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)


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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41 Responses to There goes the neighbourhood

  1. Derek R says:

    RickW wrote:
    The major­ity of eco­nomic com­men­ta­tors fos­ter the view that the prob­lem can be solved overnight. They seem obliv­i­ous to the fact that Greece runs a cur­rent account deficit around 10% of GDP. The coun­try is insol­vent. That imbal­ance will not be cor­rected overnight.

    Totally agreed, Rick. I was look­ing at that same graph ear­lier today and think­ing just what you are. With­out a major turn­around in the Greek bal­ance of pay­ments they are doomed, no mat­ter what the politi­cians may concoct.

  2. Lyonwiss says:

    @ Peter­jbolton Novem­ber 2, 2011 at 12:56 am

    My idea of a “cure” or a “solu­tion” is a sim­ple and prac­ti­cal action, which, if imple­mented, will make a sub­stan­tial dif­fer­ence to the problem.

  3. Lyonwiss says:

    @ Adit Novem­ber 2, 2011 at 2:14 pm

    The­o­ries of mon­e­tary eco­nom­ics typ­i­cally do not include defaults and bank regulation.

  4. Endless says:

    Joye’s take:

    An inter­est­ing final para:

    A final com­fort­ing thought for the hous­ing mar­ket, is that, con­trary to Steve Keen’s hys­ter­i­cal claims, there is absolutely no evi­dence of a cat­a­strophic plunge in credit growth caus­ing pre­cip­i­tous falls in dwelling prices. The hard empir­i­cal fact is that hous­ing credit growth has sta­bilised at a rate in line with pur­chas­ing power, as we would expect. ”

    And he has a nice graph to sup­port it!

  5. RickW says:

    @ End­less

    An inter­est­ing final para:
    “A final com­fort­ing thought for the hous­ing mar­ket, is that, con­trary to Steve Keen’s hys­ter­i­cal claims, there is absolutely no evi­dence of a cat­a­strophic plunge in credit growth caus­ing pre­cip­i­tous falls in dwelling prices. The hard empir­i­cal fact is that hous­ing credit growth has sta­bilised at a rate in line with pur­chas­ing power, as we would expect. ”

    I take the oppo­site view regard­ing Steve Keen given his priv­i­leged posi­tion in actu­ally know­ing what is going on in the world econ­omy. It is regret­table that he does not have greater vis­i­bil­ity and is far more hysterical.

    His some­what triv­ial mod­el­ing (in terms of ana­lyt­i­cal meth­ods) has sim­ply, but ele­gantly, shed light on one cer­tain fact — DEBT CANNOT BE IGNORED in eco­nom­ics and finance. How stu­pid am I to think that econ­o­mists actu­ally under­stood this!!!. This fact is blind­ingly obvi­ous to any­one with an ounce of com­mon sense and the weak­est pow­ers of obser­va­tion regard­ing cur­rent world affairs over the last three years. And yet gov­ern­ments, banks and a vast array of finan­cial com­men­ta­tors do what­ever they can to encour­age MORE DEBTHOW STUPID ARE THESE PEOPLE???

    The best that can be hoped for is to have the time to pro­gres­sively de-lever. This is bet­ter than the chaos appar­ent in Greece for exam­ple. There has been a once in a life­time oppor­tu­nity in Aus­tralia to pro­gres­sively de-lever over the last four years and maybe the next two or three and yet we are col­lec­tively encour­aged to march toward the edge of the cliff fol­low­ing Ice­land, Greece, Ire­land, Por­tu­gal, Spain, Hun­gary, Italy, Bel­gium etc Order could change depend­ing on how much cur­rent pri­vate debt gov­ern­ments choose to back as the big­ger coun­tries unravel. Ger­many, Japan and US could be in the first 20 ahead of Australia.

    We could start a book on who is next after Greece. If the CDS mar­ket on sov­er­eign debt is accu­rately priced then Por­tu­gal is next in line.

  6. Endless says:


    I’m with you on Debt, and Steve’s con­tri­bu­tion. I’m just not clear on the link between debt and house prices falling, or rather the catalyst.

    To date there has always been some event, FHOG etc, that stops house prices from falling sig­nif­i­cantly (although admit­tedly, some areas have had sig­nif­i­cant falls).

    Joye is pre­dict­ing a boon for hous­ing as a result of the rate cut. On Steve’s analy­sis the rate cut should do lit­tle or noth­ing to the slide in house prices.

    My gut tells me Steve’s is right, my eyes want to see it…something about putting fin­gers in scars…

  7. Steve Keen says:

    I’ve given up on get­ting through to Adam on that issue–amongst many oth­ers. Time con­stants han­dle the time taken for exam­ple in pro­duc­tion or con­sump­tion; time delays can also be incor­po­rated eas­ily in dynamic mod­els where there is an absolute delay in data col­lec­tion and response–as with a lot of gov­ern­ment pol­icy for exam­ple. It’s no big deal in con­tin­u­ous time, and a pain in the butt in dis­crete time, which is one of the many rea­sons I favour con­tin­u­ous time mod­el­ling over dis­crete time in economics.

    And I think that’s too clever in nam­ing Andrew, but I’m not too fussed. I’ll stick with MCT because it empha­sises two things econ­o­mists have ignored: money and dynam­ics. But ulti­mately peo­ple other than I will come up with an endur­ing name for it.

  8. peterjbolton says:

    @ End­less Novem­ber 2, 2011 at 3:12 pm | #

    A rather reveal­ing arti­cle by Mr. Joye, indeed.

    Why would RBA find it dif­fi­cult to fore­cast infla­tion, when that is what they were estab­lished to do, but I assume that RBA’s def­i­n­i­tion of infla­tion is far dif­fer­ent to every­body else’s understanding.

    The RBA has more or less admit­ted that it is awfully dif­fi­cult to fore­cast future infla­tion with any degree of accuracy.”

    And, what is so sur­pris­ing about the fol­low­ing state­ment? Does not Mr Joye under­stand the func­tional pri­or­i­ties of a Cen­tral Bank?

    Unfor­tu­nately, the deci­sion the RBA made yes­ter­day could only be jus­ti­fied by one lonely quar­ter of infla­tion data, which stands out as a strik­ing anom­aly when jux­ta­posed against the infor­ma­tion con­tained in the pre­ced­ing quar­ters, as illus­trated in the chart above.”

    Indeed a “game changer” and time to sup­port the hot money sweet spot for them flee­ing for­eign hordes of wealth and to prop up Aus­tralian houses prices beyond all dig­nity, com­mon sense, and affordability.

    Yesterday’s bold deci­sion by the RBA to cut rates is a ‘game changer’ for Australia’s hous­ing mar­ket. Our mod­els imply that we should see a rebound in activ­ity one quar­ter ear­lier than expected (ie, in the first three months of next year). Any fur­ther rate cuts will only embolden this dynamic.”

    All this just indi­cates that RBA is a major part of that which will implode in Aus­tralia in the very near future; not as an event as that has already begun, but as a field of socio-economic devastation.

    Long Live the Queen.

  9. Philip says:

    RickW, End­less

    Joye’s argu­ment about Steve’s ‘hys­te­ria’ is non­sense, and so is the graph he pro­vides. The period timetabled is June 2008 — August 2011, whereas Steve’s pri­vate debt to GDP ratios go back to 1860! Fur­ther­more, it takes more than a cou­ple of years of delever­ag­ing to cause sub­stan­tial falls in hous­ing prices. The graph has an arrow sup­pos­edly point­ing out the recent trend — but Joye doesn’t bother point­ing out the obvi­ous trend in the graph: falling credit from April 2010 to today. A real hack job.

  10. Hacktuary says:

    Isn’t it exactly a year since the price of bananas went through the roof? Hmm. Last time (Cyclone Larry) we got a banana-driven rise in inter­est rates, then a year later a “shock” reduc­tion in infla­tion as the rise in banana prices dropped out of the year-on-year infla­tion mea­sures. Truly the RBA and ABS are pathetic.

  11. Scott Govoni says:

    The bot­tom line is that all eco­nomic the­o­ries are fun­da­men­tally flawed because they are all based on con­sumer con­sump­tion. No econ­omy can infi­nitely con­sume to grow an economy.

    What is your response to my obser­va­tion Mr Keen?

    I didn’t pay to have you delete my com­ments. If you want to delete them, please just refund my money.

  12. Pingback: House prices fall for first time since February

  13. RJ says:


    they are not stu­pid. Far from it

    credit always = debt

    We need bank credit for con­sump­tion and pen­sion sav­ings. As we age we need more credit and con­se­quently more debt

    The prob­lem at present is too much non Govt debt and not enough Govt debt

    And Greece’s prob­lem is being in the Euro. They no longer have their own cen­tral bank and are pay­ing the price for this. It will hap­pen to all euro coun­tries one by one unless the ECB buy Govt bonds as required

  14. RJ says:

    As an exam­ple the USs accrued pen­sion and health care accrued lia­bil­ity is over $100 trillion

    They US Govt should run much larger deficits (by say mas­sive tax cuts) and then drain the extra money gen­er­ated by this extra spend­ing by issu­ing Govt bonds.

    Pen­sion funds can then buy these bonds. Prob­lem solved. Peo­ple could then relax about retire­ment as they would have their pen­sion invested in Govt guar­an­teed bond assets

    And the prob­lem of too lit­tle credit would be slowly solved. Non Govt debt would be replaced by com­puter gen­er­ated Govt debt

  15. Pingback: There goes the neighbourhood | Steve Keen’s Debtwatch – link bits

  16. Magnus says:

    Steve, I was won­der­ing if you could elab­o­rate on what the def­i­n­i­tion of “pri­vate debt” is, i.e. what kind of debt and insti­tu­tions are included in it. I’m doing some plots for Swe­den, but am unsure of exactly what data to use, to make it com­pa­ra­ble to your plots.

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