How to spot a housing bubble before it bursts

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After a bub­ble has burst, no one denies that it exist­ed. But before it does, the pop­u­lar refrain is that though bub­bles exist­ed else­where in the world, “there’s no bub­ble here”. So hous­ing bub­bles are admit­ted to have exist­ed in Japan, the USA, Spain and Ire­land – because they’ve already burst.

But the rest of the world – and espe­cial­ly Aus­tralia – is dif­fer­ent. House prices in Aus­tralia, the UK, and every­where in between where they are still ris­ing, are jus­ti­fied by … (fill in your favourite fun­da­men­tal rea­sons here) and are not in any way man­i­fes­ta­tions of bub­bles.

My unpop­u­lar alter­nate refrain is that house price (and share price) bub­bles are always and every­where a phe­nom­e­non of ris­ing bank lever­age, and any­where that has high and ris­ing lev­els of house­hold debt (rel­a­tive to GDP) is a can­di­date for being a bub­ble econ­o­my. This is a non-main­stream argu­ment in eco­nom­ics, because for decades the so-called ‘effi­cient mar­kets hypoth­e­sis’ and ‘cap­i­tal assets pric­ing mod­el’ have dom­i­nat­ed aca­d­e­m­ic eco­nom­ics, and they both argue that lever­age has no effect on the price of assets.

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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.