House Prices and the Credit Impulse

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Today’s figures for the fall in house prices over the last quarter and year were larger than the usual bull-side pundits expected: a 1.7% fall for the quarter (versus the 0.5 percent median prediction of 17 economists surveyed by Bloomberg) and 0.2% fall for the year (versus expectations of a 1.6% gain for the year by the same group of economists, according to Chris Zappone’s article).

Figure 1

I wonder if the same economists will now assert that declining immigration and/or population is behind the fall? After all, population growth and a supply shortage relative to population growth were the reasons they gave for a rise in prices in the first place—surely the same argument must work in reverse?

In fact, as I’ve argued ad nauseam on this blog and elsewhere, the real explanation for rising house prices was rising credit. To be more precise, what drives the change in house prices is the acceleration of mortgage debt.

This is an empirical extension of the argument I’ve made about the role of credit in the macroeconomy—for background, see these three posts on Deleveraging, Australian Debt, and Australian banks and house prices). In a credit-driven economy, aggregate demand is the sum of income plus the change in debt—and therefore the change in aggregate demand is the sum of the change in income plus the acceleration of debt, a phenomenon dubbed “The Credit Impulse” (Michael Biggs et al., 2010).

In the past I’ve correlated this with changes in employment, and shown that the rapid change from accelerating to decelerating debt was the cause of the Great Recession (or the Global Financial Crisis, as it’s called in Australia). But the Credit Impulse affects asset prices too—since we use credit not merely to purchase newly produced goods, but also to buy existing assets. Today, I’ll take a look at the correlation of the Credit Impulse with change in Australian house prices, and compare this to the property spruiker’s argument that population growth and supply constraints justify Australia’s astronomical house prices.

This correlation is the “smoking gun” in the Australian property debate.

Figure 2

Not only does the acceleration in debt correlate with changes in house prices—the correlation of the acceleration in all private credit with change in house prices is 0.28, and the correlation of acceleration in mortgage debt with change in house prices is 0.58—the acceleration in debt also leads changes in house prices by about 3 to 6 months.

Figure 3

How about the correlation of changes in population—and the ratio of population to dwellings—with changes in house prices?

Figure 4

Not only are these demographic factors far less volatile than house prices—and than media and popular obsession with them would imply—their correlation with changes in house prices is actually negative. The correlation of change in house prices with change in population since 2000 is -0.34, and the correlation with change in population per dwelling is even worse, at -0.41.

The picture gets worse when you consider leads and lags: the correlation of population and population density 6 months ahead of price changes is lower than the contemporaneous correlation, and in either direction—leading or lagging—the correlation is negative.

Population dynamics—even immigration dynamics—have nothing to do with house prices. What determines house prices is not the number of babies being born, or immigrants—illegal or otherwise—arriving, but the number of people who have taken out a mortgage, and the dollar value of those mortgages.

For changes in house prices, what matters is the acceleration of mortgage debt, and that’s why the First Home Vendors Boost was instrumental to the turnaround in house prices in 2009: it turned a nascent deceleration in mortgage debt into an acceleration once more. That acceleration has now run out and deceleration has resumed–and house prices have started to tumble as a result.

Figure 5

The fact that the Credit Impulse leads changes in house prices also gives some indication of where future prices are likely to go. The mortgage Credit Impulse shown above is for the acceleration in mortgage debt over a year: the change in the change in mortgage debt compared to the previous year. This brings in an inevitable lag in the series—matched by the lag in the change in house price data, which also shows the change in house prices over the previous year—so that the turning points in each series line up in the graph: lows in the mortgage credit impulse are associated with lows in house price change, and vice versa. With the mortgage credit impulse still headed south, and leading falls in house prices by 3-6 months, that implies that there are at least two more quarters of negative house price movements coming up.

Figure 6

Of course, there could always be a change in government policy that entices people back into debt—as the First Home Vendors Boost did in 2008. However, governments might huff and puff to try to keep the house price bubble inflated—as the Victorian Government is doing in its current budget, with its supposed boost to First Home Buyers that in reality is a support scheme for Victorian house prices—but the likelihood of the little piggies rushing back into the straw house of debt is minimal, when Australian mortgage debt is already at levels that dwarf those in the USA. The Australian house price bubble is over.

Figure 7

Biggs, Michael; Thomas Mayer and Andreas Pick. 2010. “Credit and Economic Recovery: Demystifying Phoenix Miracles.” SSRN eLibrary.

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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61 Responses to House Prices and the Credit Impulse

  1. Lyonwiss says:

    Philip and Steve

    Nigel Stapledon pointed that there are some structural differences between the US and Australian markets. To Stapledon, any prediction based on selected macroeconomic similarities between the two countries can only be compelling if those structural differences are shown to be immaterial.

    But Stapledon has not shown that those structural differences are important and material. Hence he has not shown that ignoring those differences is an invalid assumption (by Steve). We don’t really know one way or the other.

    His paper is another example of useless academic junk (even without neoclassical analysis). If you think this is harsh, reading his conclusion again, carefully: there is nothing new which hasn’t been asserted somewhere before even the statement “the dire predictions for house prices in Australia do not appear realistic”.

  2. sirius says:

    I will be brief
    That’s that can’t be repaid wont be repaid…Greece

    DreamTime…So You Want To Win An Election In 2012 Eh?…

    And it’s not just debt…
    “Gord overlooked a critical point; productivity is tightly coupled to energy. Whether or not you believe that peak oil is here we all know that oil is getting harder and more expensive to extract. More expensive energy = lower productivity.”

    “Yes. To write a long article on debt and the ability to service it without mentioning net energy is a good indication that the author does not have a clue what he is talking about.”

    Comments from posters to article here…

    And some true words ??
    “Humanity has difficulty is imagining a future unlike the past. This is human nature and is why humanity is always unprepared for cataclysmic shifts. Warnings are rarely heeded and consequently casualties are always high. Today is no different.”


  3. Philip says:

    Having a closer look at Stapledon’s comparison, I crunched some numbers in the S&P Case-Shiller Composite 20-city index, found at:–p-us—-

    Stapledon has picked the one state that features three cities on the 20-city index, and also had the steepest prices rises as well, from Jan 1997 – April 2006 (the bubble years). He believes that only a US coastal comparison is legitimate with Australia’s capital cities, which are all on the coast.

    LA: 266%
    San Diego: 246
    San Fransisco: 214%

    Yet he could’ve chosen Boston, MA, which is also on the coast but inflated only 140%. Others, such as Seattle, Chicago and Cleveland that are in bay areas posted even smaller house price inflation. It appears that Stapledon has purposely picked the most inflated cities in the most inflated coastal state (California) that feature in the 20-city composite index and then compared them against Australia’s capital cities. Not exactly a fair comparison.

    Also, Australia has a greater mortgage debt-to-GDP level, and the analysis about Australian policy not encouraging subprime lending is nonsense. While we don’t have the equivalent of Freddy and Fannie Mae to provide below-market rate loans to low-income people and the ridiculous Ninja loans, we know that due to deregulation in Australia that some institutions have been lending out at a LVR of 105%. The CBA has also been lending out at a LVR of 97%, as well as other banks.

    Nevertheless, as Lyonwiss points out, Stapledon’s paper can’t tell us what will happen one way or the other. Even if Australia is not as extreme as the US as Stapledon points out, that cannot tell us whether we will avoid a crash or not. It appears that Stapledon may not understand the dynamics of financial instability as well as Keen does.

  4. Jack Spax says:

    This may be aguide to how they intend to prop up the banks and John Symond. More RMBS for entities that have major bank shareholdings and keep credit running. Swannie Mac

    http:/ /

  5. peterjbolton says:

    I have already commented… but -and -also – again – I repeat:

    1. Where is the Mining BOOM?

    2. Economists are really just poor academics???? poor???

    3. The budget is being balanced by a new Means Test for Pensioners – are we really this f*&^%$# desperate?

    4. “WTF” is becoming a symbol of great complexity, albeit simplification.


    I support sending ALL our politicians back to the UK and the USA and starting anew with a Republic – with no democratic anything – Anarchy by Rothbard.

    Yeah, “all pensioner are terrorists” – George W. Bush ( I think???)

  6. simpleguy says:

    Thank you for your continued work on this VERY important issue. I think what is really missing at the moment is a thorough examination of what would happen to the property market if negative gearing on existing properties was to cease (as argued for in your work, and I have believed for years should be done). If someone could explain exactly what removing new negative gearing for existing properties would mean to people it would help a lot.
    I might add that my thoughts for modifying negative gearing where to limit negative gearing to new properties, which is transferable for a limited time period (say 10 years). ie. Their must be some mechanism for transferring the ability to negative gear the initial investment to a new buyer. Similarly any genuine investment in an existing building (renovations, adding rooms, etc) should be able to be offset and costs transferred necessarily- but not initial purchase prices (except for any transferred renovation costs).

    Anyway….I’m no economist and it is exactly the above issues I am grappling with if the negative gearing tax is to changed to new properties only. It needs to be as simple as possible without distorting the market too much the other way (under investment in existing properties to the point that old properties are knocked down and new ones built on top).

  7. simpleguy says:

    Apologies for my spelling and grammar mistakes in the previous comment.

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