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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  • ken

    My impres­sion is that a lot of the busi­ness debt is actu­ally con­struc­tion by pri­vate firms for the pub­lic sec­tor, with guar­an­teed returns. Think desali­na­tion plants.

  • gen­er­a­tivej


    Thanks for your blog. I’m a novice in this field, and won­der­ing if you or read­ers know of any­one look­ing at the Cana­dian mar­ket from a sim­i­lar, debt-focussed, per­spec­tive.

  • Hi gen­er­a­tivej,

    My guess is that Auto­matic Earth might con­sider the Cana­dian sit­u­a­tion:

    Do any other read­ers know of other sites?

    Cheers, Steve

  • @ Steve “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.”

    I believe that this phe­nom­e­nal is called “sat­u­ra­tion” par­tic­u­larly used in the illicit drug trade as when a drug — any drug — fails to bring about its expected effects while the placebo effect — a well proven dri­ver — also, no longer has any obvi­ous effect. The next step is the body goes into “dry shock” accom­pa­nied by all those delight­ful auto-responses such as delir­ium tremors, tem­per­a­ture volatil­ity, shak­ing, fluid purges, etc., etc. 

    What dri­ves a per­son to pay the moon for a home over 30 years at inter­est rates that could be knee-jerked to >17^ more or less overnight so that the bank­ing indus­try can min­i­mize their losses and which one will even­tu­ally pay x3 times the price of the home (30 / 70/7) over one’s life­time at circa 70% of pre-tax income — where the a grand aggre­gate of taxes that one will need to bear is — at present around ~70% (this includes the full suite of Aus­tralian tax­a­tion from Cen­tral Bank/“leadership” induced infla­tion to fed — state — local gov­ern­ment ser­vices) income, rates, insur­ances, etc? The answer is bla­tantly obvi­ous and is the inabil­ity of “lead­er­ship” to inspire and as such, impose their flawed hand-me-down opines onto the trust­ing and gullible.

    I am also impressed by the amount of volatil­ity that your charts are indi­cat­ing which to me indi­cates that the water pipes are clang­ing and bang­ing around the house (“warn­ing warn­ing Will Robin­son”) espe­cially as com­pared to the offi­cial charts. Of course the Offi­cially sanc­tioned indi­ca­tors are drawn from “mod­els” that have been manip­u­lated and tweaked to shown the expec­ta­tion and not the result; this is the norm in Offi­cial­dom. The other prob­lem is the lag­ging indi­ca­tors as as far as I am con­cerned offi­cial lag­ging indi­ca­tors are way, way off as can be seen by open­ing the win­dow to see that it is rain­ing while the weath­er­man is claim­ing that its just fine. Of course there is also demo­graph­ics.

    But there is also the ‘feed-back loop’ which exists in all phe­nom­e­non. Pay­back one might say sub­jec­tively , but it really is the sci­en­tific phe­nom­ena of resis­tance, that nec­es­sary process between all causal event.

    Excel­lent Post today by Mish today with Car­o­line Baum

    Macro­eco­nom­ics really is stuck in the Dark Ages.”

    Key­ne­sian eco­nom­ics went into hiber­na­tion in the lat­ter part of the 20th cen­tury fol­low­ing an array of stim­u­lus fail­ures on the part of both Demo­c­ra­tic and Repub­li­can admin­is­tra­tions in the 1970s. The only thing the spend­ing stim­u­lated was stagfla­tion.”

    I am won­der­ing “How many times does an eco­nomic model have to be dis­cred­ited before it is dis­carded?”

    Eco­nom­ics is now going through the great­est and most detailed demon­stra­tion of phe­nom­e­nal sci­ence — apart from the secret manip­u­la­tory frauds being per­pe­trated by the banker/ruler A team which should pro­vide for future gen­er­a­tion the data nec­es­sary to sort “eco­nom­ics” out in some sort of sci­en­tific man­ner. all we need then, is will and integrity (and access to Top Secret Cen­tral Bank records).

    There is an old say­ing that when one sees fraud at the top, then fraud is every­where; such is where we are today, but sat­u­ra­tion is the state that is required for con­silience.

  • Recent News:

    “China hopes to allow all exporters and importers to set­tle their cross-bor­der trades in the yuan by this year, the cen­tral bank said on Wednes­day, as part of plans to grow the currency’s inter­na­tional role. In a state­ment on its web­site, the cen­tral bank said it would respond to over­seas demand for the yuan to be used as a reserve cur­rency. It added it would also allow the yuan to flow back into China more eas­ily.”

    This makes sense as China is the world’s major man­u­fac­turer in its own right and by proxy, it is the World’s man­u­fac­turer. So its cur­rency becomes the World Reserve Cur­rency (for a awhile) and if it links it to Gold and or Sil­ver plus a bas­ket of cur­ren­cies (reli­able) or other such things that will help sta­bi­lize its period of sta­bil­ity, then it will be time for the the West, that is, places like the US and Aus­tralia and west­ern Europe to re-con­sider their places in the global com­mu­nity, some­thing that should have been done or started in 2005 or well before. Prob­lem is that “lead­er­ship” vision is usu­ally always look­ing back mode.

  • Aus­tralian hous­ing is vastly, dra­mat­i­cally over­priced, by all rea­son­able mea­sures. Unchecked com­mod­i­fi­ca­tion of shel­ter for the pop­u­la­tion has been caused by mis­guided gov­ern­ments fail­ing to reg­u­late the hous­ing mar­ket while encour­ag­ing the use of tax loop­holes like neg­a­tive gear­ing and per­mit­ting over-lever­aged spec­u­la­tors to bid up asset val­ues so the govt can ben­e­fit from huge intakes of land tax, rates and stamp duty. The recent analy­sis by The Econ­o­mist here.….

    .….is right on the money, and you can see from the chart gallery below (includ­ing two charts from The Econ­o­mist house price web tool) just how over­val­ued Aus­tralian hous­ing really is.….

    Aussie Prop­erty Bub­ble Charts

    12 months ago there was com­plete denial that real estate was in trou­ble, but now the real­iza­tion is begin­ning to dawn on many that some­thing ter­ri­bly seri­ous is about to occur in Aus­tralia. The spruik­ers main­tain faith in a soft land­ing, but they’re straight out of luck this time. The big­ger the boom, the big­ger the bust, and the prop­erty boom that began in Aus­tralia in the nineties evolved into the great­est real estate bub­ble known to mankind. The bust that’s com­ing will be a doozy. As 2011 unfolds the spruik­ers will come to under­stand that real estate in Aus­tralia is dead for gen­er­a­tions. For any­one who’s inter­ested in read­ing some excel­lent blogs about the Aus­tralian prop­erty bub­ble I highly rec­om­mend the blogs hosted on the Aus­tralian Prop­erty Forum.….

    Aus­tralian Hous­ing Ponzi Scheme Blogs

    Dur­ing the next two years we can expect to see vacancy rates and inven­tory lev­els surge to unprece­dented lev­els as house prices col­lapse by up to 40 or 50% in most parts of Aus­tralia. This might sound extreme, over the top. But how over the top were the 200% to 300% rises in house prices we saw over the past decades. A 50% fall is noth­ing in the scheme of things, it just brings prices back to a fair level. House prices always revert to the mean and Aus­tralia is no dif­fer­ent. All the non­sense dreamed up by spruik­ers about short­ages and pop­u­la­tion growth, it’s all just hot air, designed to breath more life into the bub­ble. A vain attempt to blow new life into a dying bub­ble jus­ti­fy­ing more unsus­tain­able price increases to already exor­bi­tant asset prices. But the air has run out. Con­sumers are tapped out. There is no more money left. The bub­ble is dead. Long live the new new par­a­digm, where an aver­age fam­ily can finally afford a decent home in Aus­tralia. It’s been a long time com­ing, but soon it will be time for the bears to party. Bring it on!

    Rob Fisher
    Australia’s Real Estate Col­lapse Forum

  • Great analy­sis Steve! If I may, I’d like to link your post to my weekly analy­sis post on (with attri­bu­tion to here of course)

    The Credit impulse is an impor­tant macro-eco­nomic indi­ca­tor — more so, because the main­stream com­men­tariat ignore it.


  • Philip

    Good update Steve. I must say I am look­ing for­ward to the 2nd edi­tion of Debunk­ing Eco­nom­ics — a use­ful tool as main­stream econ­o­mists have not hum­bled them­selves since the GFC.

  • TruthIs­ThereIs­NoTruth

    Hello Steve,

    I’m not sure how you define a prop­erty ‘spruiker’ but I hope that it is not by the reverse logic that any­one who talks the hous­ing short­age story is a ‘spruiker’ because in this case I would qual­ify as one while I am not one as far as I am aware.

    New con­struc­tion and pop­u­la­tion change was a story which has been around before the onset of the GFC and was quite clearly one of the fac­tors which pre­vented a demise in the hous­ing mar­ket at a time when the hous­ing mar­ket was where the cri­sis orig­i­nated. This is not a counter argu­ment to the increas­ing debt (or the FHVB fac­tor), on the con­trary, increas­ing debt and short­age of fea­si­ble hous­ing are com­pli­men­tary argu­ments, as opposed to mutu­ally exclu­sive as seem­ingly implied by your good self.

    From a math­e­mat­i­cal per­spec­tive I would also like point out that (pop/dwelling) which rep­re­sents your counter argu­ment, is very clearly not the same thing as d(d_pop — d_d­welling) which rep­re­sents the ‘spruiker’ argu­ment.

  • Growth in house prices has been out­strip­ping median incomes and credit lev­els are no longer sus­tain­able. It appears impos­si­ble for house prices to con­tinue ris­ing more quickly than incomes for­ever, the log­i­cal con­clu­sion would be so much money spent to ser­vice debt that there is no money left for any other pur­pose. See my blog on Peak Debt for more:

    Peak Debt Blog

    Aus­tralia is rush­ing head­long into peak debt, dri­ven by exces­sive bor­row­ing and a dan­ger­ous addic­tion to credit. It appears bizarre to bor­row ever greater sums sim­ply to bid against other for the same group of assets. We are at the max­i­mum credit limit. Now!

  • Sure Chris–attribution is all that is needed.

  • I was using the rate of change of pop­u­la­tion per dwelling in my analy­sis TININT.

  • ecoN­um­bers

    It was inter­est­ing to see this cor­re­la­tion between house prices and accu­mu­lated over­sup­ply. House prices were ris­ing at the same time as over­sup­ply was build­ing up. Dur­ing the only period when over­sup­ply dropped house prices were falling.

  • TruthIs­ThereIs­NoTruth

    apolo­gies, still…

    d(population/dwelling) is not the same as d(d_population — d_d­welling)

    the basis of the short­age argu­ment is that
    d(d_population — d_d­welling) has notably increased and as such is a fac­tor sup­port­ive of hous­ing prices and rents, not dis­miss­ing other fac­tors such as debt or direct stim­u­lus

    the argu­ment also was NOT that there is a his­tor­i­cal cor­re­la­tion between this vari­able and house price. con­tribut­ing fac­tors can behave like impulses rather than long term struc­tural com­po­nents.

    plus I haven’t heard the short­age argu­ment for a while any­way…

  • I know TININT, and I think you are ascrib­ing exces­sive logic to that case. As I’ve seen it, it’s been d/dt(Population) — d/dt (Dwellings), and I made it slightly more sophis­ti­cated by con­sid­er­ing d/dt(Population/Dwellings)–where of course I know there are prod­uct rule dif­fer­en­tial effects involved.

    On the impulse front, I com­pared change in pop­u­la­tion per dwelling to change in house prices across the only impulse there has in fact been–2006 to 2010–and the cor­re­la­tion was strongly neg­a­tive.

    And yes, it has gone notice­ably quiet of lately. I won­der why?…

  • bret­t123

    Excel­lent post Steve!

    Steve, would you agree then that as long as China keeps boom­ing we could have a falling debt to GDP ratio for a con­sid­er­able time — with lit­tle impact to the econ­omy over­all?

    We’ve now had 2.5 years of falling debt to GDP “rel­a­tively” no impact in com­par­i­son to other parts of the world.

  • kev­in­txu

    hi steve, great work deal­ing with the finance side of the hous­ing issue. Do you have much data to analyse the inven­tory side? That is you’ve men­tioned that there are sur­plus and inven­tory build­ing up, but you haven’t pro­vided exact num­bers or detailed analy­sis based on those num­bers.

  • rud­der­less

    Hi Steve,

    Pretty con­vinc­ing argu­ments — what would you say are the odds on another FHVB stim­u­lus in this elec­toral cycle?


  • ferb
  • Pretty low rudderless–there was no FHOG after Keating’s last throw of it in 1989 prior to that very deep reces­sion, until 2001 under Howard.

    And it’s much less likely to work now any­way, with prices hav­ing hit a ceil­ing com­pared to incomes already, and house­hold debt five times as high (com­pared to incomes) as in 1990.

    It could how­ever be tried in con­cert with a huge set of RBA rate cuts. But I hope it would be polit­i­cal sui­cide for the party that pro­posed it.

  • Dave

    Hi rud­der­less

    I heard through that the gov­ern­ment has removed its min­is­ter for hous­ing, in what seems to be a delib­er­ate attempt to break links with the Real Estate lobby groups. It seems Trea­sury and the RBA are (pri­vately) aware of the sit­u­a­tion caused by the FHVB, and we can only hope the gov­ern­ment has lis­tened.

  • Dave

    Hi Steve

    Great update! I had been hear­ing from Leith that a slide in house prices had begun, it’s good to see your updated fig­ures. As a poten­tial first home buyer who was about to become a vic­tim in Autralia’s hous­ing bub­ble dur­ing the FHVB, I am sin­cerely grate­ful for your clear analy­sis of Australia’s debt. 

    With­out such solid evi­dence I would surely have been among the other panic buy­ers, buy­ing only because ‘house prices always go up’. I owe you one!

  • Robbo

    Timely updates
    I lis­ten ear­lier through the week to an inter­view by Jim Puplava with Puru Sax­ena, over on the Mac­robusi­ness web­site. Puru is a money man­ager based in Hong Kong with no vested inter­ests in this coun­try.
    Accord­ing to Puru Sax­ena, China will either raise rates or raise their cur­rency to quell the infla­tion­ary prices of food and energy due to the US infla­tion­ary pro­grams.
    He believes China will raise inter­est rates tip­ping their prop­erty mar­ket over the edge. The knock on effect is base metal indus­tries will col­lapse, as base met­als are pri­mar­ily being used for con­struc­tion with Australia’s rev­enue cut and our over­priced prop­erty in the fir­ing line.
    When this hap­pens, I assume our busi­ness bor­row­ing for the ‘volatile export sec­tor’ (your words) will also start falling and Gov­ern­ment will no doubt engage in some sort of spend­ing pro­gram to fill the void left by busi­ness.
    Not to men­tion our $AUD will be sold off, increas­ing our costs of imports for energy and goods.
    In this sce­nario I can see all our sec­tors of debt lend­ing falling at a faster rate than the cur­rently being expe­ri­enced.

  • Thanks Dave,

    Inter­est­ing how the press sto­ries are now start­ing to show a more cyn­i­cal edge too:

  • rud­der­less

    Hi Dave

    The gov­ern­ment has removed its min­is­ter for hous­ing” ?
    I would of thought that would have made the head­lines front & cen­tre!