Updated Credit Accelerators
As I’ve noted in earlier posts, the concept of the Credit Accelerator is still a work in progress. A major objective is to be able to use monthly data and remove the noise that generates, but for now I’m working with the change in the change in debt over a year, divided by GDP at the midpoint of that year. In order to be able to still use the latest monthly debt data from Australia (and quarterly from the USA), I’ve revised the formula to “freeze” the last available value of GDP six months in advance of the last data for debt. This gives an accurate measure of the change in the change in debt, but divides it by a GDP figure that will later need revision.
The result for Australia is shown in Figure 1 below, using debt data released by the RBA on Friday: the Mortgage Accelerator is now negative (though not as negative as it has previously been). The correlation coefficient is also higher than I reported in the previous post—0.53 rather than 0.42 (the previous figure was derived from data including a discontinuity in the mortgage data caused by a reclassification of household debt data by the RBA in the early 90s)
Figure 1: The Mortgage Debt Accelerator and change in real house prices
On the other hand, the US Mortgage Accelerator is now positive, though only barely—see Figure 2. It will be interesting to see whether this is maintained in the next release of the Flow of Funds, due out on September 16th, and if so whether there is any slowdown in the rate of decline of US house prices (though the recent extreme volatility on share markets may be enough in itself to renew the trend to falling debt, thus turning the Accelerator negative once more).
Figure 2: Debt acceleration determines change in US house prices
Finally, one thing I omitted from yesterday’s blog was evidence of the role of the First Home Vendors’ Boost in causing and reigniting the housing bubble. I can provide statistical evidence as well, but the visual evidence in Figure 3 is stark enough.
Figure 3: First Home Vendors Scheme starts, reignites & rescues the housing bubble