A sudden conversion of property bubble doubts

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Back in the Olde Days, before the global financial crisis, when I was one of a handful raising the alarm, some of the most strident opposition to my opinion about what this might mean for housing in Australia came from Christopher Joye (who was then a Director at Rismark). We went head to head on many occasions, with me arguing that our prices were a debt-fuelled bubble, and Joye arguing that rising house prices simply reflected rising household incomes.

Fast forward to today, and though house prices have not done what I expected (see I will be wrong on house prices, November 12, 2013), one of the most prominent commentators asserting that there is a dangerous house price bubble in Australia is… Chris Joye (who is now a writer for The Australian Financial Review. There are also many others who were once on the “no bubble” side of the argument who are now warning that there is one.

I’m delighted by this shift of course, but it does beg the question “what has changed — the facts, or the commentators?” The answer, as in most things, is a bit of both — but I think more the commentators than the facts.

Click here to read the rest of this post.

Chris and I have also had a chat to clarify one point: that the numbers in his 2013/4 articles are based on a revised version of the index which results in lower numbers. Business Spectator is adding the following addendum to my article, and I’m copying it here for the record:

Amendment re index numbers

Chris has since clarified that the figures he published in 2010 and those cited this year are based on two different indices. I’ve derived the following table from Chris’s email:


Old Index

New Index


31 December 2009




31 March 2010




30 September 2011




31 March 2014




This week



Chris concluded in his email that:

“Since mid 2013, I have correctly forecast that the house price-to-income ratio would **rise** and breach its all-time peak of 4.5 times (on the current index). This is exactly what has happened—and the ratio continues to rise, which explains my concern!”

This implies that this week’s level has cracked 4.5—which I’ve included in the table—so the level now is equivalent to what it was in 2009-2010.

That makes more sense than the apparent contradiction due to changing the way the Rismark index was calculated between 2010 and 2014: the ratio was 4.5 in 2009-10, and now it’s 4.5 again and rising.

But I still don’t think this is enough to explain Chris’s radical change of tone on this topic—including claims of the possibility of a severe drop in house prices in the future. To me, this has far more to do with the point I made at the end of my article, which Chris didn’t dispute—that the change in house prices can no longer be explained by the change in disposable incomes. Instead, it’s rising leverage that explains rising house prices.

This is the issue I’ve always focused upon when arguing that our high house prices are a danger, not a national treasure, and I’m glad to have Chris raising the same alarm. As Chris argues in his blog this week:

“Yet a key insight for punters is that incomes are only half the housing story. If we take the median house price back in 1986 and grow it by disposable incomes per capita over the last 27 years, we can only explain 55 per cent of the increase in prices. But if we add in the impact of variations in mortgage rates – holding the share of incomes committed to repayments constant – we can fully account for all the capital gains registered over that period.

So purchasing power, or the amount you can afford to borrow based on prevailing rates, is a hugely important determinant of current home values. The issue is whether you choose to max out your borrowing capacity based on an unusually sharp cyclical decline in costs.” (“Rate rises will burst home owner bubble”, April 5th 2014)

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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10 Responses to A sudden conversion of property bubble doubts

  1. ken says:

    It’s a funny world, unemployment is rising, rate of foreign investment is declining, prices for our exports are declining and our house prices are rising. Plus last month rents were actually falling. I’ve always thought that while we didn’t have much in subprime mortgages, we have lots of subprime tenants, who scrape each week to get the rent together to pay somebodies negatively geared loan interest.

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  6. amello says:

    Hi Steve, I’m a bit sceptical about some of these figures and how they are calculated. Specifically, I would like to know how private debt and leverage are calculated. Since the GFC, Australians and myself included are lot more cautious with their finances and most people who were over leveraged or living at the border have already sold their properties or took their losses at the stock market (Australia shares took a much bigger losses than in the US and are still much lower than their peak as opposed to the US). Doe these calculations on private debt and leverage take into account the fact that many Australians (myself included) have refinanced their debt and built a shielding buffer in the form of offset accounts, etc? I personally bought a house about a year ago in Brisbane and the price that I paid was still quite lower than 2007 prices. I chose to put a 20% deposit and finance the rest, leaving me with a good cash buffer against economic shocks. I think many Australians have done the same since the GFC. I actually also considered taking a higher LVR loan, just so I could have more cash buffer, but then I decided not too, so my point is that maybe (just maybe) Australians are just managed their finances better and using debt in a smart way, rather than gamble…

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  9. Steve Hummel says:

    Dr. Keen, if you could please read the article below I think that you will see how advanced C. H. Douglas’s thinking was about the endogenous nature of the money system even in the 1920’s, how much his thinking dovetails perfectly with your own research and how his mechanisms of a national dividend and compensated retail discount encompass the entire system so as to make it fully functional…unlike today. Thank you.


  10. Steve Hummel says:

    The Parable of the Flying Astronauts

    Once there was an astronaut called Stability who upon having flown from Sydney to San Francisco remarked: “Ah flight is such a wonderful completely stable experience.” (This despite the fact that air turbulence, an attempted hijacking as well as babies bawling throughout the flight made him throw up, “crap his drawers” and gnash his teeth throughout its length)

    A colleague of the astronaut named Instability flying in the space station then said: “No, no, no Stable, flying is actually a completely unstable state of “controlled falling”….can’t you see that?”

    Then another colleague of the astronauts named Natural Grace who was on the Moon said: “Yes, Stable and Unstable, you’re both right…and that is how I experience it….and you can experience it that way too, even on earth…if you look at all realities”

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