Aus­tralian Debt Update

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I’ve been work­ing on the sec­ond edi­tion of Debunk­ing Eco­nom­ics for the last three months, and I’m now flat out try­ing to fin­ish the first draft by the end of March—hence the paucity of posts recently. How­ever the lat­est Aus­tralian GDP fig­ures came out this week, and this has enabled me to update the Credit Impulse data for Aus­tralia, which has impli­ca­tions for both employ­ment and asset prices—and espe­cially house prices.

For those unfa­mil­iar with the term, the Credit Impulse is the change in the change in debt, divided by GDP. It plays a major role in dri­ving eco­nomic and asset mar­ket per­for­mance because, in our credit dri­ven economies, aggre­gate demand is the sum of income plus the change in debt. Con­se­quently, the change in aggre­gate demand is the sum of the change in income plus the accel­er­a­tion of debt.

There­fore, a con­stant level of aggre­gate demand requires con­stantly ris­ing GDP—which is unlikely in itself—and con­stant accel­er­at­ing debt. The only rate of accel­er­a­tion for which this is pos­si­ble is zero: debt (in real terms) would have to remain con­stant for con­stant growth in aggre­gate demand to be pos­si­ble.

Since instead debt growth is volatile, the econ­omy is nec­es­sar­ily cycli­cal: a period of accel­er­at­ing debt must be fol­lowed at some stage by decel­er­at­ing debt—otherwise debt would become infi­nitely larger than GDP.

A large part of why Aus­tralia got through the GFC so well—so far—is that gov­ern­ment pol­icy encour­aged the Credit Impulse here to stop falling and turn around far ear­lier than occurred in the USA.

If this rela­tion­ship is a bit dif­fi­cult to grasp, the com­par­i­son of debt-financed demand makes it clearer: whereas the US was hit by seri­ous delever­ag­ing, Aus­tralia stopped just shy of delever­ag­ing and then relev­ered its way back to a debt-financed pros­per­ity.

The debt-dri­ven boost to aggre­gate demand was the major rea­son that we sailed through the GFC. The role of the FHVB in moti­vat­ing this is obvi­ous when one com­pares the trend in mort­gage debt before it to what hap­pened after: there was an effec­tive turn­around of over 8% of GDP, pump­ing an addi­tional $100 bil­lion into the econ­omy. It also meant that while US mort­gage debt was plung­ing, ours was exploding—and of course dri­ving house prices up with it.

The most recent data for Aus­tralia now implies that the China boost has taken over this role of keep­ing the Aus­tralian econ­omy buoy­ant, though whether this will avert a down­turn as the hous­ing sec­tor slows is a moot point: on a yearly basis, the Credit Impulse has peaked and is now turn­ing back towards zero, but on quar­terly basis (the bars below show change from 3 months ago every month, scaled to an annual rate of change), the Credit Impulse has been neg­a­tive for 6 of the last 9 months, but pos­i­tive for the last two months.

The rea­son is this “chang­ing of the guard” from the house­hold to the busi­ness sec­tor: whereas house­hold borrowing—motivated by the First Home Ven­dors Scheme—counterbalanced a dra­mat­i­cally neg­a­tive pulse from the busi­ness sec­tor, now the busi­ness sector—motivated by exports to China—has switched from decel­er­at­ing to accel­er­at­ing debt.

That doesn’t mean that busi­ness debt is ris­ing however—just that it’s falling less rapidly than it was when the GFC first hit. Busi­ness debt con­tin­ues to fall rel­a­tive to GDP, and now that the FHVB is over, house­hold debt is also headed down (though just to con­fuse things slightly more, it appears to have headed up slightly in the last month).

Not only does Aus­tralia have a two-speed econ­omy, from a Credit Impulse point of view, the faster half (busi­ness bor­row­ing, espe­cially by the export sec­tor) is far more volatile.

The slow part that actu­ally got us through the GFC (the house­hold sec­tor, and espe­cially mort­gage debt) is now decel­er­at­ing (though again, the next month’s data might show a pos­i­tive.)

Just as the rise in mort­gage debt was what drove prices up, this decline in the credit impulse from mort­gage debt is the real rea­son that Aus­tralian house prices are now falling (though of course the first swal­low of the end of the house price bub­ble is not falling prices but ris­ing inven­to­ries of unsold prop­er­ties).

This is as good a place as any to knock the prop­erty spruiker fur­phy that under­ly­ing demand from pop­u­la­tion growth exceed­ing dwelling con­struc­tion needs is the cause of house price rises in Aus­tralia, (whereas for the rest of the world they’re happy to blame irre­spon­si­ble lend­ing now that all the other bub­bles have burst). This is the cor­re­la­tion of new lend­ing to the change in nom­i­nal house prices:

If we look at the change in mort­gage debt and change in house prices, we get the fol­low­ing pat­tern:

And the fol­low­ing cor­re­la­tions apply: it seems that changes in mort­gage debt lead changes in house prices by about 8 months to a year.

So a rea­son­able sta­tis­ti­cal case can be made that mort­gage debt and house prices are cor­re­lated, and mort­gage debt leads house prices. What about the spruiker case that pop­u­la­tion growth exceed­ing dwelling con­struc­tion is the real rea­son? Here’s the time pat­tern:

And here’s the cor­re­la­tion data: it’s the wrong sign, triv­ial in mag­ni­tude, and con­sid­er­ing leads and lags makes the cor­re­la­tion worse, not bet­ter.

So get used to it: mort­gage debt dri­ves house prices, and growth in mort­gage debt is now end­ing. The recent falls in house prices are just the begin­ning.

In the aggre­gate, Australia’s debt ratio is now headed down again, after the fall was tem­porar­ily reversed by the FHVB.

How far this will go remains to be seen. On the his­toric record, it still has some way to go.

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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  • Jamie


    Apolo­gies if this is old hat, but I recently saw a pre­sen­ta­tion from West­pac regard­ing the hous­ing mar­ket. Appar­ently 50% of investor mort­gages are inter­est only (which didn’t overly sur­prise me), as are 30% of owner occu­pied mort­gages (which cer­tainly did).

    My inter­pre­ta­tion is that (i) inter­est is the ‘only’ part of a mort­gage a lot of peo­ple can afford to pay (ii) lever­age across the com­mu­nity is enor­mous (which is, I know, a point you have been mak­ing for years). 

    Surely that makes the hous­ing mar­ket quite pre­car­i­ous wouldn’t you think? Given that the num­ber of new loans taken out for house pur­chases recently dipped below the nadir in late 2008 per­haps we are finally close to that precipice.…? 

    Enjoy the posts as always.

  • Thanks Jamie,

    And that’s not old hat. In fact, if you can find a link to it, I’d appre­ci­ate you post­ing it here.

    Cheers, Steve

  • cja

    The MSM is report­ing that unem­ploy­ment is hov­er­ing at 5%, whereas Roy Mor­gan seems to think it’s hov­er­ing at 7.9% (with another 5.7% under­em­ployed). So there’s still a big dif­fer­ence between the offi­cial and other fig­ures.

  • mark7

    Hey steve

    I really hope your right in all you have said, no I know your right Iv been hang­ing on to your words for so long now.….Abraham Maslow’s heirachy of needs (1943) shows us how we ful­fil our poten­tial as peo­ple over our life course.….…the roof over our head is one of the most basic needs.….……give me one of my basic needs please Aus­tralian gov­ern­ment by mak­ing it afford­able.

    Great site Steve thanks for keep­ing me so informed over the past few years.….….…..

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