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

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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.