Download Change in Debt

Real House Price Indices
300
Herengracht Canal Real Price Index
400
B E
Australia
USA
Index
Mean 1628-1973 (198)
350
250
Index 1628 = 100
June 1986 = 100
300
200
150
250
200
150
100
100
50
50
1985
1990
1995
2000
Year
2005
2010
2015
0
1600
1650
1700
1750
1800
1850
1900
Year
1950
2000
Separating Spin from Fact on Australian House
Prices
Steve Keen
University of Western Sydney
Debunking Economics
www.debtdeflation.com/blogs
www.debunkingeconomics.com
Dr Doom on House Prices?
• How I am normally seen… Financial Review December 2010
• Some context:
– Rebel economist (since 1972)
– Specialist on “Financial Instability” (since 1987)
– Expert Witness “Predatory Lending” case (in 2005)
Economic context
• Saw this data while preparing case• Normal economist
Australia's Private Debt to GDP Ratio till December 2005
thinking on this?
150
Ratio
140
– “No Problem”
Exponential Fit
130
• Rebel economist?
120
– Crisis coming when
110
100
exponential
90
growth of debt
80
stalls
70
– Have to raise the
60
alarm…
50
40
1975
1980
1985
1990
1995
2000
2005
2010
• Logic behind normal “Neoclassical” economist thinking
– “Debt doesn’t matter”
• Transfer spending power from creditor to debtor
• No “macro” impact
Economic context
• Rebel “Minksian” economist logic: Debt does matter
– Spending = Income plus Change in Debt
– Demand collapses when Change in Debt falls
– Must fall because exponential increase in Debt to
Income (GDP) ratio can’t continue…
• Example: GDP growth 10%, Debt growth 20% (2006)
– GDP $1,000 bn
– Debt $1,250 bn, Change in debt = $250 bn
• Total spending $1,250 bn
• Next Year: GDP same, Debt growth slows to 10% p.a.
– GDP $1,100 bn
– Debt $1,500 bn, Change in debt = $150 bn
• Total spending $1,250 bn—same as year before
• Slowdown in debt growth can cause recession
Economic context
• Slowdown duly arrived globally: the “Great Recession”
Aggregate Demand in the USA
US $ billion
7
210
7
1.910
7
1.810
7
1.710
7
1.610
7
1.510
7
1.410
7
1.310
7
1.210
7
1.110
7
110
6
910
6
810
6
710
6
610
6
510
6
410
6
310
6
210
6
110
0
1965
GDP
GDP plus Change in Debt
Unemployment
• From adding 28% to demand
• To subtracting 14% from it
• Steepest fall ever
Year  2008
+28%
-14%
20
10
1970
1975
1980
1985
1990
1995
2000
2005
2010
0
2015
Economic context
• But not so bad in Australia…
Aggregate Demand in Australia
6
1.510
6
1.410
6
1.310
6
1.210
30
GDP
GDP plus Change in Debt
Unemployment
+23%
+2%
• From adding 23% to demand
110
5
910 • To still adding 2% to it
5
810
• We didn’t “de-lever”…
5
6
1.110
US $ billion
6
20
710
5
610
5
510
10
5
410
5
310
5
210
5
110
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
0
2015
Economic context
• 3 questions
– How bad is private debt today on the “Richter Scale”
– What could entice people into this much debt?
• Debt like having a tooth pulled
– Undesirable for own sake
• To market it, has to have side benefit
– “You look sexy with less teeth…”
– How come Australia didn’t “delever”?
• Answers
– Worst in History (twice Great Depression)
– Speculation on Asset Prices (especially housing)
– “First Home Vendors Boost”
Economic context
• Biggest debt bubbles ever…
Debt to GDP Ratios since 1860
300
275
250
USA
US ex. Financial
Australia
225
200
175
75
50
25
Great
Depression
100
1890s
Depression
125
“GFC” /Great
Recession
150
0
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Economic context
• Biggest asset bubbles ever… especially in housing
American Asset Price Indices
300
275
250
Index 1900=100
225
200
175
Shares
Property
• Keep in mind how big US
housing bubble looks on
this chart…
150
125
100
100
75
50
25
• Borrow to
gamble on
rising asset
prices—a
Ponzi
Scheme
• Fortunately,
Australia
doesn’t have
a housing
bubble, does
it?...
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Case-Shiller & Irrational Exuberance Data
Economic context
• US bubble doesn’t look so big any more…
Real House Price Indices
• But US prices
driven by
Subprime Debt
• Aussie banks
have been more
responsible,
haven’t they?
500
450
USA
Australia
Index 1900=100
400
350
300
250
200
150
100
100
50
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Case-Shiller; Stapledon + ABS
Economic context
• Depends how you define responsible…
Mortgage Debt to GDP
90
80
USA
Australia
• Since 1990, Australian mortgage debt
has risen 3 times faster than US
60
• From 23% below to 13% above US peak
70
50
40
30
20
10
• But Australian houses are
affordable, aren’t they?
• Glenn Stevens says so…
0
197619781980198219841986 198819901992199419961998 200020022004200620082010 2012
Economic context
• Reserve Bank of Australia (RBA) chief Glenn Stevens
says he is not “terribly troubled” about the level of house
prices in Australia.
• Mr Stevens said the ratio of income to house prices in
Australia was “not exceptional by global standards“…
• “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.
• "That is higher than it used to be but it is actually not
exceptional by global standards.” (SMH March 16th 2011)
• Four and a half?...
House Prices to Incomes: “Four and a half?...”
• Median Price to Average disposable income per dwelling
– House Prices:
• ABS House price series (2002-Now)
• ABS House price index to extend back to 1986
• Stapledon long term prices back to 1960
– National Disposable Income
• RBA Table G12 data from 1960
– Population
• ABS 310101 + ABS 32220ds10 for projections
– Housing stock
• ABS 87520037 for flow of housing 1952-2010
• ABS 4012 for housing stock 2003-09
• Average income 28% higher than median income
House Prices to Incomes: “Four and a half?...”
• And the answer is… 8 times household disposable income
Median House Price to Average Disposable Income per Dwelling
8
Sydney
Melbourne
FHOS
7
6
5
4
• Median house 3 times as expensive as 1960s
• 6 times average income
• 8 times median income
3
2
• “has not moved much either way for ten years”
1
– Because government scheme has kept prices up
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
House Prices to Incomes: No change in 10 years?
• Most recent bubble began in 1997
House Price Index to GDP Per Head
160
150
June 1953=100
140
130
120
Index: Peak 150.6, 146 now
Mean 101 (till 1997, Mean = 95)
+ 3 St. Dev.
- 3 St. Dev.
First Home Owners Grant
• Mortgage debt started bubble
• FHOG boosted & sustained it
110
100
90
80
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
The FHOG: Distorting house prices since 1983
Quarterly Change in House Prices after Inflation
Before
After
All Data During
Between Doubled
Mean
0.07%
0.94%
0.47%
2.17%
0.25%
3.10%
Min
-5.53%
-3.73%
-5.53%
-2.26%
-2.26%
-0.92%
Max
3.91%
7.86%
7.86%
7.86%
2.95%
4.93%
Std. Dev.
1.73%
2.17%
1.99%
2.71%
1.26%
1.83%
• No trend in real prices before FHOG; 1% p.q. after it
• How it works:
• Buyer takes FHOG to Bank
• Levers it up via LVR (70% in 60s, 97% now)
• Bids up price by (say) 5 times FHOG
• Vendor takes cash to Bank
• Levers upgrade purchase by (say) another 5 times…
• A double bubble
But what about population growth?
• Dwelling growth exceeded population growth 1975-2006
– Did prices fall?
Population Density Change & Nominal House Price Change
4
House Price Change
Population Per Dwelling Change
Nominal House Price Change
35
3.5
30
3
25
2.5
20
2
15
1.5
10
1
5
1975
5
 10
 15
 20
0.5
1980
1985
1990
1995
2000
2005
2010
2015
 0.5
1
• Correlation trivial (-0.06) & wrong sign  1.5
2
• What about recent immigration surge?
Population per dwelling change
40
What about recent immigration surge?
• Dwelling growth below population growth, & prices rose…
Population Density Change & Nominal House Price Change
20
House Price Change
Population Per Dwelling Change
1.75
15
1.5
12.5
1.25
10
1
7.5
0.75
5
0.5
2.5
2006
 2.5
0.25
2006.5
2007
2007.5
2008
2008.5
2009
2009.5
2010
2010.5
2011
 0.25
5
 0.5
 7.5
 0.75
 10
1
• Correlation significant (-0.56) but wrong sign
– What about “underlying demand”?
Corr X1 X2   0.562
Population per dwelling change
Nominal House Price Change
17.5
2
“No bubble” - “Underlying demand”?
• Price rise explained by shortage of housing relative to projected
demand?
– ‘ . . . the Council estimated a gap of around 85,000 dwellings
between underlying demand for and supply of housing at 30
June 2008. The Council developed a methodology for
measuring the gap based on selected measures of
homelessness… The measures used in the 2008 report were:
• 2008 gap size = additional private rental dwellings required
in 2008 to increase the number of vacant private rental
dwellings to 3 per cent of the total private rental stock
• + dwellings required to accommodate people who are
homeless and sleeping rough or staying with friends and
relatives
• + dwellings required to house marginal residents of
caravan parks.’
National Housing Supply Council 2010, pages 65-66
“No bubble” - “Underlying demand”?
• Price rise explained by shortage
of housing relative to projected
demand?
– “Gap between underlying
demand & supply” might
explain need for housing
– But doesn’t explain monetary
demand for it
• Homeless people driving up
house prices?
• If you think he’s driving up
house prices, I have a bridge
• Illicit use of measure of need as
I’d like to sell you…
basis for demand
Real driver of house-price bubble? Mortgages
Lending: New loans from 5% of GDP to 25% in 2000s
• 0.51 correlation between new lending & change in prices
– 0.53 correlation when rising trend accounted for
New Lending and Change in Nominal House Prices
30
25
New Lending % GDP
Annual Change in Price
Quarterly Change
Percent p.a.
20
15
10
5
1990
1992
1994
1996
1998
2000
2002
5
 10
Year
2004
2006
2008
2010
2012
Real driver of house-price bubble? Mortgages
• Number of buyers rose with rising debt:
New Home Loans Number as Percent of Population
Percent of population with new loan
0.4
Percent
Average 75-90
Average 90-10
0.3
0.2
0.1
1975
1980
1985
1990
1995
Year
2000
2005
2010
2015
Real driver of house-price bubble? Mortgages
• House prices follow mortgage debt
CPI-deflated Mortgage Debt and House Prices
40
Mortgage debt
Real house prices
Percent change p.a.
30
20
10
1975
1980
1985
1990
1995
 10
Year
2000
2005
2010
2015
Real driver of house-price bubble? Mortgages
• Lead is about 9 months
Change in Real Mortgages & House Prices
0.5
Correlation coefficient
0.4
0.3
0.2
0.1
 12  10
8
6
4
2
0
2
 0.1
Lag in months
4
6
8
10
12
Real driver of house-price bubble? Mortgages
• Rise in debt far greater than rise in prices
Nominal Price and Debt per Dwelling
6000
5500
Price
Debt
• House prices up 15 times since mid-1970s
4500
• Debt per house up 55 times
4000
• Divergence began in 1990
3500
• When mortgage debt to GDP began to grow
Index July 1976 = 100
5000
3000
2500
2000
1500
1000
500
0
1975
1980
1985
1990
1995
Year
2000
2005
2010
2015
What goes up must come down?
Longest time series shows no trend to real house prices
Herengracht Canal Real Price Index
400
Index
Mean 1628-1973 (198)
350
 Herengracht Canal
Amsterdam price data
1628-1973
Index 1628 = 100
300
 Long periods of rising
or falling real prices
250
200
 But no trend over 350
years
150
100
50
0
1600
1650
1700
1750
1800
1850
1900
1950
Year
Source: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=598
2000
 Implies real house
prices roughly constant
 Deviations reflect
bubbles/collapses
rather than
sustained trends
What goes up must come down?
• Prices already falling (SMH Today, Residex Figures):
Houses
Median
Month of February February Quarter February Year
ACT
$537,500
1.27%
-0.68%
7.24%
Adelaide $408,000
-0.48%
-0.46%
2.05%
Brisbane
$450,500
-0.34%
-1.29%
-3.86%
Darwin
$514,500
-0.66%
-0.98%
2.62%
Hobart
$385,500
1.48%
-2.29%
6.30%
Melbourne $598,000
0.80%
-0.19%
9.24%
Perth
$480,000
-0.11%
-2.17%
-0.26%
Sydney
$674,000
0.35%
-0.23%
6.32%
Australia $443,000
0.92%
-1.30%
4.27%
• Trigger? Same as for rises—change in mortgage debt
• Indicator: The “Credit Impulse” (Biggs, Mayer, Pick)
– Since aggregate demand = income + change in debt
– Change in aggregate demand = change in income +
acceleration of debt
• Credit Impulse = (Change in Change in Debt) / GDP
Credit Impulse & Unemployment
• Major driver of economy ignored by neoclassical economics
Credit Impulse & Change in Unemployment
• Negative for 40 months in 1990s recession
 40
5
Credit Impulse
 80
00
0
5
40
 10
80
• Only negative for 26 months in GFC
 15
120
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Change in Unemployment
10
Future Prospects?
• Economy:
– Business credit impulse positive but petering out
• China boom big positive…
Quarterly Private Credit Impulse by Sector
Private Credit Impulse
10
10
5
Household Business
Debt
Debt
On Upside On Upside
0
Business
Mortgage
Personal
Household
Debt
On Upside
0
Business
Debt
On Upside
5
 10
 10
Yearly
Quarterly
2007
2007.5
2008
2008.5
2009
2009.5
2010
2010.5
2011
2011.5
 15
2007
2007.5
• Housing Market:
– Credit Impulse turning negative
– Sharply so in latest data
2008
2008.5
2009
2009.5
2010
2010.5
2011
2011.5
Future Prospects?
• Mortgage Credit Impulse driving prices down
Credit Impulse from Mortgages by Quarter
2
1
0
1
• Lending Finance data yesterday (ABS 5671)
implies sharp falls in near future:
2
• Owner occupied housing -4.6% on month
• Personal -9.5%, Commercial -5.8%
3
2007
2008
2009
2010
Impulse
FHOG
2011
Future Prospects?
• Deleveraging reversed by FHOG now returning
90
89
88
87
86
85
84
83
82
81
80
79
78
77
76
75
74
73
72
71
70
FHVB
Actual
Trend before FHVB
Peak
8.2% GDP=$100bn
Percent of GDP
Mortgage debt to GDP
• FHVB’s $100bn boost to
economy now over
• Sixth trick unlikely…
5
5.5
6
6.5
7
7.5
8
8.5
9
Years since 2000
9.5
10
10.5
11
11.5
Future Prospects?
• Falling debt likely future scenario, as in USA
Debt to GDP by Sector
90
80
70
Mortgage
Business
Personal
Government
60
50
40
• Falling demand for mortgages
• And therefore falling house prices
30
20
10
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012