Read what Steve has written and decide if anyone should buy a property. Ask yourself if the increase in debt is sustainable (doesn’t look like it at the moment) and what will happen to prices if it isn’t. My prediction is someone who buys now will in 10 years time be lucky to get their money back. Bit unpleasant if the mortgage payments are twice what they would be paying in rent.

Thanks very much for your analysis - love your work! Couple of questions:

1. My daughter is contemplating buying a house with her partner. With your arguments in mind I’m inclined to advise them to hold off to see if the prices come down. Now I’m not seeking your financial advice! I’m wondering,though, whether increasing female workforce participation over the last few decades has made couples more able to take on mortgage debt, giving them more money and thus bidding up house prices? If so, house prices might never return to their long-term trend levels after the bursting of the current bubble. Instead, they might return to some higher baseline level (but what?) reflecting contemporary workforce participation levels (ie contemporary borrowing capacity).

2. I’m a boomer who has just retired. The first thing I did with my super lump sum was to pay off my mortgage. I’m just one of a looming demographic bulge of retirees. To what extent is Australia’s excessive private indebtedness likely to be worked off by retirees like me paying off their mortgages, and maybe giving up their credit card habits, so that they can live inside their pensions? [Noting that this wouldn't change your fundamental proposition - lots of ageing boomers getting off debt would still spell decreased aggregate demand which would still spell recession.]

All the best,

Ian

This is very significant, because not only are banks being more cautious (lending less money) customers are also becoming more cautious because money costs more (when price rises, demand contracts).

Really though, all this is at the margin (pun intended). The real problem, I believe is with the international bond and swaps markets. The spreads are still rising, thus making the cost of investment/growth rise dramatically. If this reaches a tipping point. Successful large businesses will not be able to roll their bonds (thus becoming junk bonds). The investors will become more risk averse and successful companies will be forced to liquidate assets to survive. There will be no buyers though, because the bond markets will stop functioning meaning new buyers will not be able to raise capital/debt to complete the purchases.

I read recently that the bail out programs of the US Fed (swapping treasuries for impaired mortgage backed assets) has resulted in the degradation of their balance sheet to the point where the treasuries they hold as collateral for Federal Reserve notes is now down from 95% to 53.7%. The long term average is between 85% and 90%.

The bond holders of the world must be very very nervous. If the world’s assets keep falling in value the bond market will blow up and interest rates will skyrocket. That will be the cliff that ultimately ends the speculative bubble.

Everyone should keep taking steps to get out of debt.

This looked pretty good a month ago as part of a borrowing slowdown story, but now at $22B it seems scarcely credible as part of a turnaround in credit growth. It’s roughly $1,000 per person more debt for the population of Australia. In just ONE MONTH! That’s nominally $4k more debt for my family, assuming the dog didn’t use his credit card.

$12k more debt per capita, if maintained over a year.

How much longer can we keep this up? (I guess that is what this website is all about. And none of us know.)

Concerning the “Change in Debt to Demand” graph, how is interest treated? Is interest considered to be “demand”? It’s now a significant component of personal expenditure, as you have indicated in earlier writings.

Concerning the debt graphs, how wide is the net cast to capture and count debt? I assume all regular financial institutions such as banks + their finance company subsidiaries, building societies and credit unions report to the RBA. What about store-based credit cards? What about “pay day lenders”?

I assume goods on account from merchants to commercial customers and other such invoices are not included, and it is only loans with agreed rates of interest you are counting.

Any other types of debt I’ve missed?

What about HECS?

Thanks very much for your writings. Very nice to have this on the internet.

“Landlords who require an economic return will force prices down and rents up.” dyork, rents may go up in the short term, but long term they are going down. It is an unfortunate fact of life that someone who doesn’t have a job, and there will be many, will find accommodation they can afford, even if that means sleeping in a tent or living with mum. The Great Depression increased the average age of marriage by about 2 years as people couldn’t afford to set up house together.

I would suggest that there is a linkage of growth in money supply (especially credit) with the growth of cheap energy. Money represents claims on energy (and perhaps other scarce resources) consumed in creating stuff. Peak oil and peak North Sea oil may explain much of the US and UK troubles. Australia as a net energy exporter has a favoured position, for a while.

I would also suggest that the decline, when it comes, will not be gentle. Once it is no longer possible to play the Ponzi game of housing appreciation, many will prefer to rent. Landlords who require an economic return will force prices down and rents up. The US and elsewhere show us that a decline in house prices spreads the pain widely, and hurts banks, retailers and many other sectors in the process.

Perhaps it has already started.

I’m very careful to emphasise that my aggregate demand measure (GDP [or more properly GNI--I'll update that shortly] plus the change in demand) represents aggregate spending on both commodities and assets. So a fall in that measure will be absorbed by both commodity markets and asset markets–not just commodity markets in isolation.

Probably more than 50% of the addition to debt financed asset purchases, as you say; but then some of that in turn financed commodity purchases by the recipients, and this especially applies to business borrowing. So the change in debt finances both asset speculation and demand for goods and services.

When that source of demand evaporates, then “something’s gotta give” in both commodity and asset markets. In one sense it would be better if the latter copped it rather than the former; but as we know from the Great Depression, a collapse in asset prices tends to have a cascading effect upon commodity markets too.

It also amplifies the desire to reduce debt: if you hold debt and it finances assets that are rapidly depreciating, then this accelerates the desire to reduce debt–which you do by spending less, thus reducing commodity demand. It is what I christened “Fisher’s Paradox”, after Irving Fisher, the economist who first pointed it out in his “Debt deflation theory of Great Depressions”.

Cheers, Steve