Grantham on the Aus­tralian Hous­ing Mar­ket

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Jeremy Grantham pricked, if not the hous­ing bub­ble itself, then at least the bub­ble that prop­erty mar­ket spruik­ers live in, with the quip that:

Bub­bles have quite a few things in com­mon but hous­ing bub­bles have a spec­tac­u­lar thing in com­mon, and that is every one of them is con­sid­ered unique and dif­fer­ent.” (Hous­ing mar­ket a ‘time bomb’, says invest­ment leg­end: The Aus­tralian June 16, 2010)

How true that is. Before Japan’s bub­ble burst in 1990, we heard that Japan was dif­fer­ent: the “Ris­ing Sun” was eclips­ing the USA and house prices reflected this grow­ing wealth (and—didn’t you know? —there was a land short­age in Tokyo!). Before the USA’s bub­ble burst, there were land short­ages in all the States with price bubbles—especially Cal­i­for­nia. There were prob­a­bly even Tulip short­ages in Ams­ter­dam, four cen­turies ago.

Those other bub­bles duly burst, despite their “unique” char­ac­ter­is­tics, under the weight of the same force: too much debt was taken on by spec­u­la­tors seduced by the group­think that house prices always rise. When the rise in house prices made the entry costs for new play­ers pro­hib­i­tive, debt stopped grow­ing and house prices col­lapsed.

This is the other thing that all hous­ing bub­bles (and share price bub­bles, for that mat­ter) have in com­mon: they are all dri­ven by bor­rowed money, and they can only be sus­tained so long as rate of growth of debt out­paces incomes. Once that stops, the engine of unearned income that enticed spec­u­la­tors in breaks down—since the only way that we can all appear rich with­out work­ing is if we spend bor­rowed money.

Of course, we all know that spend­ing bor­rowed money is a sure­fire route to ulti­mate poverty. The great tragedy of an asset bub­ble how­ever, is that it’s some­one else’s increase in debt that makes us appear wealth­ier when your house sells for more than you paid for it. In effect, the hous­ing mar­ket “laun­ders” the debt money, mak­ing it appear real.

Any doubt that bor­rowed money is what has dri­ven house prices into the stratos­phere in Aus­tralia is dis­pelled by the data: despite all the hooey about Aus­tralian lenders being more respon­si­ble than those in the USA, mort­gage debt in Aus­tralia rose three times faster since 1990. Hav­ing started with a mort­gage debt to GDP ratio that was just 40% of America’s, we now have a higher ratio than the USA—and ours is still increas­ing while theirs is clearly falling.

Notice how­ever that our ratio was lower than the USA’s—and was falling too—before the gov­ern­ment brought in the First Home Ven­dors Boost. As it has always done, that gov­ern­ment inter­ven­tion in the mar­ket set off a price bubble—the gov­ern­ment in this sense is as respon­si­ble for the house price bub­ble as the banks are.

The gov­ern­ment pulls this trick because it makes it look good for a while: the bub­ble pulls in yet more pri­vate sec­tor bor­row­ing, and the spend­ing makes the econ­omy boom. But when the grant ends and the bor­row­ing slows down, things don’t look so rosy.

That’s one way to describe the hous­ing mar­ket right now. The boost caused the num­ber of buy­ers to explode last year, and now the num­ber is fizzing: there were just 46,000 home loans taken out by owner occu­piers in April, a cool 25% down on the same month in 2009. Actual demand (and that’s peo­ple with cash in their hands to buy now, not the hypo­thet­i­cal future demand con­cepts touted by the prop­erty spruik­ers) is there­fore falling below actual sup­ply.

As the stock of unsold houses mounts up, it is only a mat­ter of time before the bub­ble bursts.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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