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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 7 210 7 1.910 7 1.810 7 1.710 7 1.610 7 1.510 7 1.410 7 1.310 7 1.210 7 1.110 7 110 6 910 6 810 6 710 6 610 6 510 6 410 6 310 6 210 6 110 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 1.510 6 1.410 6 1.310 6 1.210 30 GDP GDP plus Change in Debt Unemployment +23% +2% • From adding 23% to demand 110 5 910 • To still adding 2% to it 5 810 • We didn’t “de-lever”… 5 6 1.110 US $ billion 6 20 710 5 610 5 510 10 5 410 5 310 5 210 5 110 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