Western Economic Association Presentation: Debt & House Prices

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The USA’s West­ern Eco­nom­ic Asso­ci­a­tion Inter­na­tion­al holds a Pacif­ic Rim con­fer­ence every two years, and this year the host was the Queens­land Uni­ver­si­ty of Tech­nol­o­gy in Bris­bane, Aus­tralia.

I spoke in two ses­sions on what Amer­i­cans call “The Great Reces­sion” and Aus­tralians calls the “GFC”–the Glob­al Finan­cial Cri­sis. The first ses­sion had two oth­er papers of inter­est to read­ers of this blog: a paper on house prices by Jakob Mad­sen, one of the “Beze­mer Twelve” who pre­dict­ed and warned of the impend­ing cri­sis, and anoth­er on the dan­gers inher­ent in Aus­trali­a’s high lev­el of for­eign debt by QUT’s Mark McGov­ern.

This Time Had Better Be Different: House Prices and the Banks Part 2

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Fig­ure 1


In last week’s post I showed that there is a debt-financed, gov­ern­ment-spon­sored bub­ble in Aus­tralian house prices (click here and here for ear­li­er install­ments on the same top­ic). This week I’ll con­sid­er what the burst­ing of this bub­ble could mean for the banks that have financed it.

Betting the House

For two decades after the 1987 Stock Mar­ket Crash, banks have lived by the adage “as safe as hous­es”. Mort­gage lend­ing sur­passed busi­ness blend­ing in 1993, and ever since then it’s been on the up and up. Busi­ness lend­ing actu­al­ly fell dur­ing the 1990s reces­sion, and took off again only in 2006, when the Chi­na boom and the lever­aged-buy­out fren­zy began.

Rally for Research

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The Dis­cov­er­ies Need Dol­lars cam­paign to stop the rumoured cuts to research fund­ing will now have ral­lies in Syd­ney and Ade­laide as well as in Mel­bourne:

MELBOURNE — State Library of Victoria (Swanston St) — Tuesday 12 April @ 12:45–2PM

RSVP via Ral­ly for Research Face­book page (you need to be logged into Face­book to view this page).
Down­load the Mel­bourne ral­ly fly­er

SYDNEY — Belmore Park (Near Central Railway station) — Tuesday 12 April @ 12:45–2PM

RSVP via Ral­ly against NHMRC Bud­get cuts Face­book page (you need to be logged into Face­book to view this page).
Down­load the Syd­ney ral­ly fly­er

Europe trip mid June

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I’m attend­ing the Soci­ety for the Advance­ment of Socio-Eco­nom­ics (SASE) annu­al con­fer­ence in Madrid on June 23–25. Giv­en that I have to fly from Aus­tralia, I’m mak­ing this an extend­ed trip. I will spend 3 days in Lon­don (June 13–15), 3 in Paris (16–18), 3 in Barcelona (19–21) and 4 in Madrid (22–25).

As well as some tourism and meet­ing up with friends like Max Keis­er in Paris, I’m open to giv­ing a talk or three, if there is suf­fi­cient inter­est.

Digging another hole in our future

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There are wide­spread reports that the polit­i­cal fetish with return­ing the Fed­er­al gov­ern­ment to a sur­plus will result in cuts to Aus­trali­a’s research fund­ing bud­get of close to half a bil­lion dol­lars:

Research cuts put lives at risk, say med­ical insti­tutes

Research cuts will cre­ate ‘brain drain’

These cuts are dri­ven by an obses­sion with run­ning a per­ma­nent bud­get sur­plus that is good pol­i­tics but bad eco­nom­ics. For Aus­tralia to con­sid­er achiev­ing this point­less goal by fur­ther under­min­ing its already pathet­ic lev­el of research fund­ing is even more insane.

This Time Had Better Be Different: House Prices and the Banks Part 1

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Before the US house price bub­ble burst, its banks and reg­u­la­tors claimed (a) that there was­n’t a bub­ble and (b) that, if house prices did fall, it would­n’t affect the sol­ven­cy of the banks.

The same claims are now being made about Aus­tralian house prices and Aus­tralian banks. On the for­mer point, Glenn Stevens recent­ly remarked that:

There is quite often quot­ed very high ratios of price to income for Aus­tralia, but I think if you get the broad­est mea­sures coun­try-wide prices and coun­try-wide mea­sure of income, the ratio is about four and half and it has not moved much either way for ten years.

Another Getup idea–direct attack on the FHOS

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Reg­u­lar read­ers of this blog would know that I am a staunch crit­ic of what I pre­fer to call the “First Home Ven­dors Grant”, which is why I quick­ly sup­port­ed the pro­pos­al on GetUp’s sug­ges­tion box for a boy­cott cam­paign by first home buy­ers.

That sug­ges­tion has become a suc­cess in its own right even before Get­Up decides whether to pur­sue it or not, with the cam­paign being report­ed in the Fair­fax media: see Online cam­paign tar­gets high cost of hous­ing. Chris Zap­pone’s arti­cle head­lines The Age and the Syd­ney Morn­ing Her­ald’s home pages, and it had 364 com­ments as of 3.30pm today–a remark­able num­ber for a sin­gle sto­ry in less than six hours.

Getup proposed campaign against negative gearing

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In just a few days, Pros­per Aus­tralia’s pro­pos­al that Get­Up should cam­paign for a First Home Buy­ers Strike has gone from last posi­tion in Getup’s sug­ges­tion box to first. At 7.15AM this morn­ing, it had 3,113 votes–almost 500 ahead of the next-ranked pro­pos­al.

In its essence, this pro­pos­al is aimed at remov­ing gov­ern­ment inter­fer­ence in the prop­er­ty mar­ket which pur­port­ed to improve home own­er­ship, but which in essence has made it worse by feed­ing the prop­er­ty price bub­ble.

GetUp campaign suggestion: First Home Property Buyers Strike

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The cam­paign group Get­Up has a “sug­ges­tion box” in which new cam­paign ideas can be sug­gest­ed, debat­ed, and if they receive suf­fi­cient votes, adopt­ed.

Pros­per Aus­tralia recent­ly sug­gest­ed a First Home Prop­er­ty Buy­ers Strike (click here for the Pros­per Aus­tralia press release), and after a week or so it is the 9th ranked cam­paign idea with 1700 votes.

I just logged on and vot­ed for it, with the fol­low­ing com­ment: