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)

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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.