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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162 Responses to Growing like Topsy

  1. Steve Keen says:

    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…

  2. says:

    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.

  3. Lyonwiss says:


    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.

  4. debtjunkies says:

    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

  5. says:

    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.

  6. says:

    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.

  7. digitalchris says:

    @ 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.

  8. ak says:


    “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…

  9. debtjunkies says:

    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?

  10. says:

    “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?”

  11. says:
  12. The Outback Oracle says:

    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!

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