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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