A Bubble of Ludicrous Pettifoggery

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By Philip Soos

Recently, Australian property analyst Terry Ryder, in an article on Property Observer, voiced complaints about housing bubble advocates. His issue is “waiting for someone who subscribes to the bubble theory to actually define it. So far, nobody has. The term implies that something has been over-inflated and will burst.” Of course, Steve Keen has already done so in his voluminous and critical work reaching back for over a decade.

If Mr. Ryder has difficulty in finding someone who has constructed an accurate definition of an asset bubble, the work of the late U.S. post-Keynesian economist Hyman Minsky is recommended reading. Minsky developed a theory called the ‘financial instability hypothesis,’ theorising that financial markets are not very efficient and continually misallocate substantial amounts of credit into asset markets, creating pyramid schemes or bubbles (Minsky called them Ponzi schemes, named after the fraudster Charles Ponzi).[1]

He defined three types of finance: hedge, speculative and Ponzi. Hedge finance: income flows from an asset are sufficient to pay down both principal and interest on the debt used to finance the asset purchase, and asset prices are based upon fundamental or intrinsic value. Speculative finance: income flows cover only interest repayments, not loan principal, requiring debt to be continually rolled over from the current time period to the next. Businesses or individuals may experience financial stress, but it is not widespread and fundamentals valuations are kept largely in check. Ponzi finance: income flows cover neither principal nor interest repayments. This leaves asset owners completely reliant upon escalating capital values in order to realize substantial capital gains at sale to meet the cost of principal and interest. Prices are completely delinked from fundamental valuations at this stage, resulting in an asset bubble.

Simply put, if gross rental income pays down neither interest nor principal repayments of mortgage debt on aggregate (including other property-related costs) and is sustained over a number of years, a housing bubble exists by this definition. Even better, there is plenty of evidence to show that the residential property market is currently experiencing said bubble. The following figure shows a long-term housing price index for Australia, adjusted for inflation and quality.

Figure 1: Australian Median Capital Cities Housing Price Index 1880-2011, 1880=100[2]

The 1996-2010 period is easily the largest boom on record. This meteoric surge in housing prices, however, is not proof in itself of a bubble; more evidence is needed. Data from the Australian Tax Office shows that, on aggregate, residential property investors have been running substantial net income losses since 2000-01. The same would hold true concerning owner-occupiers and imputed rental incomes.

Figure 2: Residential Property Investor Net Rental Income 1993-94 – 2009-10[3]

The reason for these sustained net income losses is the combination of general running costs with interest and principal repayments, as shown in the next figure.

Figure 3: Deductions and Repayments as % of Gross Rental Income 1993-94 – 2009-10[4]

In 2009-10, the negatively geared cohort, who comprise 63% of the residential property investor market, are precariously positioned under a staggering amount of mortgage debt. The following figure shows a breakdown by income tax bracket.

Figure 4: Deductions and Repayments as % of Gross Rental Income 2009-10[5]

The reason why costs outweigh gross income is because Australians have burdened themselves with the largest household debt increase in history to engage in an orgy of residential property speculation.

Figure 5: Household Debt as % of Nominal GDP 1861-2011[6]

In conclusion, Minsky’s financial instability hypothesis helps to integrate the occurrences of why housing prices and the proportion of household debt to the economy (GDP) have boomed while net income losses are sustained. That Australia’s residential property market has resembled Ponzi finance for the last ten years is nothing short of astonishing (longer if counting 2010-11 and 2011-12 as there is a substantial lag in making tax data available). The market would have collapsed during the global financial crisis in 2008 were it not for a fresh First Home Owner’s Boost (FHOB) re-inflating housing prices to a new, higher peak.

Although Mr. Ryder claims that bubble advocates are “publicity-seekers” and “shallow, lazy and like the sound of their own voices”, outbursts of ludicrous pettifoggery should not deter the presentation of sound evidence.


[1]. Minsky, Hyman P. (1992). “The Financial Instability Hypothesis,” Working Paper No. 74, Levy Economics Institute of Bard College, New York.; Minsky, Hyman P. (2008). Stabilizing An Unstable Economy, 2nd Edition. United States: McGraw-Hill.

[2]. Stapledon, Nigel D. (2007). “Long Term Housing Prices in Australia and Some Economic Perspectives,” PhD Thesis, University of New South Wales.

[3]. ATO Taxation Statistics 2001-02 through to 2009-10.

[4]. ATO Taxation Statistics 2001-02 through to 2009-10.

[5]. ATO (2012; personal communication).

[6]. RBA (2012; personal communication).

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12 Responses to A Bubble of Ludicrous Pettifoggery

  1. Steve Hummel says:

    “outbursts of ludicrous pettifoggery should not deter the presentation of sound evidence.”

    Indeed. And yet Minsky is not the total answer. Minsky’s excellent evidences are accurate….as theoretical observations of effects. But what about real causes? Causes are those funny little nebulous but utterly significant things like human consciousness, or seemingly mundane but equally important temporal/commercial realities like cost accounting’s conventions. That both of these “things” are so deeply embedded in our everyday existence and hence unperceived or dismissed cannot belie their power. Ideas are the ultimate reality and that is why Man and Man’s systems are primarily metaphysical. It’s also why a flaw in the accounting system can slowly but inexorably overturn national and world economies,….and why changing that flaw with a new paradigm, in other words, a new way of financing costs by going directly to the individual instead of going back through the normal COMMERCIAL cost accounting cycle which enforces individual monetary scarcity,…could transform economics and its apparent onerousness.

    As Damien Mearns said here a while back (Damien did you fall of the edge of the world?) “Can we please not wait another 80 years to discover that Minsky, like Keynes was not the total answer?

  2. ken says:

    What is a really bad sign of a bubble, is when the government needs to pump money into the economy just to allow people to pay their mortgages. In our economy it is almost the single reason for the need for deficits. We are going well and still need about 5-6% of GDP new borrowings by state and federal governments. If anyone seriously put the budget into surplus, without another asset bubble, would find fairly quickly that lots of people couldn’t pay their mortgages.

  3. TruthIsThereIsNoTruth says:

    Personally I don’t think it is of relevance what you call it, the facts and figures and what they imply is what is interesting. Figure 2. would look very different if you include imputed rent on the properties the “investors” are actually paying down. If you have a leveraged property investment it is the last thing you pay off because of negative gearing. Not really sure what that implies but it adds a bit more dimension to the argument. The figures reflect a reaction to incentives, property investment is a debt magnet.

    In the growth phase, it may bear some resemblance to a ponzi scheme, it has the same symptoms. But now that the growth phase is over, is it necessarily going implode. Property investors are naturally patient and also cashed up, ponzi schemes implode when everyone panics and hits the market at the same to sell. I’m not so sure real estate has the same mechanism to facilitate this kind of occurence. With rents creeping up and interest rates declining, holding on for better prices is a pretty neutral strategy.

    Subtle sensationilism amounts to propaganda.

  4. Steve Hummel says:

    “We are going well and still need about 5-6% of GDP new borrowings by state and federal governments. ”

    Yes, that should be a blaring sign that there is a problem present that has not been recognized. What if, just what if the REAL problem is something so mundane or a part of life that it has simply eluded us? What if we’ve looked for complexity where the answer is extremely basic and relatively simple…and yet always in effect and so we’ve also missed it by its familiarity? Remember, everyday commercial realities are with us constantly, and theories being abstractions are at least once removed from the emersive quality of everyday reality.

    The REAL Truth is that truth is sometimes difficult to comprehend BOTH because it is so “everyday” AND when one looks for it via the once removed impersonal vehicle of theory. Human consciousness is one such pervasive and ever present reality that fits into this category. What if the effects of a flaw in the ever present cost accounting cycle makes for systemic monetary and economic instability? What if the velocity of money is fallacious because it forgets that every $10 that buys something does not equate with $10 worth of actual purchasing power, but rather with say $1 of purchasing power, but forgets about the $9 of overhead charges that must be met in order to re-create another $10 of ACTUAL purchasing power? When someone buys something from a commercial establishment for $10 does the owner of the business just pocket that money or does $8.50-9.00 HAVE TO BE PUT ASIDE TO COVER HIS DEBTS AND OVERHEAD EXPENSES? Maybe he does pocket it if he lives in my wife’s home country of Romania. :) But most of the time businesses keep only one “set of books.” Cost accounting. Its effects cannot be gotten around ethically….unless you GIVE people the money they require to survive without being forced to accumulate debt with a direct payment like a citizen’s dividend. Then the free market….will actually be free.

  5. Endless says:


    I agree. it would take a lot to break the faith in property investment. Unlike equities, a bit of a run and everyone jumps. In the absence of a catalyst — like, a substantial increase in unemployment — there is a lot of will-power out there to hold on and see. While the FHOG may have helped reverse the downward trend in 2008, now it is low interest rates and rising rentals which seems to be holding things steady.

    While Steve has mentioned that debt is currently accelerating, which gives rise to the recent holding up of House prices, he has also argued that in a de-leveraging environment, rents will fall. Rents are rising.

    If house prices are not going to continue ever upward, it seems more likely that this bubble may slowly deflate.

  6. Steve Hummel says:

    It’s the slow motion train wreck to neo-feudalism. Nothing more and certainly no less. Until people understand that the systemic problems of financial and economic instability are actually a slavery versus freedom issue we will be ruled. But “systems were made for men, not Men for systems” , and the monopoly on credit that Private Banks, Central Banks and their lap dog governments now possess can easily be overcome with a mandated and firewalled off from the remainder of government Dividend and Discount which none are allowed to assail. And once that freedom is a reality it will not be overcome. Every successful mass movement is a wedding of self interest and the Common Good. That way it’s about everyone and in every instance. So the battle is already won…it’s simply an awareness of the truth that is needed.

  7. ferb says:


    Dont know where u live but in Melbourne rents have dropped 5-10% in the last 6 months, especially in mid-level units/apartments. There is a glut of empty units. 3 out of the 11 in my block alone. A friend own a whole block of 6 in South yarra, all recently renovated and she had to drop asking rents from 550/wk to 480/week on 3 of them just to get a tennant.

    This housing supply argument is a load of bull. There are vacant houses all up and down my street and surrounding streets in Richmond.

  8. TruthIsThereIsNoTruth says:


    I checked out the data (rp data press releases), since dec11 weekly rents are pretty much flat on the net in Australia. Funny enough, Melbourne is the only place that’s coming up as an increase. Seems to be good demand for Sydney inner suburbs from what I see. However investors have been more than compensated with falling interest rates over this periop.

    In my initial comment, I wasn’t trying to argue the undersupply case. My point was that as the spread between interest rates and rents decreases, it reduces the potential for panic selling by investors. I was wrong on the rents though, got caught up in extrapolating personal experience based on local evidence, very human thing to do.

  9. Endless says:

    Brisbane, Ferb, and I confess to be localising my views. Here inner city, rents appear to me to be rising. Certainly seen no evidence of discounting from my observation.

    I note RP data sees rents as largely flat. I find it hard to believe any of the property spruiker arguments (including under-supply etc) but see nothing to suggest imminent house price falls — in price or rent.

    Faith in property is hard to shake.

  10. TruthIsThereIsNoTruth says:


    Picked this up in a link via Steve’s latest spectator article.

    Have to say the banks’ role in the model under the current monetary system is spot on. It has all the elements I’ve been harping on about on this forum.

    Within the confines of the model, I agree with the conclusion. This is still a too narrow consideration, however I am sure the IMF interprets the conclusion in the right context.

    In a broader context, my main argument against the chicago plan is that it leaves finance in the hands of beurocrats and ivory tower academics, hence no surprise where the push is coming from. And while for many of you that may be better than leaving it in the hands of banks, I prefer this as I see there are at least some tangible checks and balances (when it is functioning properly) as opposed to politics and egocentric theory self promotion.

  11. Steve Hummel says:

    The REAL problem with the financial system is the triopoly on credit that Private Banks, Central Banks and their lap dogs the governments of the world currently have. Break that monopoly up with policies that simultaneously limit the triopoly’s power and portfolios, and economically empowers individuals….and we’ll be getting somewhere. An individual Dividend and a general discount, the perfect monetary policy reflection of the Wisdom of Confidence, Hope, Love and Grace. Wisdom applied to monetary policy, I’m sorry, along with a few rational regulations….its the answer.


  12. unclepete says:

    In my view, one of the main reasons real estate prices hold up well in Oz is on account of the continuing large immigration numbers. The gov’ment simply creates demand for all sort of “stuff” that way. Of course it is the ultimate Ponzi scheme, and eventually we will need another planet to bugger up. Mind you I am a mere technician, and would not know Minsky from a mizo soup. But on the other hand I CAN tell you that the real economy is dying in the proverbial, from mere observation of the activity levels in factories and workshops.

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