A Motley Crew interview on Australian House Prices

Flattr this!

The Motley Fool‘s international investing team will be visiting Australia for a week starting on February 15th, meeting with more than a dozen domestic companies to get a feel for what the Australian stock market has to offer. If you’d like to get their impressions, sign up for their free dispatches here. Their overview piece on the trip itself is entitled “One Last Giant Property Bubble“.

I’m one of the people they’ll be interviewing, and as a prelude they posed 3 questions to me:

  • Is Australia’s housing bubble bigger than the one in the US?
  • What would trigger a correction?
  • Who would get hurt the worst?

In my typical fashion I supplied a thesis when a crib sheet was required, so my answers had to be edited somewhat for their site:

The Next Bubble Coming From Down Under

Here’s the original full-length version (click here for PDF).

Is Australia’s housing bubble bigger than the one in the US?

The Australian housing bubble is categorically larger than the USA’s, though in standard bubblology talk, the main reason that it is—that it was far more a pure speculation on prices than the American bubble—is touted as one of the reasons that “Australia is different” and a crash won’t happen here.

Before I elaborate on that point, here’s the data. The raw data for the US is the Case-Shiller Index, while the recent raw data for Australia comes from the Australian Bureau of Statistics established house price index. This has two series—one using 2003-04 as a base year, and the other 1986-87. I combine the two to produce a composite index from then till now.

For pre-1986 data, I use the numbers derived by an Australian academic Nigel Stapledon in his PhD thesis, which used newspaper records to derive series for Sydney and Melbourne going back to 1860.

Figure 1 compares just the recent (post 1986 data), where Case-Shiller’s base year is 2000 and the ABS’s is 2003-04:

Figure 1

Figure 2 puts them to the same base year of 1986. It’s now obvious that nominal house prices in Australia have risen far more than in the US since 1986: a factor of six increase, versus a peak of about a 3.5 increase in the USA (which has now fallen to less than a 2.5 times increase after the US bubble burst in 2006).

Figure 2

I also mark on it the beginning and end of the Australian government’s contribution to this Ponzi Scheme, the most recent incarnation of its “First Home Owners Scheme”, which gives first home buyers a cash grant towards their first purchase that is then levered up by a bank loan when they go shopping. For this reason I call it the “First Home Vendors Scheme”, since the real recipients of the government largesse are the vendors who sell to these new entrants—and they get not merely the government money, but the levered amount that the banking sector throws on top of it.

When the “Global Financial Crisis” loomed (as the “Great Recession” is called DownUnder), the then Rudd Labor Government doubled this grant to $14,000 for an existing property and tripled it to $21,000 for a new one, in what they called the First Home Owners Boost, and which I nicknamed the First Home Vendors Boost (FHVB). The Scheme, which began in October 2008, was supposed to last 8 months but was extended to 14 months because it was “so successful”.

Back to the data. Consumer price inflation has run at different speeds in the two economies, so real prices are the best for comparisons; Figure 3 deflates the Case-Shiller 20 city index by the US CPI, and the Australian data by its CPI.

Figure 3

The intriguing aspect of this comparison is that the two bubbles tracked each other from 1997 till 2004 (with the Australian at a higher level since a mini-bubble back in 87-89 that I’ll return to later), and then diverged. The Australian trend broke first, but then restarted just before the US bubble finally burst. The Australian bubble then broke again in 2008, only to be restart shortly after by the FHVB. It has recently topped out, with one quarter of falling prices (with the nominal index dropping 0.3%), and the latest rising by 0.7% (bear in mind however that the 0.3% fall for the September quarter was first shown as a 0.1% increase, and both figures are still subject to revision).

A final long-term comparison to see just how Australian and US house prices really compare uses Stapledon’s data back to 1890, when the Case-Shiller Index began:

Figure 4

Whether this period marks the beginning of the end of the Australian house price bubble will only be clear in hindsight, but the volatility of the index is now extreme, and the impact of the FHVB on it is obvious in Figure 5.

Figure 5

This is not a new phenomenon: though I apportion most blame for the Australian house price bubble to the finance sector, there’s little doubt that the fuse itself was lit by the government’s interventions via the First Home Owners Scheme, which began in 1983.

‘This Government was elected . . . with a commitment to boost the nation’s economy . . . Our housing policies are an essential element of our national recovery strategy . . . Our program is designed to achieve the dual objectives of ensuring that housing plays a key role in our economic recovery and ensuring that Australian families can gain access to adequate housing at a price they can afford.

The main elements of our program are . . . a new more effective scheme to assist low income home buyers – the first home owners’ scheme . . . to get the housing industry moving without delay we removed the savings requirement from the existing home deposit assistance scheme . . .’ (from the Hansard record of the First Home Owners’ Bill 1983, which gave birth to the First Home Owners Assistance Scheme)

This scheme has always been used as a means to stimulate the economy, and it’s worked—but in much the same way that an anabolic steroid will help an athlete win a medal: it pumps up the performance at the event, only to leave the athlete with long term health problems in the future. From 1951 until the FHOS was introduced in 1983, the average quarterly increase in house prices was 0.07%—which is statistically indistinguishable from zero, given that the standard deviation was 1.73%.

Figure 6

After the Scheme was introduced, the average quarterly increase increased by more than a factor of ten to 0.94%, and the volatility rose as well. Since there have also been periods where the Scheme was removed and when it was doubled, it’s possible to drill down further on its impact—and it’s bleedingly obvious that it both increased house prices and their volatility.

Table 1

Stats Before FHOS After FHOS All Data During FHOS Between FHOS periods When FHOS doubled
Mean 0.07% 0.94% 0.47% 2.17% 0.25% 3.10%
Min -5.53% -3.73% -5.53% -2.26% -2.26% -0.92%
Max 3.91% 7.86% 7.86% 7.86% 2.95% 4.93%
Std. Dev. 1.73% 2.17% 1.99% 2.71% 1.26% 1.83%
Count 131 110 241 25 51 7

Government interventions in this asset market make it very hard to work out a decent base year from which to compare Australian house prices to those in America. Prior to 1949, the Australian government enforced a rental ceiling, which kept house prices artificially low. Since 1983, it has run the First Home Vendors Scheme, which (along with other interventions like negative gearing) kept prices artificially high. I take 1970 as the best date for a comparison of the Australian and US house price indices, since it’s halfway between when the price spurt caused by the abolition of the rental control scheme had petered out, and the new regime of keeping house prices high took over. So Figure 7 is my preferred series comparing Australian and US house prices (with the B marking the introduction of the First Home Vendors Scheme):

Figure 7

As tends to happen at the end of a bubble, when prices have been driven far higher than incomes, spruikers have claimed that Australian house prices are not really high when compared to incomes. The Demographia survey’s comparison of median house prices to median incomes has been disparaged by spruikers who happily compare median house prices to average incomes, where those average incomes include imputed rental returns from owner-occupied dwellings, superannuation entitlements that can’t be used to pay mortgage bills, etc.

This tends to be an interminable debate about what should and what shouldn’t be included, so I prefer to compare the house prices to the broadest possible measure of income: GDP per capita (which understates the problem because GDP includes imputed rental income from owner-occupied dwellings, which of course can’t be used to pay the mortgage!). Starting from the same date, this yields the comparison of Australian house prices to income shown in Figure 8, on which basis Australian house prices are at least 50% overvalued, with all of the rise above the long term average occurring since first the Howard and then the Rudd government doubled the FHVB in response to fears of a recession.

Figure 8

Another take on affordability and whether housing is overvalued is to consider income per household, since it could be argued that the increase in women’s participation in the workforce since 1970 has meant that two (or more) incomes are being earned per dwelling, making a higher price affordable. Figure 9 compares the house price index to household disposable income per dwelling (using the RBA table G12 for disposable income and ABS tables 4102 and 87520037 for the number of dwellings).

Figure 9

Spruikers claim that there have been significant demographic shifts, that houses now are bigger and better than those in 1970 and so on. However all of the increase in the house price to GDP per capita index above its average has occurred since 2001 (when Howard doubled the FHVB because of fear of a recession), and there has been no real change in Australian demographics since then, as Figure 10 and Figure 11 indicate.

Figure 10

Figure 11: The period 2006-10 is the only one where population growth exceeded growth in dwellings

This is a good point to consider the usual spruiker case that house prices have risen because demand—driven by rising population—has exceeded supply. One of the most regularly cited justifications for this is the National Housing Supply Council report, which estimates the gap between supply and “underlying demand”.

‘ . . . the Council estimated a gap of around 85,000 dwellings between underlying demand for and supply of housing at 30 June 2008. The Council developed a methodology for measuring the gap based on selected measures of homelessness, including the number of marginal residents of caravan parks and the undersupply of private rental dwellings indicated by the rental vacancy rate. The measures used in the 2008 report were:

2008 gap size = additional private rental dwellings required in 2008 to increase the number of vacant private rental dwellings to 3 per cent of the total private rental stock
+ dwellings required to accommodate people who are homeless and sleeping rough or staying with friends and relatives
+ dwellings required to house marginal residents of caravan parks.’ (National Housing Supply Council 2010, pages 65-66)

These are legitimate measures of a social need, but they’re not a measure of the market demand for housing! Figure 12 shows the correlation of changes in the number of Australians per house with changes in nominal house prices:

Figure 12

A falling ratio of people to houses—so that the housing stock was growing more rapidly than population—should have meant falling prices according to the standard “supply and demand” argument. But what about the one brief period where population was actually rising faster than the housing stock—between 2006 and 2010—and house prices also rose sharply?

Figure 13

Whoops! The correlation is actually strongly negative: minus 0.56. Population dynamics gave spruikers a good story, but it wasn’t what drove house prices up.

What did instead was debt. Demand for houses is not population increase: it’s people with new mortgage loans. When you look at the relationship between new lending and the change in house prices, you finally start to see some serious long run correlations (as long as the data makes possible, anyway).

Figure 14

The correlation coefficient here is 0.53—rather better than the minus 0.06 that applies between change in population per dwelling and change in price over 1975-2010—and it improves when the trend of rising mortgage new debt to GDP is removed. So we’ve had a debt-driven housing bubble, just as has the USA, and it’s the dynamics of debt that will determine when and how it bursts—not demographics.

What would trigger a correction?

Ponzi Schemes ultimately fail under their own weight, because they involve paying early entrants more than they put in, while producing no profits with high running expenses. A debt-financed Ponzi Scheme can however appear to work for a long time, because the price of the object of the Scheme—in this case house prices—can rise so long as debt levels per house rise faster still.

That was clearly the case in Australia. Property spruikers focus on the price increases and ignore the debt, but the latter has risen far more than the former: nominal house prices are up by a factor of 15 over 1976, but debt per house has risen by a factor of 55 (Figure 15).

Figure 15

The turning point in that process appears to be nearby: both debt per dwelling to price (Figure 16) and debt per dwelling to disposable income (Figure 17) appear to be topping out.

Figure 16

Figure 17

Figure 18

This underscores the fact that, just as in America, rising mortgage debt was the real fuel for rising house prices. Though Australia didn’t have as widespread a Subprime phenomenon as the USA, and many more mortgages are held on the books of the banks, the level of mortgage debt actually rose faster and higher in Australia than in the USA (The vertical lines on Figure 19 identify when the First Home Vendors Scheme first began—in 1983—and when the recent doubling of it ceased—in January 2010; there is however still a $7,000 grant for a first home buyer).

Figure 19

What will bring this bubble undone is its very success: having successfully driven house prices skywards, the cost of entry into the market is now prohibitive so that the flow of new entrants is drying up. Since the Scheme depends on a constant flow of new entrants, this alone will bring it unstuck. A gauge of just how difficult it is to get into the market is given by looking at the ratio of the average first home loan to the average income—when most first home buyers are going to have an income below the average.

The average first home loan has risen fourfold in the last 2 decades, from $75,000 to almost $300,000 (Figure 20).

Figure 20

This rise has far outstripped increases in all incomes, let alone wages, which have lagged increases inr productivity in Australia as they have in the USA. In 1992, the average first home loan was 2.5 times the average before tax yearly wage income. Now it is 5.5 times as much, and it briefly reached 6 times annual income during the frenzy caused by the Rudd Goverment’s doubling of the FHVG (Figure 21).

Figure 21

Spruikers also claim that this increased debt burden just reflects lower interest rates. Even the Governor of the Reserve Bank of Australia made such a claim:

The rough statistic that I have quoted many times was that the average rate of interest was about half; that meant you could service twice as big a debt. Guess what? That is exactly what occurred, and that had a very profound effect on asset values. (Glenn Stevens, remarks to the House of Representatives Standing Committee on Economics Finance and Public Administration, 2007, p. 26)

Let’s see how well this argument stacks up against reality by considering the servicing cost on a typical 25-year floating interest rate mortgage in Australia as a percentage of the pre-tax earnings of Australian workers.

Figure 22

The result is pretty stark: in 1992, servicing the average first home loan took under 20 percent of the pre-tax income of the average wage earner. Now it takes 60 percent. Since the average tax rate on workers is about 22%, and since payments on your own home can’t be written off against tax in Australia, this means that the average wage earner would have only 20% of his/her income left for all other expenses after paying the mortgage.

Clearly it’s no longer possible for a single wage earner to buy the median house in Australia—and even a 2 bedroom apartment is out of the question. But what about a couple—what have they got left for expenses after paying taxes and the mortgage?

Back in 1992, this was a doddle: paying the mortgage took just 12 percent of the family budget. Now it takes 37 percent. For those unfortunate couples who took out a home loan while the FHVB was in operation, it takes as much as 42 percent of their combined after tax income.

Figure 23

So the bubble will collapse because it has been too successful—and the government’s doubling of the FHVG has added to this because it encouraged new entrants who may have waited till 2011 to buy in during 2009 instead. There are less first home buyers entering at the bottom of the escalator (Figure 24), and they are taking out smaller loans, while the trend in other loans is also headed down (Figure 25).

Figure 24

Figure 25

So the volume of unsold properties is mounting and the time to sell is increasing. This normally precedes the beginning of a downturn in house prices—since most vendors initially refuse to accept offers below their reservation prices.

One reason that is often advanced as to why Australia won’t suffer a US-style housing price crash is that there hasn’t been a huge building boom here. The factoid is definitely true; but the obverse interpretation is that Australia’s housing finance has been even more speculative in nature than the USA’s. The fraction of total borrowing that has financed investment-oriented construction versus speculation-oriented purchases of existing properties by investors has fallen from almost 60 percent in the mid-80s to under 10 percent now. In fact, “investors” in the Australian market now invest less than owner-occupiers do—though the recent spurt in the fraction of owner-occupier loans supporting construction from the all-time low of under 8 percent to just over 11.5% was probably an artifact of the tripling of the First Home Owners Boost for those building their own home.

Figure 26

In the aggregate now, less than 10 cents in every borrowed dollar builds a new home. This does mean that there isn’t an overhang of newly completed properties on the Australian market. But conversely, the huge proportion of “investors” who have bought in solely to achieve capital gains means that the investor side of the market is very fragile”: any sustained pause in price increases means these investors face mounting losses.

Figure 27

The increase in the number of “investors” relative to owner-occupiers played a major role in driving up house prices. The rise in “Mum and Dad investors”, as they were termed, saw investor borrowing rise from about 15% of total mortgages in 1990 to over 30 percent since 2000.

Figure 28

Predictably, the rise in “investors” as a proportion of total borrowing saw rental income top out and begin to fall.

Figure 29

Most “investors” declare losses on their income tax (which is subsidised by the Australian scheme known as negative gearing, where property speculators can write off losses on servicing rental properties against all other income). However this ruse is only worthwhile if asset price inflation more than compensates for the taxpayre-subsidised losses made while owning a property. So the investor proportion of the market is likely to add to supply if there is a sustained period of flat prices, since their losses will mount in the meantime.

Figure 30

On top of this there are the usual “exogenous” factors: further increases in interest rates by the RBA, and the prospect of a slowdown in China.

The RBA is convinced, by the boom in China and its neoclassical models of the economy, that capacity constraints lie just ahead for Australia, and that therefore it has to increase interest rates to contain inflation. This is a classic application of the “Taylor Equation” approach to monetary policy that pretty accurately defined its behavior before and well into the GFC—taking September 2007 as the start of the global crisis (the US Fed began slashing its rate that month).

Figure 31

The recent floods and cyclones in Victoria and Queensland are wildcards that will drive up food prices, and the global bubble in commodity prices will also play through, but overall I expect that the RBA’s expectations of inflation caused by capacity constraints will not pan out—for reasons that I expand on below under the Credit Impulse. I think they may well put rates up once more, but will then be forced to start cutting them.

China is another wildcard for Australia. It is clearly the reason that our terms of trade, and especially the prices for (and volumes of) our exports of minerals, are the highest they have ever been.

Figure 32

I don’t know enough about China today to make an informed comment here, but my feeling is that China’s growth can’t be sustained, and that the Chinese authorities will do the best they can to secure other sources of minerals. Certainly I wouldn’t advise extrapolating the current incredible prices (or volumes) for our minerals forward, which does make Australia’s economic performance particularly susceptible to a change in our fortunes with China.

My focus is on the endogenous force: credit expanding faster than both incomes and asset prices is what drove asset prices up, and the failure of credit to continue growing faster than income is all that is needed to set the reverse process of declining asset prices in train—while leaving the debt in place.

The Credit Impulse

The key factor behind not just the property bubble, but Australia’s apparently outstanding performance during the Global Financial Crisis—is what Biggs, Meyer and Pick christened “The Credit Impulse”. In contrast to neoclassical economics, I have a credit-oriented analysis of capitalism in which aggregate demand is derived not merely from incomes but from the change in debt. On this basis, the change in aggregate demand will reflect both the change in incomes (GDP) and the change in the change in debt: so the acceleration or deceleration of debt levels adds or subtracts from the change in aggregate demand. This affects both economic performance and hence employment, and asset price change—since from this perspective, aggregate demand is spent purchasing both new goods and services and existing assets.

The collapse in the Credit Impulse was the factor that made the Great Recession great for the USA. The much smaller collapse in the Australian Credit Impulse—and that it turned positive again on a yearly basis n early 2010—is the primary reason why the downturn was so much milder in Australia.

Figure 33

The correlation of the Credit Impulse with change in employment over the long term is high:

Figure 34

Figure 35

It’s even more marked over the crisis itself, though clouded by the impact of massive government interventions via fiscal policy and, in the USA, quantitative easing. The severity of the downturn in the USA was directly attributable to how quickly accelerating debt gave way to decelerating debt, and the decline in the rate of deceleration has been a major factor in attenuating the crisis more recently. Though this sounds paradoxical and counter-intuitive, it follows from the logic that aggregate demand is the sum of GDP plus the change in debt: since the change in aggregate demand is the sum of the change in GDP plus the change in the change in debt, a slowdown in how fast debt is falling can actually boost aggregate demand. That is apparent in the US data from mid 2009—when the recession was officially regarded as having ended.

Figure 36

The same qualitative phenomenon applies in Australia, though with much different magnitudes. Firstly the deceleration in debt—the change in the Credit Impulse from positive to negative—was not nearly as large, and it was reversed more rapidly.

Figure 37

However the main mechanism for achieving that result—stopping the Credit Impulse turning extremely negative, and pushing it back into positive territory—was the First Home Vendors Scheme. As a result of that Scheme, households did not delever—instead they took on substantially more debt, with the mortgage debt to GDP level rising by 6 percent. This more than counterbalanced dramatic deleveraging by the private sector.

Figure 38

This can’t continue, because the household sector is already more indebted than its US counterpart, and the debt servicing costs in Australia are far higher courtesy of our much higher mortgage interest rates.

Figure 39

The quarterly data on the Credit Impulse implies that this is now turning negative again.

Figure 40

This trend is likely to continue. The artificial boost to the rate of growth of mortgage debt caused by the FHVB is gone, households are indebted beyond anything ever seen before, and high interest rates are killing consumer spending. This in turn will cause a fall in aggregate demand that has to be worn by both consumer and asset markets. The former effect will contribute to rising unemployment—countering the positive boost to employment from the China trade—while the latter will reduce debt-financed demand for housing.

Who would get hurt the worst?

The most obvious losers from a price downturn will be the buyers enticed into the market by the FHVB, many of whom began with 5% equity and who can therefore be easily thrown into negative equity territory by even a small price fall.

This won’t lead to “jingle mail” defaults in Australia because our housing loans are full recourse. But since a trigger for the downturn will be a decline in aggregate demand as the Credit Impulse turns negative, unemployment will rise—certainly in NSW and Victoria that don’t directly benefit from exports to China—and this will cause forced sales, though a lesser rise in bankruptcy sales than in the USA.

Figure 41

The second obvious group of losers will be the banks themselves, who have dramatically increased their share of profits via the huge increase in mortgage debt. A decline in mortgage originations will reduce their profitability, and their solvency since mortgages now constitute the more than a third of total bank assets and over half of all banks loans.

Figure 42

Figure 43

Australian banks assert that they are well capitalised and that a downturn in house prices would have little impact on their liquidity, let alone their solvency. That claim has proven false after the fact of a property price crash everywhere else on the planet, and I expect Australia to be no different.

Figure 44

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.
Bookmark the permalink.

92 Responses to A Motley Crew interview on Australian House Prices

  1. ak says:


    This analysis is very impressive and I agree with the conclusions. I believe that effects of running out of cheap oil (triggering speculative price bubbles like in 2007) might finally pop our bubble as the risk of cost-push inflation will hold interest rates high and at the same time corporate profits will suffer. This may happen quite soon – in the next few years.

    “The US fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.”


    They are even sending their American KGB officials to China to cut a global deal – will it work? I doubt…

  2. Pingback: Tweets that mention A Motley Crew interview on Australian House Prices | Steve Keen's Debtwatch -- Topsy.com

  3. mattnz says:

    Great article thanks Steve.

    I think you meant Motley Fool, instead of 80’s rockers Motley Crew.


  4. Steve Keen says:

    That was deliberate Matt, and the MF guys approved it!

    I’m being interviewed (well, over dinner) by seven of them in a couple of weeks, and that’s quite a crew…

  5. Pingback: A Motley Crew interview on Australian House Prices | Economics for People

  6. Muzz says:

    Hi Steve,

    Greetings from the outer rim of your blog membership galaxy.

    I have one very minor pedantic quibble: You use capitals when naming the First Home Owners Scheme that began in 1983, and this gives the impression that it’s the correct name – it isn’t. It was called the First Home Owners Assistance Scheme. I only know this because I was a beneficiary and still have the paper work. I thought it worth correcting in case somebody wants to search for information on it.

    Sadly, this is probably the greatest contibution to the blog that I can muster (c;

  7. Steve Keen says:

    That’s not bad Muzz–I know it’s important to get the detail right. I’ll amend the entry now for posterity’s sake.

  8. Steve Keen says:

    PS Can you scan and send the paperwork my way?

  9. TruthIsThereIsNoTruth says:

    so you are providing information to overseas speculators so they could profit from a fall in the Australian housing market?

  10. Muzz says:

    Actually Steve, I owe you an apology. In digging out the papers I discover that both terms were used in the correspondence. Unfortunately the one on top of the pile was HFOAS. I guess either might be correct, but your memory tips the balance in favour of FHOS. I hope the editing hasn’t been too much rigmarole for you.

    I’ll email scans to you later today (WA).

    Do you remember Keating (as treasurer) scrapping negative gearing on investment properties? This must have been about 1984-85. It lasted only a short time and it would be interesting to read about the ructions in the press of the time. I remember it because it exactly corresponded with the only period that I rented out a property. I’m pretty sure it lasted less than a year.

  11. pacham12 says:

    Enjoy reading your work and agree with a lot of your analysis. I currently live in the US and gave been following the Australian housing market for the past 7 years. The two factors that I gravitate towards to explain some of the growth are as follows:
    1. Interest rate reductions since the 1980’s – I believe this as fueled considerable growth in Australian property prices over the last 25 years. Moving from 18% to 7% significantly increases the amount someone can borrow. I estimate that this accounts for about 120% of the property price increase over the past 25 years.
    2. Personal Income tax reductions that happened around 2004. I’m not living in Australia so I haven’t experienced this directly however the reductions in federal income tax appear significant. I recall in the 90’s that as soon as reached an income of $50k you were taxed at about 48 cents on the dollar. I estimate that income tax reductions could have increased property prices around 25% since 2004.
    I agree with you that property prices are over valued in Australia, however I suspect that unless interest rates rise dramatically or the tax code reverts to 1990’s level, then the crash may not be as severe as here in the US.
    Interested to hear your thoughts.

  12. Steve Keen says:

    I think you overstate the impact of rate cuts on causing the bubble Paul, but I agree that the potential to cut mortgage rates here has a lot to do with the ease with which the bubble can be revived. I do expect the RBA to reverse direction this year and reduce rates, once both the bubble bursts and the impact of a negative Credit Impulse starts to push up unemployment.

  13. Steve Keen says:

    I’m calling the data as I see it TININT; always have, always will.

  14. cyrusp says:

    Professor Keen, could I ask why you use and trust government statistics for inflation, productivity and unemployment?

    In your speeches you sometimes bring up the fact that the U-3 unemployment statistics in the US is dodgy – and you even refer to shadowstats as producing more realistic stats.

    But then you casually mention things like this in your thesis:

    “This rise has far outstripped increases in all incomes, let alone wages, which have lagged increases inr [sic] productivity in Australia as they have in the USA.”

    According to shadowstats again, productivity has been falling in the US for the past 2 decades. Any rise in the official stats was due to “methodological gimmicks”:


    It’s similar to the inflation statistics which have again been manipulated by substitution/hedonics/removing or down-weighting house and land prices – which suggests that the “great moderation” never actually happened – it was just statistical gimmickry all along.

    I’m curious why economists insists on using these obviously flawed numbers in their models when all it results in is a case “garbage in – garbage out”.

  15. Steve Keen says:

    It’s the published data cyrusp; I keep track of other data as well–including Roy Morgan’s unemployment data for Australia, and Shadowstats–and occasionally publish posts based on them too when the divergence becomes extreme. But to engage with the standard debate I have to reference the official data, even if it is dodgy.

  16. cyrusp says:

    Thanks for the answer. As an engineer I find all of this very strange. I guess that’s why they they call it the ‘dismal science’ 🙂

  17. Muzz says:

    An interesting difference between this earlier FHOS and later ones is that the full amount was not available as a lump sum. There were three options that ranged from having it all in monthly payments to having about 60% in a lump sum and the rest in monthly payments.

  18. Steve Keen says:

    It is indeed! Definitions and statistics are highly corrupted in this field. We have nothing like an atomic standard of measurement.

  19. Muzz says:

    That “mini bubble” in ’87-’89 might look mini on the graph but it was HUGE. I sold a property in ’89 for two and a half times what I paid in ’84, and all of that increase came in the last two years. I felt very, very lucky that I had got into the market before the bubble.

    I’ve since blown all my real estate opportunities. I would be a much wealthier person now if I’d kept that place and simply sat on my backside and subsisted somehow. Downgrading the abode so that I could study for a degree and build a career was financially a mistake.

  20. cja says:

    This is twisting my melon. ‘Official’ figures say unemployment is flat at 5% whereas Roy Morgan says it’s risen yet again to 7.9%.

    Anyone know what’s going on here, because this is starting to look dodgy to me…

  21. peterjbolton says:

    Interesting and relevant post today by Deep T at:

    I have learned this day from you Steve: that the Australian government Policy did in fact intentionally and deterministically bias banking towards the residential sector for its socio-economic dynamic growth vehicle . Too bad, but definitely a good ‘political’ strategy.

    If we, Australia, which still remains a truly and legally, British Colony to this day, (I have just visited Parliament House in Canberra ACT, so I have this first hand) had learnt anything from the British, we would have learnt to invest, one way or another, into the capitol costs of infrastructure (real infrastructure) where the private sectors would freely and willingly invest in the extension of same and thereby, stimulating growth while building a nation. The British were good at this once.

    Australian Policy, has clearly not invested, but spent, ie consumed in spending heavily in the ‘comforts’ for today, ie, not “investment” for the future and accordingly, which is not the Prime Function of governance, under most definitions. Hence, the total breakdown of the socio-economic model which is gaining rapidly across the oceans of the Globe as this paradigm of inept governance, is spent.

    ‘Investment’ explicitly implies a future tense.
    Comfort, suggest merely spending, albeit in Moral Hazard in the present tense.

    Australia has become totally reliant on foreign investment (plus digging holes, in the main part) to such an extent, that the whole country is now at full risk by a Sovereign debt collapse, through residential pursuits by over-leveraged banks, and similar to other nations around the World. But, not only has the average Australian subsidized this political pursuit, ie, continually, he/she has been taxed at every corner of the square along the road, which includes the increases in inflationary taxations on the political model necessities of ballooning and rapid house price increases beyond affordability. Plus all the direct costs of the consequences of same.

    Then we have banking bailouts and guarantees, taxpayer RMBS purchases, higher interest rate loan requirements, (due to the necessity to pay out higher interest rates on foreign deposits), mortgage insurance and transaction charges and taxes, ballooned rates, insurances and other fees, other charges to ensure that the lender bankers in the massively leveraged credit creation for residential lending, function “risk-free” (ARM mortgages), we have taxpayer full risk “prime- senior- entitlement” to the coming collapse in bank operations – just like Ireland, fully committed, by those of the Policy.

    Little to no reasonable lending investment in loans for SME’s linked to infrastructure, have left Australia and Australians fully naked to total risk perpetrated by ill-founded political Policy and banking entanglement activity (“Moral Hazard”). Australia has no manufacturing per se, few skill sets, and little ambition to do anything but dig holes for foreign markets and foreign shareholders, live in over-priced houses owned by Banks and get drunk on Friday nights. Some future.

    I ask, where is the “leadership” in this menagerie?

    Ho hum

  22. sirius says:


    I agree with what you wrote but I would go even further. Do you remember when I said “We are asking the wrong questions?”.

    I shall say a little here. This “money” system (which in fact it is not) works by enslaving one group/country to provide a “wealthier” lifestyle for another.

    The “beauty” of the system is that there is an anonymity between the 2 parts – the “money” system itself.

    Thus the “well to do” live in their “ivory towers” not having to be concerned or bear the responsibility if their taxes are spent on buying guns to kill others, used to impoverish other nations to such an extent that we have organ trafficking, child prostitution or a bunch of other ills.

    The ones in their “ivory towers” mock the impoversished and say “there there what a shame” all the time while the very “investments” are used to facilitate this.

    The impoverished meanwhile are too weak to do anything (much) about it.

    I can give you specifics. (I have studied this for many years now). When I understood how this money system (which is constantly morphing) worked I realised that without its reform this process was absolutely going to continue on unabated.

    Many people are so bothered about themselves that they don’t see it or refuse to see it.

    You taled about “forces”. I can plot the waves of credit and how it filters down and its effects.

    The thing about it all is that I owe Professor Keen a huge debt because it was through his work that I was able to tie it all together.

    I am not talking about Utopia here. It is inconceivable to have a “perfect world” but we are very far from that (and I surmise this is not meant to be the case anyway – but what do I know of that?).

    With System Dynamics I can also model the “Human Response” and predict certain outcomes (funny that). Although I could not tell you that Egypt would erupt, I could over the last year as each new event took place imagine how “the forces” would play out and cause some dislocation or event. Given what is continuing to happen this needless stupidity seems set to continue.

    The “problem” that I have with all this (and it has always been a “problem” for me) is that it is the innocents who suffer while the guilty go free.

    That (unfortunately for me anyways) is the world that we live in.

    I cannot believe what passes as “news” or “debate” on the Television (I rarely can bring myself to watch any). Howvere the illusion is very effective and works for most people.

    Of course some people simply do not believe a single word that government says anyway but it is little consequence for those living in the “ivory tower” land.

    I would finish this with two things which I am sure most will not understand at all and likely will completely misunderstand…

    1) I love “God” (And I am most definitely not some “religious nutter” – never was and never will be – and I find it extradordinary that I would ever issue those words to myself let alone in public).

    2) I respect my neighbour

    p.s. I never received an email from you

  23. sirius says:


    Typos – the obvious one, “taled”, I meant “talked”

    A little
    The “problem” is not the banks it is “us”.
    (I am sure you will appreciate what I am saying here).

  24. sirius says:

    I thought “government” involved “free-speech”. Whoops no it doesn’t – if you don’t say what you are told (or say nothing) then out you go…

    “”Hours later, chief secretary to the treasury Danny Alexander confirmed on live television that Lord Oakeshott had stepped down by “mutual consent”.


    Then of course

    “”Shadow chancellor Ed Balls said Lord Oakeshott had paid the price for “telling the truth”. “”

    Funny that but Balls he hasn’t. One thing is very clear. The party in opposition always reverse their words when they are in “power”.

    The process nowadays is so blatant and clear to see that it is “comical”.

    It is clear that “change” is inevitable.

  25. Mich says:

    I don’t think the banks will lose. All over the world this group is transferring the (unrealized) losses to the taxpayers, pension funds.. anyone but themselves, with help from the people we trust to run the government and funds etc on our behalf. And we let them do it.

    In fact the whole deflation/inflation issue doesn’t matter anymore, governments have taken on or are guaranteeing the “assets”. Higher taxes, pension costs and/or lower value of money, saver or borrower; we pay.

    The banks will be fine. Well well, how lucky.

    I keep wondering why economists ignore crime, legalized or nor, a major factor in the economy now imho.


Leave a Reply