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.”

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  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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