobbel
GSM,
Thanks for your comments.
I guess we agree on most points. There will not be a property crash. However, now that prices have caught up to economic reality, new supply will cap any further significant increases (unless governments begin to impose new taxes & charges).
bb,
Why do you think that there will be no property crash in Australia if the same conditions you mentioned (including rising costs of building new houses) were in place in other countries and housing markets crashed there despite that?
Prices depend on how much people want to pay / for how much they agree (or have to) sell. This equilibrium is mainly affected by the availability of financing and the availability of houses on the market – all the houses, not only new ones. If there are foreclosures or panic develops – the market is flooded. If loans are cheap and people believe in rising prices – the bubble develops. The supply side doesn’t adjust.
Why do we have negative equity in the US? This phenomenon directly contradicts your reasoning.
Yes I know that in Australia the Laboliberal government will do whatever it takes including postponing foreclosures (already done) and selling 100% of our assets to China and Japan (already achieved to some extent) to stop the property bubble from deflating – but in the end you cannot defeat differential equations. The only “tool” left will be the printing press.
Yes it may take another 10 years but you cannot simply defy the gravity by borrowing more and more and even more.
bb, GSM and ak,
I believe that the housing bubble has been largely manifest in wages for tradepeople. My father is an electrician, and I was wiring up houses on weekends in my early teens. There was not much money to be made. Since 2000 when house prices skyrocketed, the cost of trades appears to have also done so.
No longer do you see beat up old utes on the road, it seems every contractor has a new HSV or 4×4. Surely purchased on credit.
My wife recently got quotes to rebuild the quite large deck behind our house. I knew that materials costs would probably exceed $5k. The price I can recall came in at $28k. $20k is four or five months average wage, for about a weeks work for 2 men.
Deflation could hit self employed builders very hard, the cost of building may drop significantly.
I would be interested if any of the contributers to this site are builders with first hand knowledge of the costs imposed on them.
bb,
Please have a look at Graph 10
http://www.pacificlink.org.au/investors/pdf/Affordable%20housing%20-%20Information%20Paper%20on%20Housing%20Affordability.pdf
and superimpose it with the house prices graph.
The “big” bubble 2002-2004 coincided with a spike in investment borrowing. It is the credit tail what wags the housing market dog.
The whole document is worth reading.
Ak @ 208
“Why do you think that there will be no property crash in Australia if the same conditions you mentioned (including rising costs of building new houses) were in place in other countries and housing markets crashed there despite that?”
Because Australia do not have the same conditions as other countries.
Property bubbles are pretty easy to spot. You essentially need one of two the following conditions
1. Rising supply in excess of underlying demand (usually increasing supply relative to trend)
2. Expanding development and building margins. ie: Price increases > cost increases
In the US both conditions were satisfied. In Australia, neither.
Here is the link to US housing supply showing a dramatic increase in starts from 2003-2005
http://www.census.gov/const/www/quarterly_starts_completions.pdf
Here is the summary of Lennar’s building margins source from their 10K over ten years
2000 +8.8%
2001 +12.0%
2002 +12.4%
2003 +13.9%
2004 +15.5%
2005 +17.1%
2006 +6.3%
2007 -29.9%
2008 -9.4%
Here is the link to their web site if you want to check the numbers
http://phx.corporate-ir.net/phoenix.zhtml?c=65842&p=irol-sec&secCat01.1_rs=11&secCat01.1_rc=10&control_searchbox=&control_selectgroup=1
A doubling of building / developer margins, plus a rapid increase in supply in the US is very different ot Australia were builder and developer margins have collapsed, and new supply is flat.
The following link is the AV Jenning annual report. Page 44 shows building revenues of $158m and operting loss of $8m.
http://www.avjennings.com.au/getdoc/38c69d3f-a1ed-440a-a80f-68458f1f9bcd/AVJenningsAnnualReport2009.aspx
So long as prices = cost of production I can not be convinced there is a bubble. If there is no bubble, there will be no house price collapse.
ak @ 210
I’m sorry, but this chart does not tell me much.
House bears beleive a person goes to the bank, asks for $100, and this feeds into house prices. The next day, a second person asks for $110, and pays 10% more compared to the first person. Result = bubble. QED
An alterntive explaination for this chart is a builder builds house for $100. Buyers needs to borrow $100 because the builder does not want to work for a loss. Therfore the rising credit chart reflects the rising cost of production – nothing more. In fact it can be anything else since building and developer magins are so poor.
I think MechanicalEngineers explaination is closer to the mark, driven by a skills shortage (ie: they will not get hit by deflation).
I will read the article. Thanks for the link.
bb,
You seem to be neglecting land value.
bb,
Regarding Figure 22A, I’m not sure how the balance sheet is relevant. If the debt is used to purchase an asset, then depending upon the asset performance one can obtain a capital gain or suffer a loss. This may allow an individual to get out of debt.
The chart is showing debt servicing cost for the nation as a percent of GDP. The upper red curve is the combination of interest rate and debt that requries 16.7% of GDP for debt servicing. The wiggly line is the historical data, the peak is in 1990 on this line.
The 16.7% is just the historical peak of this curve, not based on any other principle. I was at school in 1990, so I’m not sure what the economy was like, but the widespread opinion is that there was excess leverage from the 80′s speculation leading to the “recession we had to have”.
At current debt levels, about 9.5% loan interest rate would raise our servicing cost back to this level. That is official rate of 6%.
I would not think that we could reach the 450% of GDP before a meltdown, but I do not know. It is also possible that we could sustain debt servicing of 20% of GDP or higher, but again I doubt it, that is just to much money disapearing out of the ecomomy to keep people employed.
Hi bb,
I notice that you believe Australia is different. Do you believe house prices could ever fall in Australia or will they simply rise with inflation for decades to come? Loaded question I know. So let me re-phrase. What in your opinion could trigger a fall in house prices in Oz?
Just to spice up the currrent debate – “New home sales fall 6% in October”
http://www.theaustralian.com.au/business/property/new-home-sales-fall-6-per-cent-in-october-in-second-consecutive-decline/story-e6frg9gx-1225805307917
I still have not met anyone who can explain why in the middle of a supposed housing shortfall and with rental yields increasing the sale on new homes fall. It is not rational. It is even less rational when we consider that the price of existing stock is rising.
It only makes sense if some part of the equation is wrong, either the shortfall conditions, the reported yields or the sales data.
bb, individuals can be manipulted and generally quite easily and this can lead to irrational behaviour such as bidding up the price of existing housing stock when it is in some cases cheaper to buy the land and build a new house.
Excess new supply is not the only requirement for a bubble – the RBA recently admitted that in 2006 we had 8% more houses and households.
Let’s look at the financing of house purchases data (I have no time to find information about all the purcheses – including these involving no borrowed money)
http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5609.0Main%20Features2Sep%202009?opendocument&tabname=Summary&prodno=5609.0&issue=Sep%202009&num=&view=
Recent data (Sep 09)
Number of Owner Occupied Dwellings Financed Excluding Refinancing = 50000
Construction of dwellings = 7500
Purchase of new dwellings = 2700
Purchase of established dwellings – slightly less than 40000
Why should I believe that new home sales drive the market prices if they only account for about 20% of all the transactions (financed by borrowing)?
Sorry people typo with my previous post:
“Excess new supply is not the only requirement for a bubble – the RBA recently admitted that in 2006 we had 8% more houses THAN households”.
Thanks debtjunkies
Sales fall 6 per cent while prices attain record highs? Smells of trend reversal…
http://www.theaustralian.com.au/business/property/new-home-sales-fall-6-per-cent-in-october-in-second-consecutive-decline/story-e6frg9gx-1225805307917
Also
For those talking about “a price crash”. There appears to be a reality disconnect here. Are we considering 40% to be a ‘price crash’ – if so consider 10 to 15 % – I think that the general landscape would be unrecognisable after even a modest decline, such as %10
Paul Andrews,
I do include land in my analysis. You can look at the land developers (Stockland, AV Jennings) and their margins are awful. You can look at the builders (AV Jennings (again) and Mirvac) and the same applies.
Also be careful when you talk about land. It is made up of two very different components.
Englobo land account for 5-10% of the marginal cost of production (estates). Yet serviced land can account for +50%. Serviced land includes many “hard costs” including roads, guttering, power, sewage, earth-works / engineering, and water.
Mechanical Engineer,
I think we may have to agree to disagree.
I think personal balance sheet is very relevant. If I earn $100 in income and have a $1000 loan, and rates increased, I would be in trouble.
If I earn $100 in income, have a $1000 loan, have a $1500 house, and $1000 in super, I’m not in the same situation. We can argue whether assets are over-valued, but the fact remains Aussies now have massive super accounts compared to 1990. If the world turns bad, it is an easy policy decision to give people access to some of these funds to de-gear the economy and accelerate retirement (creating jobs) and boost consumption.
Hi BTB
I think we can all agree, bubbles always burst.
When I think bubble, I think
1. asset values > replacement cost (ie: US 2007, US Commercial 1989, UK commercial 1973), or
2. Assets where there is no need for new production (japan housing, tulips)
I think when you see House prices significantly greater than the cost of production, then we are in a bubble. I look for;
1. Rising supply ahead of demand (not easy to measure, but increasing supply relative to trend is a good starting point).
2. Expanding margins for developers and builders.
Don’t get me wrong. I do not think Aussie houses are cheap. Nor do I think they will grow by more than 2-6% per annum from here. If they do, then I think we will be at the start of a bubble – not the end.
Hi bb
I think it might to do with the nature of the bubble ( I havent looked at the earning from the property developers yet). You can change hands even a limited number of properties rapidly to have a bubble effect .That is one kind of a bubble. Bubble in gold prices for example.
W:r:t super I am not sure I need to read up more, because super to me is not exclusive to Australia, I have seen this in other countries I have worked , but it seems people with big super savings also have the least debt.
ak,
Thanks for the link. You must spend a lot of time thinking about this stuff, which makes it fun to chat.
“Why should I believe that new home sales drive the market prices if they only account for about 20% of all the transactions (financed by borrowing)?”
Why spend $500k on a new house in Rouse Hill when $500k buys a terrace in Balmain (example data only).
Prices for existing stock have to increase such that new (less desirable) stock becomes competitive again. The two markets (new stock and existing stock) heavily influence each other – Just as Prof Keen points out with the FHOG.
Australia IS different…we have kangaroos!
Hi Debtjunkies
“Excess new supply is not the only requirement for a bubble – the RBA recently admitted that in 2006 we had 8% more houses THAN households”
I think this comment was sourced to the 2006 Census (please correct me if I’m wrong).
I think the census data suggest 8% of housholds were vacant on census night (again, please correct me if I’m wrong).
If I am right, these last three words change the quote significantly.
For instance, on average 4% of all households should be vacant at any one time (4 weeks holiday per year over 52 weeks x say 50% chance of going away). One must also take into account single people working late, or going out, some people not filling out the census, and natural vanacy required for a functioning market.
I think this 8% vacant number is no difference to previous census data going back to 1975. Again I don’t have all the data so I am happy to be corrected on these points.
ak / debtJ / BTB / pb / Mech Eng / All
Thanks for the feedback & Discussion – I have very much enjoyed it. Must go now and read some of ak’s & Mech Eng’s links so I can better contribute to the debate (and also do some real work).