Grow­ing like Topsy

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My Walk to Mt Kosciuszko is no longer a soli­tary affair: at last count, I will have a dozen com­pan­ions for the entire dis­tance, and another 16 join­ing me for at least one day.

One of those com­ing for the entire trip is the Com­men­tary Edi­tor from Busi­ness Spec­ta­tor, Rob Burgess. Rob will report from and on the Walk on a daily basis, cov­er­ing it both as a news story, and as the basis for a dis­cus­sion of the wider issues fac­ing busi­ness and eco­nom­ics in the uncharted ter­rain of the sup­pos­edly  ‘post-GFC’ world.

The oth­ers join­ing me on the trek are doing so not just for the scenery, but because they too believe that Australia’s eco­nomic pol­icy has become beholden to main­tain­ing house prices at unsus­tain­able lev­els. Despite gov­ern­ment rhetoric (and some action) about improv­ing home afford­abil­ity, the First Home Ven­dors Boost  did far more to make houses more unaf­ford­able than the government’s minor actions in the oppo­site direc­tion. The other walk­ers are join­ing me to bring atten­tion to the absur­dity of man­ag­ing the Aus­tralian econ­omy by mak­ing it impos­si­ble for peo­ple to afford houses in their own coun­try.

But though The Walk will have a polit­i­cal protest at its core, it is not party par­ti­san: our call here is “A Plague on Both Your Houses”. What­ever else might change if Tony replaces Kevin, one thing that won’t change is a sky-high house price pol­icy, since both sides of pol­i­tics in Can­berra (not to men­tion the com­mer­cial Banks and their econ­o­mists) have become con­vinced that the major rea­son the GFC occurred was that house prices fell.

This is true in the same sense that jump­ing off a cliff is painless—it’s hit­ting the ground at its bot­tom that hurts. The real cause of the GFC wasn’t falling house prices per se, but the mort­gage debt that drove them higher as house­holds took part in a spec­u­la­tive bub­ble. The ris­ing debt level was, in effect, climb­ing the moun­tain in the first place: delever­ag­ing was jump­ing off it.

The only way to pre­vent a finan­cial cri­sis is not to climb the moun­tain in the first place: to stop debt being taken on for spec­u­la­tive rea­sons. But instead politi­cians the world over encour­aged house­holds to do pre­cisely that, in the mis­guided belief that finan­cial engi­neer­ing was a road to wealth. Instead, it was the road to debt penury.

Once that debt has been accu­mu­lated,  try­ing to stop house prices falling is like keep­ing Wily Coy­ote sta­tion­ary in midair after he’s fallen off a cliff with an anvil attached to his legs: he’ll stay there for a moment, but after a while, it’s “Hello Terra Firma”.

House prices rose in Amer­ica and the rest of the OECD because house­holds took on buck­et­loads of mort­gage debt, and they fell because house­holds stopped tak­ing on more debt. The fall in house prices was a symp­tom of house­holds end­ing the lever­ag­ing game: it was coin­ci­dent with the cri­sis, it made it worse because the col­lapse in house prices and the rise in insol­ven­cies made banks insol­vent, but the real prob­lem was that house­holds had got into too much debt.

So how does Aus­tralia keep house prices high? By encour­ag­ing house­holds to get into yet more debt. The next chart shows what hap­pened to the house­hold debt ratios (both to dis­pos­able income and to GDP) before and after the First Home Ven­dors Boost.

The rise against GDP is far more dra­matic than against house­hold dis­pos­able income because other gov­ern­ment policies—the stim­u­lus pack­age itself and the RBA’s 4% cut in inter­est rates—boosted dis­pos­able income dra­mat­i­cally last year (but even so, mort­gage debt is now a higher pro­por­tion of house­hold dis­pos­able income than before the GFC).  The Boost-inspired house price bub­ble was financed by house­holds adding another 6% of GDP to their already unprece­dented debt bur­den, when prior to The Boost they were on track to reduce mort­gage debt by about 3% of GDP in 2009.

We’ve avoided hit­ting the ground of delever­ag­ing by climb­ing to a higher cliff.

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  • Bill White would prob­a­bly call him­self a Min­skian rather than an Aus­trian Lyon­wiss, and (from mem­ory!) he’s some­one I nom­i­nated (of the 96). He’d make my short­list too, but as a nom­i­nee myself I took no part in the selec­tion of the final 12, so I have no idea why he wasn’t included there.

    Ditto Peter Schiff; if I’d been select­ing the field, I would have included him too. It could well be that the mem­bers of the RWER blog who par­tic­i­pated in the selec­tion process included more Post Key­ne­sians than Aus­tri­ans, hence the outcome–I don’t know. But I might add that Kurt Richebacher would gen­er­ally be seen as Aus­trian.

    Know­ing Edward Full­brook, who founded RWER, I expect that the rea­son for what might appear to be biased selec­tion is far more likely to be a fil­ter­ing process based on a set of rules that appear to have arbi­trary out­comes.

    On that note, you can check the dis­cus­sions from which the 12 nom­i­na­tions were drawn at this link; then also take a look at the dis­cus­sion of the actual list of 12 drawn from the 96 per­sons nom­i­nated.

    You will see that the dis­cus­sion is exclu­sively about the “out­rage” that Naseem Taleb was not one of the nom­i­nees. Ahem, there was a slight prob­lem: no-one nom­i­nated him! If the wingers in the dis­cus­sion there had nom­i­nated him in the first place, when it was open to any­one to do so, there would have been 97 nom­i­nees and he could quite pos­si­bly have been one of the ones to make the final 12. So as often hap­pens on the Inter­net, what some see as a con­spir­acy has a far sim­pler expla­na­tion.

    I’m doing my best to include the best from all schools in my own work, and I hope that’s what will be the nature of eco­nom­ics as the years post the ini­tial cri­sis roll on, rather than the ide­o­log­i­cal bat­tles of old. But I’m not hold­ing my breath! I find that self-described Marx­ists hate my inter­pre­ta­tion of Marx, and self-described Aus­tri­ans hate my inter­pre­ta­tion of what is the best in their tra­di­tion…


    Steve (and all),

    Have you seen this video of Aus­tralian prop­erty spruiker Christo­pher Joye’s pre­sen­ta­tion to the ‘Trans­form­ing America’s Hous­ing Pol­icy’ forum in the USA, Feb 13 2009, where he lets the cat out of the bag on a “phe­nom­e­nally risky invest­ment” … the sin­gle fam­ily home?

    High­lights (from 21:00)

    21:59 (Laud­ing our 4 pil­lar bank­ing sys­tem) — “We’ve had no nation­al­i­sa­tions, no bailouts, no Gov­ern­ment inter­ven­tions…”

    (No govt inter­ven­tions?! Oh really? So what the heck were the whole­sale fund­ing guar­an­tee, deposit guar­an­tee, Govt buy­ing up to $16bn in RMBS, etc ?!? —

    22:22 — “Our research shows that the sin­gle fam­ily home is a PHENOMENALLY RISKY INVESTMENT; it’s around SIX TIMES the risk of a broad-based prop­erty index; in Aus­tralia, a sin­gle fam­ily home has around 20% volatil­ity, so, volatil­ity akin to equi­ties… and yet, the aver­age fam­ily invests 50–60% of all their wealth in the world in this HIGHLY IDIOSYNCRATIC asset…”

    23:37 — “I under­stand that here in the US the aver­age LTV is around 95% which sug­gests that around 30–40% of all mort­gagors are under­wa­ter or have neg­a­tive equity, but it’s typ­i­cal around the world for house­holds to gear to 70–80% when buy­ing a new home, and they’re lever­ag­ing against what is AN INCREDIBLY RISKY under­ly­ing asset…”

    (Com­pare his daily com­men­tary back here in Aus­tralia spruik­ing prop­erty invest­ment, mer­its of home own­er­ship, et al)

    From what I can see, Joye was in the USA spruik­ing the “mer­its” of his Equity Finance Mort­gage prod­uct.

    Oth­ers who fol­low the hous­ing mar­ket (I don’t) might wish to com­ment on whether his var­i­ous com­pa­nies (Ris­mark, EFM, etc) or any of his com­men­taries / blogs back home in Aus­tralia, ever men­tion his research and con­sid­ered view, that buy­ing a sin­gle fam­ily home is “a phe­nom­e­nally risky” invest­ment?

    The immoral­ity, hypocrisy, and greed here dis­played is beyond despi­ca­ble, IMO.

  • Lyon­wiss


    I have the great­est respect for you as an indi­vid­ual. But some­times it is easy to be caught up in another reli­gious sect, which uses you to fur­ther their own agenda. That’s why I men­tioned Perel­man, because he is intel­li­gent enough not to play the game. (All Mar­co2 could see was Perel­man was not “smart” enough to get rid of bed­bugs, or cock­roaches actu­ally.) The Revere Award is divi­sive and will retard the cause of bet­ter eco­nom­ics.

    I agree totally about Joye: ” The immoral­ity, hypocrisy, and greed here dis­played is beyond despi­ca­ble, IMO.” Hous­ing is “risk­less”, when he was spruik­ing hous­ing. Hous­ing is “incred­i­bly risky” when he sell­ing a hous­ing insur­ance prod­uct. Just like Gold­man “Sucks”, which was sell­ing toxic mort­gage secu­ri­ties, while at the same time buy­ing credit default swaps to ben­e­fit from their even­tual demise.

  • debtjunkies

    BIR #152,

    Kris Sayce first noted Mr Joye’s hypocricy in early March.

    Not to be out­done, our Mr Joye responded in his usual fash­ion and claim­ing in his blog and Busi­ness Spec­ta­tor arti­cle that “…I have been telling Aus­tralians about the very high idio­syn­cratic risk of indi­vid­ual homes since my 2002-03 report to the Aus­tralian Prime Min­is­ter”.

    The blog reply by C Joye was pub­lished on 4 Mach 2010 and can be found here: Detail


    Steve #149,

    The amaz­ing thing about the GFC was not that some econ­o­mists pre­dicted it, but that so many did not when blind freddy with­out an eco­nom­ics degree could tell some­thing was about to hit the fan.”

    I could not agree more whole­heart­edly with your obser­va­tion. As an openly-admit­ted eco­nom­ics igno­ra­mus — never been to uni, much less read an eco­nom­ics text — in look­ing at the havoc and suf­fer­ing aris­ing from the GFC thus far, I per­son­ally find it not only stu­pe­fy­ing, but also both judi­cially and morally out­ra­geous, that all those in posi­tions of power and respon­si­bil­ity so com­pletely failed to fore­see (or, more sus­pi­ciously, just did not see fit to fore­warn?) what was so clearly com­ing.

    In fact, it is that very rea­son which strongly inclines me to sus­pect wide­spread con­spir­acy, rather than mere incom­pe­tence. It is such an out­ra­geous “fail­ure” that I find it nearly impos­si­ble to accept that any­one… much less EVERYONE… in those posi­tions (cen­tral bankers, Trea­sury heads, et al) could ALL really be that blindly incom­pe­tent. Espe­cially given their access to core data and infor­ma­tion that mere lay­men never see.

    I’ve said it before, and will again — all those in posi­tions of (highly paid) eco­nomic respon­si­bil­ity who did not foresee/forewarn of the GFC should be sacked. And/or charged. It doesn’t mat­ter which way you try to skin it. Either they are all unfor­giv­ably incom­pe­tent. Or (worse), they DID see trou­ble com­ing, and chose not to fore­warn / take action to pro­tect the pub­lic. In which case each and every one should be arrested and charged.


    debtjunkies #154,

    Thanks for that link.

    I’m almost ren­dered speech­less by Joye’s “response”. Rather than debunk the patently obvi­ous sophistry and mis­rep­re­sen­ta­tion, I’ll just make this com­ment.

    Telling the gen­eral pub­lic — in the plainest of lan­guage — that “the sin­gle fam­ily home is a PHENOMENALLY RISKY INVESTMENT”, and that by tak­ing out a mort­gage “they’re lever­ag­ing against what is AN INCREDIBLY RISKY under­ly­ing asset”, is one thing.

    Telling the gen­eral pub­lic (in one (1) arti­cle, in Busi­ness Spec­ta­tor, which almost none of them actu­ally read), that “While there are unde­ni­ably sig­nif­i­cant socio-eco­nomic ben­e­fits derived from own­ing a home and cre­at­ing, in Mar­garet Thatcher’s words, a ‘prop­erty own­ing democ­racy’, there are also non­triv­ial costs, which are less fre­quently focussed on. One of these costs is the port­fo­lio diver­si­fi­ca­tion risks asso­ci­ated with invest­ing 70–100 per cent of all your net wealth in a highly lever­aged asset with very sig­nif­i­cant idio­syn­cratic risk”, is some­thing else entirely.

    Any­one with an IQ above room tem­per­a­ture would grasp the import of the for­mer state­ment. I nearly went to sleep just read­ing the sec­ond.

    But of course, I’ve no doubt Chris Joye is fully aware of this. Which is why he would never state the for­mer in, say, a for­mal Ris­mark press release to the MSM. Much less actu­ally repeat that mes­sage in any main­stream forum.

  • dig­i­talchris

    @ Gen Y saver #114

    What freaks me out is that even though peo­ple have seen the house price crash sce­nario played out in tech­ni­color in the u.s. and numer­ous other coun­tries, they still don’t believe it could ever hap­pen here…”

    I find this quite fas­ci­nat­ing but also frus­trat­ing at the same time. The more I look around, the more I see it. Inter­est­ingly, per­son­al­ity type, edu­ca­tion, back­ground and cur­rent socioe­co­nomic sta­tus don’t seem to mat­ter. These peo­ple from all walks of life are respond­ing like robots to MSM mes­sages deliv­ered either through the media they read/see/hear/watch or by those same mes­sages passed on by peo­ple they see as sig­nif­i­cant within their own social groups.

    I have mused in a pre­vi­ous post on this forum that there has been a delib­er­ate and con­certed Con­fi­dence Cam­paign going on in this coun­try and around the world and that it glob­ally ‘launched’ directly after the Lon­don G20 sum­mit in early 2009 when all the suits came out of Down­ing Street smil­ing. This is only my the­ory. But check out this smooth, smooth link:

    If my the­ory holds up, then the cam­paign has been wildly suc­cess­ful here and was helped in no small part by our own domes­tic sit­u­a­tion and avail­able the wads of cash avail­able to our gov­ern­ment at the time. Oth­ers recently have also observed in this forum the sense of wild hys­te­ria that now grips the hous­ing mar­ket in Aus­tralia. IT CAN ONLY GO UP! ARE YOU STUPID? GET IN! We all hear it. The gen­eral feel­ing around the place (some­one said ‘smell’ which for some rea­son is apt – maybe it’s the smell of napalm in the morn­ing) – well it really does remind me of the stock­mar­ket before a big plunge. I can’t fathom it…People I know and respect for their intel­li­gence are caught up in this. It’s like a slow motion car crash. Awful and weird to look at but fas­ci­nat­ing nonethe­less if you can remove your­self from the com­ing impli­ca­tions which are dis­as­trous. Ulti­mately this says to me that every human per­son­al­ity type can be pro­grammed and as we see, this is an under­stand­ing that can be used in good ways and in bad ways.

    BTW my the­ory as to WHY the ‘cam­paign’ has been suc­cess­ful here is not restricted to pre-exist­ing eco­nomic or human fac­tors, but to the way media is struc­tured in this coun­try and the very lim­ited num­ber of mass pop­u­la­tion hubs. We are quite dif­fer­ent to other coun­tries in that we have a small group of large cities and lim­ited media out­lets to ser­vice them that can be very, very effi­ciently used in any large scale PR plan to deliver a con­sis­tent mes­sage to most of the pop­u­la­tion simul­ta­ne­ously and relent­lessly. It is work­ing.

    @ BIR #142

    Thanks for that. And very suit­able words for the con­text. I’ll find some for you….

    @ BIR #146

    To under­stand that desire to help can cause dam­age — is a nec­es­sary under­stand­ing. (I agree).

    @ AK #144

    Not sure of the Aus­trian approach. I’ve got some home­work now.

  • ak


    I have mused in a pre­vi­ous post on this forum that there has been a delib­er­ate and con­certed Con­fi­dence Cam­paign going on in this coun­try and around the world and that it glob­ally ‘launched’ directly after the Lon­don G20 sum­mit in early 2009 when all the suits came out of Down­ing Street smil­ing. This is only my the­ory.”

    You are absolutely spot on! As you know I have access to what’s writ­ten in Pol­ish and if I’m really des­per­ate to have a set of con­trar­ian views, in Russ­ian.

    The selec­tion of com­ments in Inter­net MSM in these lan­guages is com­pletely dif­fer­ent. I often read some­thing on a Pol­ish web­site and then dig deeper to get the orig­i­nal arti­cle writ­ten in Eng­lish. Of course there is a lot of pro­pa­ganda in Pol­ish media but rather about local issues or the EU, not about the GFC and global recov­ery. They don’t care…

  • debtjunkies

    The thing to realise is that Joye is first and fore­most a spruiker that relies on a solid foun­da­tion to the prop­erty mar­ket.

    How much do you think that all the RE Agents and the gen­eral pub­lic would pay for all the reports RP Data pro­duces about the RE mar­ket if that mar­ket tanked US style? 

    How much cred­i­bil­ity would the RBA pay to Joye’s mus­ings and the indexes pro­duced by RP Data if he got it soo wrong?


    I am from China and I am shocked by the real estate bub­ble in China. Hous­ing in China now is more expen­sive than in the US, while salaries are way lower than in the US. Hous­ing is out of reach for most wage earn­ers, and more than 80% peo­ple in the past year bought houses as an invest­ment.

    The com­mon belief is that Gov­ern­ment will not let hous­ing prices fall and that the sup­ply of hous­ing is too lim­ited espe­cially in Shang­hai and Bei­jing for prices to fall. Does this sound famil­iar?”

  • The Out­back Ora­cle

    Yes! Sounds exactly Japan before the RE mar­ket fell…what? 80% or there­abouts.

    “I have mused in a pre­vi­ous post on this forum that there has been a delib­er­ate and con­certed Con­fi­dence Cam­paign going on in this coun­try and around the world and that it glob­ally ‘launched’ directly after the Lon­don G20 sum­mit in early 2009”

    Absolutely cor­rect!