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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  • Lyon­wiss

    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”.

  • sir­ius

    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.”


  • Philip

    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.

  • Jack Spax

    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:/ /


    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???)

  • sim­pleguy

    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).

  • sim­pleguy

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

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