Jubilee Shares and the Amer­i­can Mon­e­tary Act

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Stephen Zarlenga of the Amer­i­can Mon­e­tary Insti­tute invited me to speak at the 2010 con­fer­ence in Chicago, which I did on the topic of “why a credit money sys­tem doesn’t have to crash, and why it always does”. My speech, the dis­cus­sion, the speeches of Michael Hud­son and Kaoru Yam­aguchi, and a panel dis­cus­sion, are linked at the end of this post. I rec­om­mend watch­ing them all if you can spare the time.

I was pleased to be invited, since this indi­cated a very open-minded approach by the AMI: they are cam­paign­ing to have the Amer­i­can Mon­e­tary Act passed to estab­lish a 100% reserve mon­e­tary sys­tem, which is a pro­posal that I have expressed ambiva­lence about in the past.

The pro­posal itself is func­tional: it would con­vert our cur­rent banks into insti­tu­tions like build­ing soci­eties, which when they lend money to a bor­rower, have to decre­ment an account they hold at a bank–so that no new money is cre­ated by the loan. In the AMI’s plan, banks would have accounts with the Fed­eral Gov­ern­ment (the Fed­eral Reserve, which is cur­rently pri­vately owned, would be incor­po­rated into the US Trea­sury), and could only lend what was in those accounts. Money cre­ation would then be exclu­sively the province of the Gov­ern­ment via deficit spend­ing.

I don’t oppose this plan, but I think it directs atten­tion at the wrong prob­lem: the issue to me is not how money is cre­ated, but how it is used. If it’s used to finance pro­duc­tive invest­ment, then gen­er­ally speak­ing all will be well; but if it’s used to finance spec­u­la­tion on asset prices, then it will lead to finan­cial crises (though not nec­es­sar­ily as severe as the one we’re expe­ri­enc­ing now).

My reform pro­pos­als are there­fore directed, not at how money is cre­ated, but at how it can be used. Briefly, I argue that banks are always going to want to cre­ate as much debt as they can (under what­ever sys­tem of money cre­ation we have). So if we’re going to stop the use of money for spec­u­la­tive pur­poses, our reforms have to affect the will­ing­ness of bor­row­ers to bor­row, rather than expend­ing energy on ulti­mately futile attempts to limit bank lend­ing directly.

Bankers espe­cially might not like this anal­ogy, but it’s apt: banks are effec­tively debt push­ers, and try­ing to con­trol bank lend­ing at the source is like try­ing to con­trol the spread of ille­gal drugs by directly con­trol­ling the drug push­ers. While ever there are drug users who want the drugs, then there’ll be a profit to be made by sell­ing drugs, and drug push­ers will always find ways around direct con­trols.

So if you want to stop the spread of drugs, it’s far more effective–if it’s at all possible–to reduce the desir­abil­ity of the drugs to end-users. This was the basis of the very suc­cess­ful “Kiss a non-smoker: enjoy the dif­fer­enceanti-smok­ing cam­paign run in my home state (New South Wales, Aus­tralia) in the 1980s.

We need some­thing like that in finance to counter the suc­cess­ful cam­paigns that bankers have run to give debt as “sexy” an image as tobacco com­pa­nies once gave cig­a­rettes, even though–in another apt analogy–it causes finan­cial can­cer: the uncon­trol­lable growth of debt is very much akin to the expo­nen­tial growth of a tumour that ulti­mately kills its host.

The metaphor is not per­fect of course, since a cer­tain min­i­mal level of debt is a good thing in a cap­i­tal­ist soci­ety. Pro­duc­tive debt both gives firms work­ing cap­i­tal, and finances the activ­i­ties of entre­pre­neurs who need pur­chas­ing power before they have goods to sell.

But debt that funds sim­ply spec­u­la­tion on asset prices is very much akin to a can­cer. And like the cig­a­rettes that cause lung can­cer, grow­ing unpro­duc­tive debt gives a “hit” that makes the bor­rower addicted to more debt: when debt is grow­ing,  the debtor and soci­ety in gen­eral feel bet­ter. It enables the bor­rower to make prof­its from spec­u­lat­ing on asset prices, since the ris­ing debt dri­ves up asset prices; and the spend­ing this cap­i­tal gain allows spreads into the wider econ­omy, cre­at­ing a gen­uine but ulti­mately ter­mi­nal boom. The boom can only con­tinue if debt con­tin­ues to grow faster than income, but at some point this guar­an­tees that the debt-ser­vic­ing costs will exceed society’s capac­ity to pay, and the ces­sa­tion of debt growth causes a cri­sis like the one we are in now.

My two “kiss a non-debtor” pro­pos­als to make debt far less attrac­tive to bor­row­ers are:

  1. To rede­fine shares so that, if pur­chased from a com­pany directly, they last for­ever (as all shares do now), but once these shares are sold by the orig­i­nal owner, they last another 50 years before they expire; and
  2. To limit the debt that can be secured against a prop­erty to ten times the annual rental of that prop­erty.

The objec­tive in both cases is to make unpro­duc­tive debt  much less attrac­tive to bor­row­ers.

99% of all trad­ing on the stock mar­ket involves spec­u­la­tors sell­ing pre-exist­ing shares to other spec­u­la­tors. This trad­ing adds zip to the pro­duc­tive capac­ity of soci­ety, while pro­mot­ing bub­bles in stock prices because lever­age dri­ves up  prices, encour­ag­ing more lever­age, lead­ing to a crash when price to earn­ings ratios reach lev­els even the Greater Fool regards as ridicu­lous. Then shares crash, but the debt that drove them up remains.

If instead shares on the sec­ondary mar­ket lasted only 50 years, then even the Greater Fool couldn’t be enticed to buy them with bor­rowed money–since their ter­mi­nal value would be zero. Instead a buyer would only pur­chase a share in order to secure a flow of div­i­dends for 50 years (or less). One of the two great sources of ris­ing unpro­duc­tive debt would be elim­i­nated.

I have to thank one of the par­tic­i­pants at the AMI con­fer­ence for inspir­ing a name for this pro­posal: Jubilee Shares, after the Bib­li­cal prac­tice of abol­ish­ing debt every 50 years. There’s a twist to my pro­posal of course: it wouldn’t be a lia­bil­ity that was abol­ished but an asset, but the intent is to stop the lia­bil­ity of debt ever ris­ing to the level where it would be a prob­lem. So I sug­gest call­ing shares that last for­ever Jubilee Shares, while those that are on the sec­ondary mar­ket are just ordi­nary shares that expire after 50 years.

Jubilee shares could be intro­duced very eas­ily, if the polit­i­cal will existed–something that is still years away in prac­tice. All exist­ing shares could be grand­fa­thered on one date, so that they were all Jubilee shares; but as soon as they were sold, they’d become ordi­nary shares with an expiry date of 50 years from the date of first sale.

The prop­erty pro­posal is some­what dif­fer­ent, and related to the “pro­duc­tive debt vs unpro­duc­tive debt” dis­tinc­tion I made ear­lier. Obvi­ously some debt is needed to pur­chase a house, since the cost of build­ing a new house far exceeds the aver­age wage. But debt past a cer­tain level dri­ves not house con­struc­tion, but house price bub­bles: as soon as house prices start to rise because banks offer more lever­age to home buy­ers, a pos­i­tive feed­back loop devel­ops between house prices and lever­age, and we end up where Aus­tralia is  now, and where Amer­ica was before the Sub­prime Bub­ble burst: with house prices out of reach of ordi­nary wage earn­ers, and lever­age at ridicu­lous lev­els so that 95 per­cent or more of the pur­chase price rep­re­sents debt rather than owner equity.

This hap­pens under our cur­rent sys­tem because the amount extended to a bor­rower is allegedly based on his/her income. Dur­ing a period of eco­nomic tran­quil­ity that occurs after a seri­ous eco­nomic cri­sis has occurred and is finally over–like the 1950s after the Great Depres­sion and the Sec­ond World War–banks set a respon­si­ble level for lever­age, like the require­ment that bor­row­ers pro­vide 30% of the pur­chase price, so that the loan to val­u­a­tion ratio was lim­ited to 70%. But as eco­nomic tran­quil­ity con­tin­ues, banks, which make money by extend­ing debt, find that an easy way to extend more debt is to relax their lend­ing stan­dards, and push the loan to val­u­a­tion ratio (LVR) to say 75%.

Bor­row­ers are happy to let this hap­pen, for two rea­sons: bor­row­ers with lower income who take on higher debt can trump other buy­ers with higher incomes but lower debt in bid­ding on a house they desire; and the increase in debt dri­ves up the price of houses on sale, mak­ing the sell­ers richer and lead­ing all cur­rent buy­ers to believe that their notional wealth has also risen.

Ulti­mately, you get the run­away process that we saw in the USA, where lever­age rises to 95%, 99%, and even beyond–to the ridicu­lous level of 120% as it did with Liar Loans at the peak of the Sub­prime frenzy. Then it all ends in tears when prices have been dri­ven so high that new bor­row­ers can no longer be enticed into the market–since the cost of ser­vic­ing that debt can’t be met out of their incomes–and as exist­ing bor­row­ers are sent bank­rupt by impos­si­ble repay­ment sched­ules. The hous­ing mar­ket is then flooded by dis­tressed sales, and the bub­ble bursts. The high house prices col­lapse, but as with shares, the debt used to pur­chase them remains.

If we instead based the level of debt on the income-gen­er­at­ing capac­ity of the prop­erty being pur­chased, rather than on the income of the buyer, then we would forge a link between asset prices and incomes that is cur­rently eas­ily punc­tured by ris­ing debt. It would still be possible–indeed necessary–to buy a prop­erty for more than ten times its annual rental. But then the excess of the price over the loan would be gen­uinely the sav­ings of the buyer, and an increase in the price of a house would mean a fall in lever­age, rather than an increase in lever­age as now. There would be a neg­a­tive feed­back loop between house prices and lever­age. That hope­fully would stop house price bub­bles devel­op­ing in the first place, and take dwellings out of the realm of spec­u­la­tion back into the realm of hous­ing, where they belong.

The AMI Conference

I was impressed that AMI wanted me to be a keynote speaker at its con­fer­ence, know­ing that I (while not a critic) was not an enthu­si­as­tic sup­porter of their plan. Their inter­est was in my analy­sis of how pri­vate money is actu­ally cre­ated, since they have been crit­ics of “frac­tional reserve bank­ing” (FRB), which I have argued doesn’t actu­ally exist. As an expla­na­tion of how debt-based money is cre­ated, FRB asserts that “deposits cre­ate loans”, whereas the empir­i­cal data estab­lishes that “loans cre­ate deposits”.

My talk is linked below, as are the talks by Michael Hudson–who was one of the hand­ful of econ­o­mists who saw the cri­sis com­ing and warned of it publicly–and Pro­fes­sor Kaoru Yam­aguchi, who heads the Sys­tem Dynam­ics Group of the Doshisha Busi­ness School at Doshisha Uni­ver­sity in Kyoto Japan.

I recorded my pre­sen­ta­tion using the screen cap­ture pro­gram BB Flash­back, while I videod Kaoru’s and Michael’s pre­sen­ta­tions. I’ll let the pre­sen­ta­tions speak for them­selves, but I will make a few quick com­ments about QED (the pro­gram I used to demon­strate my mod­els) and the sys­tems dynam­ics model pre­sented by Pro­fes­sor Yam­aguchi (for some rea­son, my pod­cast plu­gin isn’t work­ing, so the videos are shown as links that will open and run in another win­dow. My apolo­gies for that; if I get the time–and some tec­ni­cal advice!–I’ll fix this up later).

QED

QED is a new pro­gram for build­ing dynamic sim­u­la­tions that has been tai­lor-made to model finan­cial dynam­ics, using the tab­u­lar method I have devel­oped, where each col­umn in the “God­ley Table” is a sys­tem state (nor­mally a bank account), and each row spec­i­fies flows between sys­tem states. The dynam­ics of each state are derived sim­ply by “adding up” the columns.  My tab­u­lar approach has been aug­mented by the program’s devel­oper with two addi­tional fea­tures: a “For­rester Dia­gram” that is sim­i­lar to other sys­tems dynam­ics tools derived from the work of Jay For­rester (Ven­sim,  Simulink, Vis­sim, Stella, Ithink, Sci­cos and the like), and a “Phillips Dia­gram” that ren­ders a sys­tems dynam­ics model using the “hydraulic” metaphor that Bill Phillips devel­oped back in the 1950s.

As a brand new pro­gram, QED can’t as yet com­pete with the range of fea­tures offered by Ven­sim, Simulink and Vis­sim. But it has some advan­tages over these estab­lished pro­grams too:

  • The tab­u­lar inter­face makes it much eas­ier to model finan­cial flows, which nec­es­sar­ily appear in mul­ti­ple loca­tions: a debit from one account appears as a credit to another, and as I note in my pre­sen­ta­tion, the trans­fer if often also recorded in a third loca­tion. These trans­fers can be mod­elled using the flow­chart metaphor of stan­dard sys­tems engi­neer­ing pro­grams, but doing so is a very tedious process;
  • QED auto­mat­i­cally gen­er­ates the flow­chart ren­di­tions of a model from the tab­u­lar rep­re­sen­ta­tion, and vice versa;
  • QED sim­u­lates the dynam­ics on the flow­chart ren­di­tions them­selves, as well as in graphs. Espe­cially with the Phillips Dia­gram ver­sion, this makes it an excel­lent expo­si­tional tool; and
  • It’s free–or rather by arrange­ment with the program’s devel­oper, I have the right to dis­trib­ute the cur­rent ver­sion for free. The files I used in the talk are linked below the fol­low­ing videos. You can down­load the pro­gram itself from the QED tab on this site.

Professor Kaoru Yamaguchi & System Dynamics

As reg­u­lar read­ers would appre­ci­ate, I regard sys­tem dynam­ics as the core approach that should be used to develop an empir­i­cally based eco­nom­ics. There are a hand­ful of econ­o­mists work­ing in sys­tem dynam­ics–Mike Radz­icki in Worces­ter Poly­tech­nic, Dave Wheat at the Uni­ver­sity of Bergen, Trond Andresen at the Nor­we­gian Uni­ver­sity of Sci­ence and Tech­nol­ogy, to men­tion the ones I know best.  Until this con­fer­ence I wasn’t aware of Pro­fes­sor Kaoru Yamaguchi’s work, so I was pleas­antly stunned to see that he has devel­oped the most com­pre­hen­sive sys­tem dynam­ics mod­els of the econ­omy I’ve yet seen, and the only one that I am aware of–apart from my own–that is explic­itly mon­e­tary.

His model, which he explains in the pre­sen­ta­tion below, is far more com­plex and thor­ough than mine, but uses a “money mul­ti­plier” as the basis of its money cre­ation mech­a­nism. We are now exchang­ing research, and Kaoru is very inter­ested in pro­duc­ing a ver­sion of his model in which the money sup­ply is endoge­nous.

Why Credit Money Fails

Video (opens in a sep­a­rate win­dow)

Audio record­ing

Steve Keen’s Debt­watch Pod­cast

 

Audio record­ing of the dis­cus­sion

Steve Keen’s Debt­watch Pod­cast

 

Pow­er­point pre­sen­ta­tion

QED and model sim­u­la­tion files (right-click and choose “Save As”)

QED (expand zip file and click on QED.EXE to run the pro­gram)

Free Bank­ing with only inter­est pay­ments (this and the other sim­u­la­tion files below are also included in the zip file above–their file names begin with the num­bers 1 to 4 respec­tively)

Free Bank­ing with con­stant num­ber of notes

Free Bank­ing with loan repay­ment

Min­sky model of debt defla­tion

Panel Discussion

Steve Keen’s Debt­watch Pod­cast

 

Michael Hud­son

Talk (opens in a sep­a­rate win­dow)

Dis­cus­sion

Kaoru Yam­aguchi: A sys­tems dynam­ics model of the econ­omy

Kaoru’s files includ­ing Ven­sim sim­u­la­tion viewer (right-click and choose “Save As”

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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  • bb

    Phillip,

    You have made a num­ber of good points. To help you a bit more

    - Do not con­fuse EBIT with lever­age. Best to look at un-lev­ered returns (EBITROCE).
    — Stock turn has declined and this has affected ROCE. But the col­lapse in mar­gins speaks vol­umes about price ver­sus cost.
    — In your paper I would highly rec­om­mend you look at ofshore devel­op­ers and their profit mar­gins. They to increased inven­tory, and their mar­gins expanded, and their ROCE boomed. Why so dif­fer­ent for Aus­tralia?

    Lennar in the US saw prof­its triple between 2001–2005. ROCE +30%.

    More impor­tantly, the US, IRE, Spain all had a sup­ply response to their bub­ble. See below.

    US
    http://www.forecast-chart.com/graph-housing-starts.html

    IRE
    http://www.environ.ie/en/Publications/StatisticsandRegularPublications/HousingStatistics/FileDownLoad,18371,en.pdf

    Spain
    http://www.globalpropertyguide.com/Europe/Spain/Price-History

    Yet Aus­tralia has not had such a response.

    The key ques­tion for your paper is

    If Aus­tralia has a hous­ing bub­ble, why it is so dif­fer­ent to every­one else”?

  • bb

    DrBob127

    If you go back to the ear­lier posts, my ref­er­ence to the ABS cen­sus data was to show there was not nece­sar­ity an over sup­ply.

    Now you have had chance to see my logic, and data, do you agree?

  • PETER_W

    bb

    High prices ~ land bub­bles reduce demand

    Notice the reduc­tion in sales as a per­cent­age of all sales in the <$300K and the $300 — $500K dwellings price points

    http://www.smartcompany.com.au/property/20101011-fewer-houses-selling-at-affordable-price-points.html

    Com­po­si­tion of sales from period to period is dis­torted from over rep­re­sented FHBS 2008 toward upgraders & investors (with sub­sidised inter­est rates) 2010

    Skews the median ‘sale price’

    To keep this ponzi alive long term the state gov­ern­ments will need to sub­sidise FHBS by trans­fer­ing all the new land devel­op­ment taxes back to the FHBS.… IMHO

  • bb

    Does any­one have a good link to real wages growth in Aus­tralia from 1970?

  • DrBob127

    No you don’t bb,

    you can’t change your tune halfway through hav­ing been out-argued. In my orig­i­nal post when I told you to wake up and have a look around I said

    the idea of a hous­ing short­age has long since been debunked on this forum.”

    and in your reply 

    Re: hous­ing short­age. You can beleive what­ever you want to beleive….I always rely on the data.”

    we were always talk­ing about the strengths of the “there is a hous­ing SHORTAGE” argu­ment

    NOW that your data has been shown not to sup­port your argu­ment you turn around and claim that isn’t what you were argu­ing all along.

    I have come across enough slip­pery char­ac­ters in my time to be able to rec­og­nize the smell of bu11$h17 when I smell it.

    FWIW, you seem to love your data points and num­bers but don’t have the imag­i­na­tion to be able to see other peo­ples point of view.

    There­fore I sug­gest that you are an accoun­tant or sim­i­lar.

  • Philip

    bb,

    Thanks for the links.

    Apart from the con­struc­tion indus­try data, other met­rics are sim­i­lar to that of the U.S., per­haps even more extreme, thus not so dif­fer­ent. Given the sup­posed impor­tance of con­struc­tion data, I am sur­prised that no one has graphed data from across mul­ti­ple coun­tries to attempt some sort of com­par­i­son.

    Has any­one both­ered to con­tact the indus­try in some man­ner to ask ques­tions about prof­itabil­ity? Has any­one come across some sort of in-depth research about this mat­ter?

  • bb

    DrBob127

    I am happy to dis­cuss whether we have a short­age. Before we do that, I would like to know whether you acknowl­edge there is no over­sup­ply.

    I think my ear­lier posts on rents obvi­ously out­line my views.

    Exactly how have you out-argued me?

  • bb

    DrBob127

    FWIW, you seem to love your data points and num­bers but don’t have the imag­i­na­tion to be able to see other peo­ples point of view.”

    Happy to lis­ten to another point of view if it is sup­ported by data rather than rhetoric.

  • DrBob127

    so you ARE an accoun­tant

  • bb

    Philip,

    Happy to help. I hope you post your paper on this forum when com­pleted. I would very much like to read it.

    I have not seen any indus­try data on this mat­ter. It could be a coup for your analy­sis. Google is a great tool to access pub­lic accounts.

  • bb

    DrBob127

    I have stud­ied Finance, Account­ing, eco­nom­ics and math­e­mat­ics. By career has largely been in research.

    Can you answer my ques­tion. To be fair, I have answer many of yours.

  • bb

    Drbob,

    I re-phrase my ques­tion

    do you beleive the mar­ket WAS NOT over­sup­plied in 2006 based on the data I have pro­vided”

  • PETER_W

    bb

    Do you agree with this major bank econ­o­mist?

    St George chief econ­o­mist Justin Smirk in an inter­view Fri­day said that with banks lend­ing and con­sumers bor­row­ing plateau­ing, house prices may remain essen­tially flat for the next decade.

    ”That’s because afford­abil­ity is push­ing up against its lim­its already, so it can’t go up,” he said.

    ”You can’t see any rea­son for house prices to accel­er­ate mas­sively. Afford­abil­ity will keep a lid on it.”

    Bar­ring a cat­a­strophic shock to the Aus­tralian econ­omy, the struc­tural short­age of afford­able hous­ing means prices can’t come down, either, Mr Smirk said.

    ”What I think you might find is that in the next decade, real house prices actu­ally might not match the infla­tion rate,” Mr Smirk said.

    If Justin is right, we will slowly see 30 — 40% of the buy side ‘investors’ move over to become 30 — 40% of the sell side.

    NG only works if prices rise 4 — 5% p.a. to recoup the accu­mu­lated cash losses!

  • bb

    Peter_W

    This state­ment is only cor­rect if the dis­tri­b­u­tion of home own­er­ship remains sta­tic. If it does, the state­ment is cor­rect.

    I fear this will not be the case

    I fear with­out gov­ern­ment inter­ven­tion the cost of pro­duc­tion will con­tin­ues to increase. This will increase house prices. The new buy­ers will be the exist­ing wealthy. The mid­dle class will slowly get priced out and our coun­try will con­tinue down the path of the “haves” and “have nots”.

  • DrBob127

    Per­haps tomor­row, bean­counter

  • bb

    Dr Bob,

    I have to go now. I was hop­ing you could see that the mar­ket was roughly in bal­ance in 2006. If that is the case, my fol­low on points are

    1. From 2000–2006, the pop­u­la­tion increased by an aver­age of 250k per annum
    2. From 2006, the pop­u­la­tion increased by an aver­age of 414k per annum
    http://www.ausstats.abs.gov.au/ausstats/ABS@Archive.nsf/0/12AEC045C456FE61CA2577AC001566E6/$File/310101.xls#A2133256J
    3. Yet the aver­age annual approvals from 2000–2006 was 187k
    4. And the aver­age annual approvals from 2006–2010 was 155k

    http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/4F035A790AE82211CA2577AD00151B1F/$File/8731006.xls#A422064L

    So.….

    Since 2006 (when the mar­ket was NOT over sup­plied), pop­u­la­tion growth has accel­er­ated, while dwelling sup­ply has decel­er­ated.

    On top of that, rents are up +40%.

    Under­sup­ply.

  • Philip

    bb,

    It is dif­fi­cult to tell from pop­u­la­tion and pri­vate dwelling fig­ures if an under or over sup­ply occurred in recent times. This would require that an aver­age occu­pancy rate (AOR) be estab­lished as a base­line. An AOR is near impos­si­ble to deter­mine in itself (is it 5 or 3 or 2?). Per­haps one could be deter­mined dur­ing times when sup­ply equates to demand, but then it is dif­fi­cult to deter­mine when this occurred.

    2000–2006: 250,000 peo­ple / 187,000 approvals = 1.3 AOR
    2006–2010: 414,000 peo­ple / 155,000 approvals = 2.7 AOR

    (This assumes there is no lag between approvals and fin­ish time, not exact). I don’t think these fig­ures show an under-sup­ply.

    Is the 40% rents fig­ure real or nom­i­nal? If it is real it may pro­vide a bet­ter mea­sure for an under-sup­ply than the other fig­ures you’ve cited.

  • bb

    Phillip

    Between 2005–2010 aver­age rents have increased by 8% per annum in NSW & VIC. This is nom­i­nal. Real rents there­fore closer to 5.0–5.5%.

    See my ealier link on AOR. ABS fore­casts this to decline from 2.56 to 2.25 by 2036.

    Depend­ing on your assump­tions on pop­u­la­tion growth, this means mar­ginal AOR is around 1.5–1.7.

    Note, Approvals is not new sup­ply. It can also include upgrades to exist­ing stock.

    I esti­mates 20k of the approvals relates to exist­ing stock.

  • Philip

    bb,

    Are there rent fig­ures for Aus­tralia rather than indi­vid­ual states, like the ABS house price index?

  • bret­t123

    Inter­est­ing how the argu­ment seems to have turned (over the life of this blog) from one of pre­dic­tions of 40% decreases in house prices to now one of per­haps very low growth over the next few years.

    And it’s now a year or so after the the first home own­ers grant was reduced — yet still no col­lapse.

    Is any­one game to put up their hand and say they are pre­dict­ing 20% plus house price decreases in the next cou­ple of years? Or do we all agree that is now very unlikely?

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  • Philip

    I’ve found these set of pop­u­la­tion and dwelling fig­ures on Bub­ble­pe­dia:

    Over­build­ing by Loca­tion

    Dwellings and Pop­u­la­tion over time

    It would be inter­est­ing to see the U.S. AOR over the last decade or so. The U.S. AOR would have to be sub­stan­tially below that of Australia’s (1.6 for 1986–2008) if there was a con­struc­tion boom in the U.S. but not in Aus­tralia. This would pro­vide some proof if there is hous­ing over-, under- or on-par con­struc­tion.

    Why so many empty houses?

  • ned

    @191 bb

    See my ealier link on AOR. ABS fore­casts this to decline from 2.56 to 2.25 by 2036.”

    Yeah, well maybe it’ll go to 1. Would we be in a bub­ble then??

  • ak

    bret­t123 (and of course bb) 

    I am will­ing to make a con­di­tional pre­dic­tion that we may see a “20% plus” house price decrease in Aus­tralia pro­vided that cer­tain con­di­tions are met:

    1. Any kind of currency/trade war between China and the US may trig­ger this as the terms of trade will instantly dete­ri­o­rate,

    2. A 30–40% depre­ci­a­tion of AUD against USD com­bined with ris­ing oil prices (for exam­ple due to another war in the Mid­dle East) lead­ing to higher inter­est rates (infla­tion tar­get­ing) may trig­ger this,

    3. A cer­tain com­bi­na­tion of inter­nal polit­i­cal fac­tors in Aus­tralia such as increas­ing insta­bil­ity (the activ­i­ties of Tony A.), a reduc­tion in immi­gra­tion com­bined with higher unem­ploy­ment, “pay­ing back the pub­lic debt” or sim­i­lar mis­guided macro­eco­nomic pol­icy may trig­ger a col­lapse,

    4. A 20% decrease over the next few years is still pos­si­ble on its own if a sig­nif­i­cant num­ber of investors decide to sell their prop­er­ties due to mis­er­able cap­i­tal gains and there is no active pol­icy of prop­ping up the mar­ket.

    How­ever if Char­tal­ist (or sim­i­lar) poli­cies are in place and unem­ploy­ment is low we may not see any reduc­tion in nom­i­nal prices. Even in the cur­rent polit­i­cal frame­work the gov­ern­ment may still pull a few tricks, know­ing that the wealth (or rather illu­sion of wealth) of 60% of the soci­ety depends on the ele­vated level of house prices. 

    Aus­tralia is not dif­fer­ent and what­ever hap­pened else­where may also hap­pen here.

  • Philip

    I’ve graphed U.S. hous­ing stock and pop­u­la­tion from 1965 — 2009.

    In 1997 (when the bub­ble started) the aver­age occu­pancy rate (AOR) was 2.32 and in 2006 (when the bub­ble burst) the AOR was 2.30 — barely changed.

    From 1997–2006, the num­ber of dwellings increased by 8.99% and the pop­u­la­tion increased by 8.37%, which explains why the AOR didn’t change.

    Given these fig­ures, I won­der what the basis of the argu­ment for over-con­struc­tion is in the U.S.?

    Could it be instead that: (1) young peo­ple are stay­ing for longer with their par­ents, (2) adults are mov­ing in together to save on rent and costs & (3) with high unem­ploy­ment, peo­ple can’t afford to pur­chase hous­ing at pre­vi­ous rates? Instead of the con­struc­tion mar­ket cor­rect­ing after appar­ent over-con­struc­tion, could it be that the above fac­tors have resulted in a slump in con­struc­tion from pre­vi­ously nor­mal (equi­lib­rium) rates?

    Hmm…