Australian House Prices—again

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Mortgage debt is by far the largest component of debt in Australia today—government debt, which is the focus of political debate, is trivial by comparison (a quick caveat though—finance sector debt may be larger again than mortgage debt, if this claim, sourced from Morgan Stanley, is accurate—since it shows Australia’s aggregate private debt ratio as almost equal to the USA’s).

Figure 1


The household debt to income ratio may have topped out now, after growing fivefold in the last two decades. Figure 2 shows the ratio of household debt to disposable income, which peaked at 149% of disposable income back in late 2008. Despite the enticement into debt given by the First Home Vendors Boost, aggregate household debt never exceeded this pre-Boost peak as a percentage of disposable income, since the fall in personal debt outweighed the rise in mortgage debt.

Figure 2

This huge rise in household debt compared to income has more than offset the falls in interest rates that occurred since the 1990s. The perennial argument from property spruikers that the rise in debt has simply been a rational reaction to the fall in interest rates is pure bunkum—especially when you take a less-than-myopic look at the data, and consider mortgage rates back in the 1960s, which were well below today’s rates (see Figure 3).

Figure 3

This comparison stands even when inflation is taken into account. The average real mortgage rate in the relatively low-inflation 1960s was 3 percent—a full percent below the low inflation level of the last decade (see Figure 4). Why wasn’t mortgage debt higher back then, if the increase since the 1990s was a “rational response to lower interest rates”?

Figure 4

I date the Australian house price bubble from 1988, when it was spiked by the reintroduction of the First Home Owners Scheme by the Hawke Government in reaction to the Stock Market Crash of 1987 (the Scheme works by encouraging would-be buyers to take on mortgage debt, and then hand the leveraged sum over to the vendors—which is why I prefer to call it the First Home Vendors Scheme [FHVS]). It then really took off in 2001, when Howard doubled the Grant in response to a feared recession (see Figure 5, which combines Nigel Stapledon’s long term index with the ABS data from 1976 on; “Hawke” and “Howard” respectively mark the re-introduction of the grant in 1988 and Howard’s doubling of it in 2001), though it was already running hot again from 1997 when—without any additional help from the government—the financial sector had enticed Australians to go from a 50% to a 70% mortgage debt to GDP ratio (at a time of rising interest rates).

Figure 5

The combination of higher rates and much higher debt levels means that paying the mortgage is taking far more out of the family purse than it used to do back in the pre-Housing Bubble years. Readily available data from the RBA shows that interest payments on household debt are five times as high as they were back in the 1970s.

The RBA data for mortgage debt only start in 1976; in the spirit of countering spruiker myopia, I’ve estimated pre-1976 mortgage debt as 30% of total debt, from the RBA’s long-term data (the average from 1977-1980 was 31%). Interest payments on mortgage debt are as much as ten times as high now as in the 1960s (see Figure 6).

Figure 6

Spruikers also prefer to ignore the fact that debt has to be repaid, and focus on the interest payments alone. In the past mortgages been paid off after 5-7 years via the resale of the property, but that will be a lot more difficult in future as house prices fall. Figure 7 shows household debt service as a percentage of disposable income with mortgage debt being repaid over 25 years and personal debt over 10. On this basis, there has been a twelve-fold increase in the proportion of family income that has to be devoted to servicing mortgages since 1970. Even compared to the high interest days of 1990, mortgage debt service is now 2.5 times as burdensome.

Figure 7

There is clearly no capacity for debt service to take a larger slice of the family income pie, which in turn is taking the wind out of the housing market. Spruikers happily make a “supply and demand” argument about why house prices have risen, but obsess about regulation-impaired supply and equate demand with population growth. In fact, demand for housing doesn’t come from population growth: it comes from the growth in the number and value of mortgages. That growth rate in fact peaked back in 2004, and it has been trending down ever since: the First Home Vendors Boost merely delayed this process without stopping it.

Figure 8

That in turn is the main factor driving house prices down—just as rising mortgage debt drove prices up, falling mortgage debt is driving them down. As I’ve explained elsewhere, the causal factor behind asset prices is not just rising but accelerating debt. This is an extension of my basic proposition that macroeconomic analysis must include the role of credit—which is ignored by conventional neoclassical economics. In a credit-driven economy, aggregate demand is the sum of incomes plus the change in debt, and this monetary demand is expended buying commodities and claims on existing assets—basically, shares and property.

Part of demand for housing thus comes from income—the focus of the property spruikers—and part comes from the increase in mortgage debt—which they ignore.


Figure 9

For prices to rise, demand must also be rising, and this requires not merely rising mortgage debt but accelerating debt. Of course variations in income (and variations in supply too) can play a role, but in the overwhelmingly speculative, overly-leveraged market that Australian housing has become, accelerating mortgage debt trumps the lot (see Figure 10).

Figure 10

This is especially so since such a large percentage of buyers are so-called investors—”so-called” because a better description is speculators. Actual investors aim to make a profit out of the income flow generated by an investment. Australia’s property “investors” instead lose money on their rental income, and hope to recoup the loss as capital gains via a later sale. With the days of house prices rising faster than incomes well and truly over, this percentage of the market could drop back to pre-1990s levels.

Figure 11

Both sources of demand are now falling strongly from the artificial boost given by Rudd’s spin of the FHVS sauce bottle.

Figure 12

One of the world’s last and greatest house price bubbles is thus finally ending.

Figure 13

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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87 Responses to Australian House Prices—again

  1. DrBob127 says:

    Wow, Chris Joye is begging the RBA not to target the housing bubble with rates when there are: “superior ‘macro-prudential’ tools available to regulators to more surgically cauterise such problems.

    An illustration of the latter would be changes to the risk-weights and capital charges that APRA requires banks to hold against commercial and residential property loans. Other examples would be defining minimum equity (ie. deposit) requirements for new lending (or maximum loan-to-value ratios), minimum debt-servicing standards, and/or the removal of external subsidies, such as the first-home owner’s grant, that distort the market’s functions.”

  2. Pingback: Australian House Prices—again « The Rest of my Life

  3. clive says:

    Homes failing to hold value as real estate drops
    THE number of Australian homes worth less than what their owners paid for them is growing.

    One in 20 homes across the country is worth less than their purchase prices. House prices tumbled 3.3 per cent in the past year and the nation’s property malaise continues, according to new research.

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  9. Ian Murray says:

    Dear aus_ed

    Clearly I don’t know you Fair Dinkum sounding Aus_ed but the feeling I get when reading your posts is that you are either a “paid blogger” or a member of the “Spruker fraternity” that has a vested interest in tring to maintain the current housing market bubble whilst trying your very best to sound like someone looking to take a balanced and objective position on Steves work.

    Site member AntiMoralHazard has got you pinged brother and I commend him for his work in pointing you out, you are clearly the one to watch in this forum, though not for the reasons you had hoped for.—Is-it-Ethical?&id=4429496

    It’s an easy out to claim your just presenting an opposing view in an open forum as we are all justly entitled to. It is my firm feeling you have a much darker agenda. Maybe you need to register a new member name here and try again.

    Keep ever watchful AMH

  10. jc says:

    @ Ericopoly, a very late answer, but first time seeing this one. Re Japan, their UE remained lower comparatively because they had their crisis from a position of strength. By that i mean they had a very large pool of personal savings to draw from once the great deflation took hold. This cushioned households from severe declines in asset prices. In the USA you had your crisis froma position of weakness….as in very little personal savings, infact more like personal debt, hence no cushion and it feeding into higher UE.

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