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.

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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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  • ken

    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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  • amello

    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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  • Steve Hum­mel

    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.


  • Steve Hum­mel

    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”