Final T‑Shirts

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After exten­sive and much appre­ci­at­ed crit­i­cal feed­back on the draft designs, this blog entry show­cas­es the three T‑Shirt designs I’m pro­duc­ing for the Walk to Kosciuszko.

Each has the words “I was hope­less­ly wrong on house prices. Ask me how” as required by the bet. Each also has a graph­i­cal answer to the ques­tion:

  • Tim­ing;
  • Our Debt Bub­ble; and
  • Gov­ern­ment manip­u­la­tion of the mar­ket in the form of the First Home Own­ers Grant.

Some blog mem­bers have made strong cas­es for a plain T‑shirt, but I will stick with the graph-aug­ment­ed designs. I entered pub­lic debate to make the points that (a) we were in for a seri­ous debt-induced eco­nom­ic cri­sis; and (b) that con­ven­tion­al eco­nom­ic the­o­ry had helped cause this cri­sis by ignor­ing the role of cred­it. I intend using this Walk to con­tin­ue com­mu­ni­cat­ing those mes­sages.

I’ve tak­en aboard the obser­va­tions that the dis­tort­ed text made it hard­er to read both the text and the graphs, but I am plac­ing the text strate­gi­cal­ly in each graph to empha­sise the mes­sage of each T‑shirt.

Some blog­gers have also argued that I should replace “Walk­ing against Australia’s prop­er­ty mania” with “Walk­ing against Australia’s prop­er­ty bub­ble”. I am stick­ing with mania, because I believe that future gen­er­a­tions, look­ing back on this peri­od, will regard it as at least the equivalent–and prob­a­bly the Master–of pre­vi­ous ages of delu­sion like the Tulip Mania, the South Sea Bub­ble, and John Law and the Mis­sis­sip­pi Com­pa­ny. Charles Mack­ay pop­u­larised the word “mania” to describe such peri­ods in his mas­ter­ful Extra­or­di­nary Pop­u­lar Delu­sions and the Mad­ness of Crowds, and I think that term fit­ting­ly describes the peri­od of delu­sion we are liv­ing through.

If the above choic­es mean that the T‑shirts work less well for visu­al bites on TV and the like, so be it. I would rather see them as his­tor­i­cal arte­facts first, and com­mu­ni­ca­tion devices sec­ond.

1: Timing

The first T‑shirt shows CPI-adjust­ed house price indices for Japan, the USA and Aus­tralia, start­ing from the com­mon date of June 1986 (the ear­li­est date in the ABS time series for estab­lished home prices).

Japan’s real house price index rose by 54% between 1986 and 1991 dur­ing its Bub­ble Econ­o­my phase, peaked at 154.75 in Feb­ru­ary 1991 in the ear­ly days of the Bub­ble’s burst­ing. By March 2009 had fall­en to 63.961–a fall of 58% over 18 years.

When Japan’s Bub­ble Econ­o­my fell into the heap that became known as The Lost Decade–and which is now clos­er to The Lost Two Decades–there were numer­ous com­men­taries that some­thing as absurd as Japan’s bub­ble could nev­er occur in Amer­i­ca, giv­en its much more effi­cient and trans­par­ent finan­cial sys­tem. As a well-edu­cat­ed Min­skian econ­o­mist, I scoffed at the time at such reports, but even I did­n’t appre­ci­ate how accu­rate my scep­ti­cism would prove to be.

The Amer­i­can real estate bubble–which began in 1997 after a peri­od of rel­a­tive­ly depressed prices after the 1990s recession–clearly dwarfed Japan’s. Between 1986 and late 2005, Amer­i­can real house prices rose by almost 88%. They then fell 36.5%, before start­ing to rise again recently–with the US ver­sion of Aus­trali­a’s First Home Own­ers Grant play­ing a large role in the turn­around. Though prices have appar­ent­ly bot­tomed, there are plen­ty of argu­ments to expect this to be only a tem­po­rary respite–from the size of the inven­to­ry of unsold hous­es to the approach­ing wave of defaults by mort­gagees whose Alt‑A “Option ARM” mort­gages are about to reset).

How­ev­er, both the Japan­ese and Amer­i­can house price bub­bles are pyg­mies com­pared to Aus­trali­a’s bub­ble. Aus­trali­a’s still unburst bub­ble drove the real price of hous­ing to 140 per­cent above the lev­el of June 1986–that is, real house prices are now 2.4 times what they were in mid-1986 (the peak in real terms is still the pre-First Home Ven­dors Grant lev­el of Jan­u­ary 2008, though the nom­i­nal index is now 8 high­er per­cent than then).

2: Our Debt Bubble

The rea­son that our house price bub­ble has kept going while oth­er less hardy com­pan­ions have already popped is the same old same old: debt. The T‑shirt itself empha­sis­es the aggre­gate lev­el of pri­vate debt to GDP over the last 150 years, to make the point that this is the biggest debt bub­ble in our his­to­ry. The pre­vi­ous two record highs were in 1882 at 104% of GDP, and 1931 at 77% of GDP. Today’s record is 158% as of March 2008.

This com­par­i­son actu­al­ly under­states the degree to which our cur­rent debt predica­ment is worse than any pre­vi­ous one, since those pre­vi­ous peaks were affect­ed by defla­tion: the debt to GDP ratio rose between 1930 and 1931 (and 1890 and 1892) despite falling debt lev­els, because out­put and prices were falling faster than debt. In the 1930s, this phe­nom­e­non increased the debt to GDP lev­el by about 10 per­cent over its pre-cri­sis peak.

We have yet to expe­ri­ence defla­tion, and yet our cur­rent debt lev­el already far exceeds those pre­vi­ous peaks.

House­hold debt has played a piv­otal role in this bub­ble. The next chart (which won’t be used for a T‑shirt) makes that point. Mort­gage debt rose five­fold (as a per­cent­age of GDP) between 1990 and today. With­out this debt binge, Aus­trali­a’s pri­vate debt to GDP ratio today would be only slight­ly above the 1930s peak, rather than being twice its lev­el.

The chart also high­lights one oth­er impor­tant point: a large rea­son why Aus­tralia has had such a mild GFC so far is because Aus­tralian house­holds were enticed back into debt by the First Home Ven­dors Boost, and by the impact of the Gov­ern­ment stim­u­lus pack­age upon house­hold dis­pos­able incomes.

House­holds were reduc­ing their mort­gage expo­sure pri­or to the intro­duc­tion of The Boost: mort­gage debt had peaked at 81.3% of GDP in June 2008, and was trend­ing down pri­or to the Boost. It then hit a bot­tom of 80.3% in Decem­ber 2008 before ris­ing to an all-time high of 86.8 in Jan­u­ary 2010.

The change has been less extreme when mort­gage debt is mea­sured against House­hold Dis­pos­able Income (HDI), since the Aus­tralian gov­ern­men­t’s stim­u­lus pack­age and the inter­est rate cuts by the RBA boost­ed house­hold incomes by almost ten per­cent last year. As a result, mort­gage debt fell only slight­ly as a per­cent­age of HDI, from 133.6% to 130.3%, and it took longer to fall. But ulti­mate­ly, even though incomes had been boost­ed so sub­stan­tial­ly, the increase in mort­gage debt last year final­ly exceed­ed the increase in incomes: by Jan­u­ary 2010, the mort­gage debt to HDI ratio had hit a new peak of 134.2%

The over­whelm­ing­ly impor­tant rea­son why this hap­pened is the pol­i­cy that the Gov­ern­ment called the First Home Own­ers Boost, and which I describe by the more accu­rate name of the First Home Ven­dors Boost. As the final T‑shirt shows, this is the fifth time in Aus­trali­a’s recent eco­nom­ic his­to­ry that the Gov­ern­ment has manip­u­lat­ed the prop­er­ty mar­ket as a means of stim­u­lat­ing the econ­o­my.

3: The First Home Owners Grant

The First Home Own­ers Grant was first intro­duced in 1983; while it’s hard to locate dis­cus­sion on why the grant was intro­duced (here’s a Hansard link for any­one with more time on their hand than I have to research this), the Grant was intro­duced when Aus­tralia was deep in the reces­sion of the ear­ly 1980s, and dur­ing the first year of the new Hawke Labor Gov­ern­ment. It is there­fore like­ly that then, as now, the Grant was intend­ed to boost eco­nom­ic activ­i­ty by encour­ag­ing the hous­ing mar­ket.

That was explic­it­ly the pur­pose to enhance­ments to the Grant in 1988, in the after­math to the Stock Mar­ket Crash of the pre­vi­ous year. The 2000 rein­tro­duc­tion of the Grant by the Howard Lib­er­al Gov­ern­ment was osten­si­bly a short-lived boost to the hous­ing sec­tor to get it over the impact of the intro­duc­tion of the Goods and Ser­vices Tax (GST), but it was quick­ly turned to its cus­tom­ary role of boost­ing eco­nom­ic activ­i­ty when a reces­sion was feared in 2001 and the Grant was dou­bled.

The intro­duc­tion of the GST is long for­got­ten of course, but the Grant lived on–and it was then boost­ed again in Sep­tem­ber 2008 as part of the Rudd Labor Gov­ern­men­t’s stim­u­lus pack­age to fight the GFC.

Each time it was intro­duced, the Grant worked as intended–and it worked not mere­ly because it inject­ed addi­tion­al Gov­ern­ment mon­ey into the econ­o­my, but also because it encour­aged Aus­tralians to take on more mort­gage debt. Each addi­tion­al A$1,000 was turned into any­thing up to an addi­tion­al $10,000 of buy­ing pow­er, so that while the Buy­er got an addi­tion­al $7,000 from the Gov­ern­ment, the Sell­er (after a very sat­is­fac­to­ry auc­tion…) got an addi­tion­al $30,000 or so from the buy­er’s bank.

The Sell­er then used this mon­ey in turn to get a still larg­er loan from their bank, so that the Grant mon­ey was lev­ered at least twice.

This dou­ble lever­age is a major rea­son why we have a hous­ing bub­ble today–and why we had one in 1988, and 2001 before that.

I don’t, like some ana­lysts, blame the hous­ing cri­sis sole­ly on gov­ern­ment pol­i­cy: for me, the ulti­mate cause of our hous­ing and finan­cial crises will always be the innate will­ing­ness of the finan­cial sec­tor to extend debt. But it is cer­tain­ly obvi­ous that Gov­ern­ment med­dling in the hous­ing mar­ket has seed­ed a bub­ble that the finan­cial sec­tor has then been only too will­ing to exploit.

As long-time read­ers know, I railed against this lat­est manip­u­la­tion of the hous­ing mar­ket when it was first intro­duced, and again when the scale of take-up of the Boost was first report­ed. My first post was the only one to draw a response from a Gov­ern­ment Min­is­ter to any of my writ­ings. Though this reads like a form let­ter that many crit­ics of this pol­i­cy may have received, the exchange is still worth repro­duc­ing here:

—–Orig­i­nal Mes­sage—–
From: Steve Keen []
Sent: Tues­day, 14 Octo­ber 2008 8:59 PM
To: undis­closed-recip­i­ents:
Sub­ject: Debt­watch com­ment on First Home Buy­ers Pol­i­cy
I argue in the attached that dou­bling the First Home Buy­ers grant is a con­tin­u­a­tion of the poli­cies that caused the eco­nom­ic cri­sis in the
first place.
Asso­ciate Pro­fes­sor Steve Keen

From: Plibersek, Tanya[]
Sent: Thu 16/10/2008 5:19 PM
To: Steve Keen
Sub­ject: RE: Debt­watch com­ment on First Home Buy­ers Pol­i­cy [SEC=UNCLASSIFIED]
Dear Steve

Thanks for your email about the First Home Own­ers Boost announced by the Prime Min­is­ter and Trea­sur­er. I under­stand the con­cerns you raise in your email, how­ev­er, as well as help­ing Aus­tralians into a home of their own, this mea­sure will bring much need­ed stim­u­lus to the hous­ing mar­ket to sup­port the Government’s macro­eco­nom­ic agen­da at a time of seri­ous glob­al uncer­tain­ty.

Hous­ing is very impor­tant to the Aus­tralian econ­o­my. Invest­ment in hous­ing accounts for about 6 per cent of the over­all econ­o­my, and hous­ing is the major source of finan­cial secu­ri­ty for mil­lions of Aus­tralians and their fam­i­lies.

Expand­ing sup­port for first home buy­ers in this fash­ion is right for the uncer­tain eco­nom­ic con­di­tions that we now face. It will also help to shore up hous­ing activ­i­ty in a sec­tor that may oth­er­wise slow. I have attached a fact sheet which pro­vides some more infor­ma­tion about the announce­ment.

Best wish­es


From: Steve Keen []
Sent:  Thu 16/10/2008 7:05 PM
To: Plibersek, Tanya
Sub­ject: RE: Debt­watch com­ment on First Home Buy­ers Pol­i­cy [SEC=UNCLASSIFIED]

Dear Tanya,

I appre­ci­ate your per­spec­tive, but I remain of the opin­ion that this is a mis­guid­ed pol­i­cy.

The hous­ing mar­ket was seri­ous­ly over-stim­u­lat­ed by debt-financed spec­u­la­tion in the last one and a half decades, and most of that stim­u­lus did far more to boost price lev­els and increase unaf­ford­abil­i­ty, than it did to increase sup­ply.

The finan­cial secu­ri­ty promised by hous­ing has become finan­cial inse­cu­ri­ty in the USA and the UK, and much of the OECD, and it will inevitably prove so for Aus­tralia too, which as you are aware has the most expen­sive hous­ing rel­a­tive to incomes in the OECD. True secu­ri­ty only exists when house prices keep step with incomes. When they rise faster for sus­tained peri­ods, on the back of even faster increas­es in debt, the finan­cial wealth cre­at­ed is both fic­ti­tious and frag­ile, as we are now see­ing on the dai­ly news.

Part of the rea­son for Aus­trali­a’s spec­u­la­tive bub­ble [I have made a slight gram­mat­i­cal edit here of the orig­i­nal] is the pletho­ra of schemes in Aus­tralia which encour­age spec­u­la­tion on house prices–from neg­a­tive gear­ing, to cap­i­tal gains tax at half the rate of income tax, the exemp­tion of cap­i­tal gains on prin­ci­pal res­i­dences, and of course the first home buy­ers scheme.

I would be far hap­pi­er to see schemes to sup­port renters and strength­en their rights, than yet anoth­er to encour­age first home buy­ers into a gross­ly over­val­ued mar­ket.

Nonethe­less I appre­ci­ate your email, and would like to keep in con­tact about this and the broad­er issues involved in our eco­nom­ic cri­sis.


Now The Boost is behind us, and the evi­dence is in on its impact. There is no doubt that it stim­u­lat­ed the economy–possibly as much as the rest of the stim­u­lus pack­age and the RBA rate cuts com­bined. It also stim­u­lat­ed house prices through the roof–and it’s the main rea­son why I’ll be walk­ing next month.

But it worked by seduc­ing Aus­tralians back into debt, since (as I observed in a pre­vi­ous report), house prices can only con­tin­ue ris­ing com­pared to incomes if debt con­tin­ues to rise faster still. This could con­tin­ue after The Boost if the fire the Gov­ern­ment lit in the mar­ket was car­ried on by “investors”–and that was and is cer­tain­ly the hope expressed both by the Gov­ern­ment and the prop­er­ty lob­by.

My expec­ta­tions, and that of many oth­er crit­ics like Adam Schwab, was that the FHVB would boost buy­er num­bers while it last­ed, but cause a slump (in First Home Buy­ers at least) when it fin­ished because (a) it would drag in many would-be First Home Buy­ers who would have pur­chased in lat­er years into pur­chas­ing in 2009, thus inflat­ing 2009 num­bers at the expense of sub­se­quent years; and (b) it would inflate prices so much that many oth­er would-be First Home Buy­ers would decide to con­tin­ue as renters instead.

That’s just from the bor­row­ers side; the sur­prise move by West­pac to reduce its max­i­mum LVR from 92% to 87% also made me feel that, just maybe, the days of ris­ing lever­age dri­ving house prices were com­ing to an end. That does­n’t sound like much, but it means that a pur­chas­er who had her eye on a $1 mil­lion dream home and had the req­ui­site fund­ing pri­or to the change would now have to find an addi­tion­al $50,000 in cash to bid the same amount–that’s a 62.5% increase in the deposit required to come up with the ask­ing price want­ed by the ven­dor (from $80,000 or 8% of the pur­chase price to $130,000 or 13% of the pur­chase price).

The ques­tion then is whether the “investors” who’ve been enticed into the mar­ket by the promise of ris­ing prices could out­weigh an inevitable fall in the num­ber of First Home Buy­ers and the start of banks unwind­ing their exces­sive lever­age beneath house prices.

Pre­lim­i­nary data does­n’t look that crash hot for the prop­er­ty bulls on both these fronts. Both the num­ber and the val­ue of new mort­gages took an unprece­dent­ed fall once the FHVB expired, as the next two charts show.

So the odds are high that the end­ing of the FHVB will be one of sev­er­al trig­gers for the long over­due burst­ing of the Aus­tralian prop­er­ty bubble–along with the unwind­ing of exces­sive hous­ing lever­age and the slow­down in the rate of growth of mort­gage debt. The FHVB will then turn out to be what I antic­i­pat­ed: a short term suc­cess that sets up the con­di­tions for a long term fail­ure, and at the expense of the quar­ter of a mil­lion Aus­tralians who were enticed into mort­gage debt by this tem­porar­i­ly suc­cess­ful but ulti­mate­ly irre­spon­si­ble pol­i­cy.

For that rea­son, the T‑Shirt I’ll be wear­ing on day one of The Walk is num­ber 3 above.

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