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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