There goes the neighbourhood

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The last two days have seen the lat­est month­ly data on cred­it growth in Aus­tralia from the RBA, and the lat­est quar­ter­ly data on house prices from the ABS. Togeth­er they con­firm trends that I’ve iden­ti­fied on numer­ous occa­sions between the accel­er­a­tion of mort­gage debt and the change in house prices (see Hand of Gov report on the Aus­tralian Hous­ing Bub­ble, A much more neb­u­lous con­cep­tion, The Chop­ping Block, Updat­ed Cred­it Accel­er­a­tors, House Prices and the Cred­it Impulse, This Time Had Bet­ter Be Dif­fer­ent: House Prices and the Banks Part 1 & Part 2).

Hous­ing cred­it increased by 0.5 per cent over Sep­tem­ber (see the RBA Release for details), but this involved a fur­ther decel­er­a­tion of mort­gage debt as Fig­ure 1 shows.

Fig­ure 1: Change and Accel­er­a­tion of Mort­gage Debt in Aus­tralia


As I explained in “A Much More Neb­u­lous Con­cep­tion”, there is a com­plex causal link between the accel­er­a­tion of mort­gage debt, and the change in house prices. In a nut­shell, the two sources of mon­e­tary demand are income and the change in debt; these then finance the pur­chas­es of both new­ly pro­duced goods and ser­vices, and the turnover of exist­ing assets. There is thus a causal link flow­ing from change in debt to the lev­el of asset prices, and con­se­quent­ly a link between the accel­er­a­tion of debt and the change in asset prices.

That rela­tion­ship is evi­dent in the pat­tern of change in Aus­tralian house prices over the last two decades. the most recent figures—that prices fell 1.2% over the June to Sep­tem­ber 2011 quar­ter, and 2.2% from Sep­tem­ber 2010 to Sep­tem­ber 2011 (see the ABS Release for details)—confirm that mort­gage debt accel­er­a­tion, and not “pop­u­la­tion pres­sure” etc., is the key deter­mi­nant of house prices.

Fig­ure 2: The Mort­gage Accel­er­a­tion and House Prices Change Rela­tion­ship (R^2 = 0.54)

Of course, one can’t for­get the role of gov­ern­ment inter­ven­tion in sus­tain­ing an asset bub­ble either, and here the Aus­tralian gov­ern­ment has a peer­less record—whether the con­ser­v­a­tives (Lib­er­al Par­ty) or pro­gres­sives (Labor Par­ty) have been in pow­er. When­ev­er the econ­o­my was fac­ing a reces­sion, its favourite tool of macro­eco­nom­ic pol­i­cy has not been fis­cal stim­u­lus, but stim­u­lat­ing the hous­ing sec­tor via the “First Home Own­ers Scheme”.

It was first intro­duced by the Hawke Labor Gov­ern­ment in 1983, in response to the reces­sion that had swept the pre­vi­ous Lib­er­al Gov­ern­ment from pow­er; it was rein­tro­duced by the Hawke Gov­ern­ment after the Stock Mar­ket Crash of 1987, giv­en fears then of a seri­ous reces­sion; the Howard Lib­er­al Gov­ern­ment brought it back as a “tem­po­rary” mea­sure to counter the impact of the GST in 2000 (and it has nev­er been removed!), and then dou­bled it in 2001 to counter an immi­nent reces­sion; and final­ly Rudd dou­bled (and for new homes, tripled) the grant as a counter-mea­sure to the Glob­al Finan­cial Cri­sis in late 2008.

Though restart­ing the hous­ing bub­ble was­n’t the express intent of gov­ern­ment pol­i­cy, its “col­lat­er­al dam­age” includ­ed spikes in house prices as well (see Fig­ure 3). The turn­around from an 8% p.a. rate of fall in real house prices to a 15% rate of increase was mere­ly the lat­est (but not the great­est) such instance of gov­ern­ment manip­u­la­tion of house prices that has giv­en Aus­tralia the most expen­sive hous­ing in the West­ern world.

Fig­ure 3: The First Home Ven­dors Scheme and House Prices

So will they try again? I’m sure they will be sore­ly tempt­ed should Thurs­day’s unem­ploy­ment data reveal a rise in unemployment—against the con­ven­tion­al expec­ta­tion that Aus­tralian unem­ploy­ment should be falling. But I doubt that they will, for two rea­sons.

First­ly the “col­lat­er­al dam­age” of such a policy—a fur­ther boost to our house prices—would be polit­i­cal sui­cide today. Though house price infla­tion was ini­tial­ly very popular—and it remains pop­u­lar with those who are high­ly lev­ered into house prices today—it would evoke huge oppo­si­tion from the many who are now locked out of home own­er­ship. The entry costs into home own­er­ship in Aus­tralia are now prohibitive—even after the fall from its peak lev­el, hous­es are still more expen­sive in real terms than they were before the Rudd Gov­ern­men­t’s spin of the house price boost bot­tle.

Fig­ure 4: Real House Prices are still above the pre-FHVB peak

Buy­ing a first home there­fore involves tak­ing out a mort­gage that con­sumes a pro­hib­i­tive share of the aver­age wage—when First Home Buy­ers can be expect­ed to be earn­ing below aver­age wages.

Sec­ond­ly, the pol­i­cy has only worked because it has gone in con­cert with the bank­ing sec­tor’s will­ing­ness to lever the Grant with addi­tion­al mort­gage debt. The very suc­cess of this process is now the best rea­son why it won’t be tried again—or why, if it is tried, it might not work as it has in the past. Aus­tralian mort­gage debt is now sub­stan­tial­ly high­er than Amer­i­can (when com­pared to GDP), and though banks may still be will­ing to lend, will­ing bor­row­ers are much hard­er to find. Our mort­gage debt is once again falling when com­pared to GDP, and I doubt that any­thing the gov­ern­ment can do can make it rise yet again from its already unprece­dent­ed peak.

Fig­ure 5: Aus­tralian mort­gage debt grew more rapid­ly than US, & now exceeds it

The one trick that Aus­tralia does have up its sleeve for re-inflat­ing the house price bub­ble is inter­est rate pol­i­cy. Since the vast major­i­ty of Aus­tralian mort­gages are float­ing rate, a cut to offi­cial inter­est rates rapid­ly trans­lates into falling mort­gage pay­ments for bor­row­ers (see Fig­ure 6). If rates fell sub­stan­tial­ly, this could encour­age Aus­tralians to take on yet more mort­gage debt, and thus re-ignite the Aus­tralian hous­ing bub­ble.

Fig­ure 6

Even this is, I think, unlikely—again, because the past suc­cess of this “asset price infla­tion as macro­eco­nom­ic pol­i­cy” game has made it unlike­ly that the same play will work again. Aus­tralian pri­vate debt lev­els have risen from the his­tor­i­cal­ly low lev­el of 25% of GDP in the peri­od from 1945–1965 to an unprece­dent­ed peak of almost 160 per­cent in ear­ly 2008. Gov­ern­ment policy—especially the First Home Ven­dors Boost—merely tem­porar­i­ly delayed the delever­ag­ing process from Peak Debt.

Fig­ure 7: Pri­vate debt ratio now falling from unprece­dent­ed lev­el

Since delever­ag­ing results in falling asset prices as well as ris­ing unem­ploy­ment, it is unlike­ly that even sub­stan­tial­ly low­er­ing inter­est rates will encour­age Aus­tralians back into debt once more. Aus­trali­a’s appar­ent­ly stel­lar eco­nom­ic per­for­mance over the last 2 decades, which was pri­mar­i­ly dri­ven by accel­er­at­ing pri­vate debt, may soon drop back to the pack now that the inevitable delever­ag­ing can no longer be delayed.

Fig­ure 8: Cred­it Accel­er­a­tor dri­ves change in unem­ploy­ment (R^2 = ‑0.65)


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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.