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I appreciate Arek Drozda’s very thoughtful piece in yesterday’s Property Observer (“<a href="https://www.propertyobserver.com.au/trends/revisting-steve-keens-40-property-price-fall-prediction/2014021667812/Page-1" target="_blank">Revisiting Steve Keen’s 40% property price fall prediction</a>”), and this note is intended to clarify some hazy issues.
My 40% claim indeed has become part of the folklore, and as with folklore, the tale is very different to the original event. Arek is quite correct that it was not a prediction, but an analogy to overseas trends, in response to an unscripted question (from memory in a 7.30 Report interview) about what my economic predictions meant for Australian house prices. It was also based on Japan, not the USA, since at the time the USA bubble hadn’t burst. I commented that house prices in Japan had fallen about 40% in the 10-15 years since their bubble economy burst, and I “saw no reason why Australia would avoid the same fate”.
Arek comments that at the time he treated this call “with a fair dose of scepticism since I could not find corroborating evidence for such a substantial fall in prices using indicators from my own analytical toolkit”.
In fact, it appears that I understated Japan’s experience (and by sheer chance picked the level that USA prices would fall by). The <a href="https://www.bis.org" target="_blank">Bank of International Settlements</a> — the only formal body to warn of the crisis before it happened— recently released <a href="https://www.bis.org/statistics/pp.htm" target="_blank">a data series on house prices across the world</a>. Using that data for Japan, Shiller’s data for the USA, and the ABS’s data for Australia gives the picture shown below in Figure 1. Japanese house prices actually fell almost 60% in the 15 years after their peak in 1988, while US prices fell 40% in six years (before the rebound began in 2012).
Figure 1: House prices after financial bubbles burst
 <img src="/images/stories/2014/02/18/keen-feb-18-one.gif" width="470" height="411" alt="keen-feb-18-one">
However at the time of my answer to a “question without notice”, I hadn’t done any serious analysis of house prices; my focus was on the level and rate of growth of private debt and its implications for the macroeconomy—and on that analysis, in contrast to the vast majority of economists, I believed that a serious crisis was imminent (and that would affect asset prices as well as the real economy).
Mainstream economists ignored private debt on the argument that “one person’s debt is another person’s asset” (Paul Krugman 2012, End this Depression NOW!, p. 43), so neither banks nor debt (nor money!) existed in mainstream models. In contrast, private debt played an integral role in <a href="https://www.debtdeflation.com/blogs/wp-content/uploads/papers/Keen1995FinanceEconomicBreakdown_JPKE_OCRed.pdf" target="_blank">my non-orthodox “Minsky model” of the economy</a>. In December 2005, when I saw the trends in private debt in Australia and the USA (see Figure 2 below), I went public with the warning that a serious debt-induced economic crisis was inevitable in the near future:
At some point, the debt to GDP ratio must stabilise–and on past trends, it won’t stop simply at stabilising. When that inevitable reversal of the unsustainable occurs, we will have a recession (see “<a href="https://www.debtdeflation.com/blogs/2007/04/30/debtwatch-may-2005-booming-on-borrowed-money/">Debtwatch May 2007: Booming on Borrowed Money</a>”).
Figure 2: Private debt trends and my warnings of a crisis when they reversed
 <img src="/images/stories/2014/02/18/keen-feb-18-two.gif" width="470" height="402" alt="keen-feb-18-two">
The crisis that I expected duly arrived in 2008, when the rate of growth of private debt began to fall (see Figure 3 below). As Arek points out, my measure of aggregate demand includes the contribution from the change in debt (<a href="https://www.debtdeflation.com/blogs/2014/02/02/modeling-financial-instability/">an argument I’ve since proven here</a>), so my analysis implied that simply a slowdown in the rate of growth of debt can cause a crisis.
Bear in mind that at the same time, mainstream economic advisors like the OECD were telling governments that “<a href="https://www.oecd-ilibrary.org/economics/oecd-economic-outlook-volume-2007-issue-1/achieving-further-rebalancing_eco_outlook-v2007-1-2-en;jsessionid=l84e3jqj65oa.delta" target="_blank">the current economic situation is in many ways better than what we have experienced in years</a>”.
Figure 3: The rate of change of debt and the onset of the crisis
 <img src="/images/stories/2014/02/18/keen-feb-18-three.gif" width="470" height="336" alt="keen-feb-18-three">
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Arek also muses about whether the Credit Accelerator was behind my house price call in 2008. It wasn’t, because I hadn’t developed it then—and I didn’t do so until after Biggs, Mayer and Pick developed what they called the “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1595980" target="_blank">Credit Impulse</a>”, using related but different logic.
The concept itself was an obvious extrapolation from my thinking on aggregate demand: if aggregate demand included the change in debt, then the change in aggregate demand included the acceleration of debt. I simply didn’t develop the idea, because I doubted that economic data would be reliable enough to reveal it, since it would involve comparing a second differential—the rate of change of the rate of change of debt—to first differentials, like the rate of change of house prices.
It turns out that I was wrong: Biggs et al showed that the effect turned up strongly in economic data. I then turned it to asset price data as well—with the approximation that I compared the rate of change of the rate of change of mortgage debt over a year to price change over the year.
As Arek notes, the correlation of the acceleration of mortgage debt with house price change is quite strong: it’s 0.68 in Figure 4, 0.88 since 2010, and 0.63 since 1993 (there was a break in the RBA data in 1991 that stuffs up calculations prior to then).
Figure 4: Stepping on the pedal--mortgage acceleration drives house price changes
<img src="/images/stories/2014/02/18/keen-feb-18-four.gif" width="470" height="320" alt="keen-feb-18-four">
As you can see, the mortgage accelerator indicator was predicting a turning point in house prices from the beginning of 2012. I didn’t make such a call then, partly because I didn’t completely trust my own indicator—which I had only started to develop one year earlier.
But another substantial reason was, in a word, revulsion. I am first and foremost an economist — and a rebel one at that — and I had hoped the world would learn from this crisis that we can’t base our collective economic welfare on borrowing money to buy second-hand houses from each other. But as Figure 5 and Figure 6 indicate (both below), we’re doing precisely that again: mortgage debt is on the rise once more (and it never fell in Australia, with the First Home Vendors Boost being a major reason that it didn’t do so), and this is driving house prices up again in the USA and Australia.
Figure 5: Mortgage debt on the rise again
<img src="/images/stories/2014/02/18/keen-feb-18-five.gif" width="470" height="335" alt="keen-feb-18-five">
I share <a href="https://www.businessspectator.com.au/article/2014/2/14/european-crisis/hair-dog-risks-bigger-british-hangover" target="_blank">Martin Wolf’s lament</a> about this. One might hope we would learn from our mistakes, but instead we seem to be in a rush to repeat them:
"The credit machine is indeed beginning to work, once again … But we have seen this play before. It ended as a tragedy…  Now, in the UK, people are celebrating the restarting of the very process that ended in this huge disaster."
As for how long the bubble can go on in Australia, we now have two additional factors that are driving prices over and above the impact of accelerating mortgage debt. These are the absence of any controls on non-residential purchases of new properties — as if housing is an export rather than, primarily, a consumption item for Australian residents — and the insane decision in 2007 to let self-managed superannuation funds take levered positions on housing and call it saving for their retirement.
Figure 6: Australian vs US mortgage debt; indebted DownUnder
<img src="/images/stories/2014/02/18/keen-feb-18-six.gif" width="470" height="402" alt="keen-feb-18-six">
The ride to the top may therefore last longer than the Credit Accelerator might imply (though SMSF mortgages should turn up in the data, much of non-resident buying won’t), and property speculators may well enjoy the ride, as Arek observes.
But to my macroeconomist’s eye, it will be a tragedy for the commons if all we will have to show for this decade is deeper mining holes, more expensive houses, a hollowed-out manufacturing sector, and an even more indebted society.
Steve Keen is the author of 'Debunking Economics', the blog <a target="_blank" href="https://www.debtdeflation.com/blogs/">Debtwatch</a> and developer of the <a target="_blank" href="https://www.debtdeflation.com/blogs/minsky/">Minsky software program</a>.
 
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stevekeen-hGRrVP8sYD

Clarifying my 40% price drop call and the factors still driving housing prices up

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Who says Twitter is just fluff? Well, I did before Max Keiser and Stacy Herbert persuaded me to sign up. I’ve since realised that it’s rather like a modern version of the old-fashioned news wire services for the public. Choose who to follow, and they’ll keep you updated on things that interest you. If that happens to be Kylie’s waistline or Kurt’s fidelity, that’s your problem, not Twitter’s. One tweet that I received told me something that didn’t seem right from my own data: that CPI-deflated US house prices were now within reach of their long-term average (i.e. 1890 till now). From my figures – which I had cobbled together from Robert Shiller’s first edition “Irrational Exuberance” data supplemented by the S&amp;P Case-Shiller Index, adjusted for inflation – prices had fallen a lot, but still had a long way to go. So I went back to Robert Shiller’s home page, checked his updated data, and sure enough real US house prices were now “only” 15% over their long-term average. Though this certainly doesn’t mean that house price falls in the US are almost over – having overshot by so much, there is every prospect of them going well below the long term average before they stop falling, especially given the unprecedented mortgage debt from which households are still deleveraging. But it means the day that real US house prices stop falling is closer than I thought before Twitter alerted me to this problem with my data. The chart below shows the difference between my old series and the new one – which is taken without modification from Robert Shiller’s data page. Figure 1: Shiller USA Real House Price Data

<img src="/images/stories/2012/05/keenmay313.gif">
The revision has intriguing consequences for the Australian market. My Australian data comes from cobbling together Nigel Stapledon’s PhD research into long term real house prices from the late 1800s to the ABS data which began in 1986 – and it too is hardly data of the standard that the physical sciences expect. But that said, the Australian house price bubble appears even more extreme: three times the long-term average, versus “only” twice the long-term average when Alan Greenspan told Congress that there was no bubble in US house prices. And of course, the dominant view in Australia is that there is no house price bubble here. Yeah, right. Figure 2: Long term real house prices
<img src="/images/stories/2012/05/keenmay311.gif">
Even when you consider just the very brief time series that the ABS has assembled, Australia’s bubble dwarfs the American one. Real house prices peaked at 2.6 times the level of 1986, whereas the US market peaked at 1.7 times the 1986 level.
Figure 3: Real House Price Indices from 1986-Now
<img width="470" src="/images/stories/2012/05/keenmay312.gif">
 
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Though US house prices have now returned to their 1986 level, mortgage debt has not. All the froth pumped into the market by 30 years of rising mortgage debt has now gone, but the level of mortgage debt is far higher.
Figure 4: Mortgage debt levels
<img width="470" src="/images/stories/2012/05/keenmay314.gif">
This is why house prices could fall a lot further in the US – even though they’re now a relative hair’s breadth from the long term average. As I’ve argued regularly here, the real driver of change in asset prices is the acceleration of debt. I won’t go into the details here – I’m rushing to get this post up before I am on a panel today at the Australian Property Council’s annual gabfest – but I’ll let the next two charts speak for themselves. 
Figure 5: Correlation of mortgage acceleration and house price changes, US
<img width="470" src="/images/stories/2012/05/keenmay315.gif">
Figure 6: Correlation of mortgage acceleration and house price changes, Australia
<img width="470" src="/images/stories/2012/05/keenmay316.gif">
Finally, the chart I published some weeks back comparing house price falls from the peaks in the US, Japan and Australia used the old data, and made Australia’s rate of decline from its June 2010 peak appear comparable to the slow pace of Japanese decline. This revised data indicates that our rate of price fall is more comparable to the US pattern.
Figure 7: House price falls from peak – the early years
<img src="/images/stories/2012/05/keenmay318.gif">
How far could Australian house prices go down? Given what has happened to US and Japanese prices, the simplest answer is “a lot more than most of the people in the audience here seem to expect”.
Figure 8: House price falls from peak – the middle years
<img src="/images/stories/2012/05/keenmay317.gif">
Figure 9: House price falls from peak–the long term
<img src="/images/stories/2012/05/keenmay319.gif">
Steve Keen is a professor of economics and finance at the University of Western Sydney and author of Debunking Economics and the blog <a href="https://www.debtdeflation.com/" target="_blank">Debtwatch</a>.
This article originally appeared on <a target="_blank" href="https://www.businessspectator.com.au/">Business Spectator</a>.
 
 
 
 
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As the Australian housing bubble bursts, prices could fall a lot further than people expect: Steve Keen

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There are several providers of statistics on Australian house prices, but only one that doesn’t have a vested interest in the direction house prices actually move in: the <a target="_blank" href="https://abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6416.0Main+Features1Mar%202012?OpenDocument">Australian Bureau of Statistics</a>. So despite the criticisms of this series – that it’s based on detached dwellings only, based on median sales data, too infrequent, not adjusted for “hedonic” differences between houses, etc, it’s the only one I trust.
Chris Vedelago wrote a very nice piece about how confusing the various commercial house price statistics are: "The Real Estate Institute of Victoria said the city’s median house price rose 0.9% in the March quarter. Except that, according to RP Data-Rismark, it fell 1%.Australian Property Monitors, which is owned by Fairfax, believes prices rose 1.6% in the three-month period. Residex, on the other hand, estimates values fell 1.9%… (“Confused about the market? We all are“, The Age,April 29) I’m happy to ignore these numbers – and even more so the spin doctoring that goes with them. The ABS numbers are in, and they show a 1.1% national fall over the March quarter. Sydney house prices fell 1.8% according to the ABS, whereas Australian Property Monitor alleged they rose 1.4% – the latter being the basis for Andrew Wilson’s latest piece “<a target="_blank" href="https://smh.domain.com.au/real-estate-news/confidence-rises-as-prices-bounce-back-20120427-1xokf">Confidence rises as prices bounce back</a>” (The Sydney Morning Herald, April 28). Yeah, right. Australian house prices have now fallen 6.1% from their peak, and have been falling for 21 months, which is the longest downturn in nominal prices ever recorded by the ABS – the previous longest being the 12 months from the beginning of the GFC (which was terminated by my favourite government policy of all time, the First Home Vendors Boost). Figure 1: Nominal house prices have fallen 6.1% since June 2010
<img src="/images/stories/keenmay21.gif">
I’m sure the usual spruikers will come out with why this is now the bottom, and it’s a good time to buy, and there wasn’t an Australian house price bubble, and the shortage will drive up prices, and…  So let’s put the current data in the context of the bursting of acknowledged overseas house price bubbles. Firstly the inflation adjusted data: in real terms, house prices have now fallen 10% from their June 2010 peak, and are back to a level they first reached in late 2007. Figure 2: Real house prices have fallen 10% since June 2010
<img src="/images/stories/keenmay22.gif">
Now let’s compare the Australian experience to date with the Japanese and US experiences – where no one, not even <a target="_blank" href="https://www.federalreserve.gov/boarddocs/testimony/2005/200506092/default.htm">Alan Greenspan</a>, denies that there was a housing bubble.  The Japanese bubble peaked in June 1991; the US bubble peaked in May 2006; and Australian house prices peaked in June 2010. Figure 3 shows the three declines from the peak, and while the Australian experience so far is clearly better than the US’s, it’s only a whisker better than the Japanese experience to the same date after the peak. Figure 3: Comparing Japanese, US and Australian house prices from their peaks
<img src="/images/stories/keenmay23.gif">
Anyone who takes comfort from that should also consider the longer-term perspective – see figure 4. Figure 4: The long-term picture for Japan and the USA
<img src="/images/stories/keenmay24.gif">
The motive force behind Australia’s bubble was the same as in the US and Japan: accelerating debt drove rising house prices during the boom. Now in both those countries, decelerating debt is driving house prices down. The same pattern applies in Australia – see figure 5. Figure 5: Mortgage acceleration drives change in house prices
<img src="/images/stories/keenmay25.gif">
Don’t take heart from the uptick in acceleration at the end of the series there: for that to be sustained into the future, ultimately Australian mortgage debt would need to start rising (compared to GDP). But mortgage debt grew more rapidly here and reached a higher peak than in the US (see figure 6); the odds that it will rise again are slim. Figure 6: Australian mortgage debt exceeded the US’s
<img src="/images/stories/keenmay26.gif">
And even though the actual level of mortgage debt is still rising, it’s doing so at the slowest rate ever recorded by the RBA (see figure 7). Figure 7: Annual growth in mortgage debt (with series break in 1991)
<img src="/images/stories/keenmay27.gif">
The odds are that the rate of decline will accelerate in the next year – since as Leith van Onselen pointed out <a target="_blank" href="https://www.macrobusiness.com.au/2012/04/tax-stats-unmask-negative-gearing/">yesterday</a>, many baby boomers are relying on rising house prices to secure their retirements. Now that house prices are falling, and have been doing so for almost two years, many of these boomers – 74% of whom earn less than $80,000 a year, with the average investor losing over $9000 a year on these “investments” – could decide to get out rather than continue to absorb losses. The unwinding of their leveraged positions could push mortgage growth below zero, and of course accelerate the house price fall. Steve Keen is a professor of economics and finance at the University of Western Sydney and author of Debunking Economics and the blog <a target="_blank" href="https://www.debtdeflation.com/">Debtwatch</a>.
This article originally appeared on <a href="https://www.businessspectator.com.au/" target="_blank">Business Spectator</a>.
 
 
 
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ABS figures show Australia's housing price bubble is bursting: Steve Keen

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The RBA’s decision to not reduce rates this month caught most pundits by surprise, including me. Given the international and local data, I thought the board would err on the side of caution and cut rates.
As I always note when asked to call what the RBA will do next, this is a call on how another body will respond to what it perceives as the economic data and the direction its model of the economy predicts the actual economy will move in. That’s closer to picking which cockroach is going to walk out of a circle first in a Changi prison gambling den than it is to economic forecasting per se (which is dubious enough activity in itself). So making a wrong guess about what the RBA will do is not the same as making a wrong economic forecast; you’re just making a different forecast of the future than is the RBA.
The RBA’s <a href="https://www.rba.gov.au/media-releases/2012/mr-12-02" target="_blank">explanation </a>for its decision shows that it is making a rosy call of both the current data and the direction in which the Australian economy is headed:
"Information on the Australian economy continues to suggest growth close to trend… the unemployment rate increased slightly in mid year, though it has been steady over recent months… In underlying terms, inflation is around 2.5%… the Bank expects inflation to be in the 2-3% range.
"Credit growth remains modest, though there has been a slight increase in demand for credit by businesses. Housing prices showed some sign of stabilising at the end of 2011, after having declined for most of the year. The exchange rate has risen further, even though the terms of trade have started to decline… With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment."
As <a href="https://www.smh.com.au/opinion/editorial/sky-probably-not-falling-in-rba-20120208-1rewj" target="_blank">The Sydney Morning Herald</a> editorialised, the RBA message was that the future looks good:
"Move right along folks. Nothing to see here. By keeping interest rates on hold this week, the Reserve Bank is sending a subconscious message to borrowers: the economy is doing reasonably well. There is no need to panic…
"Although we in NSW seem bogged Eeyore-like in our sad and dank little corner of the forest, glumly chewing our thistles day after day, perhaps we really ought to cheer up. Gloom is not just miserable in itself. When it comes to the economy, it’s dangerous."
This is not the take that the majority of economic pundits have on the data – and for once, I’m with the majority. Normally the majority is bullish (because they have a neoclassical perspective on the economy that largely ignores credit, and thinks the economy always returns to equilibrium) and I’m bearish (because I have a “post Keynesian” perspective that sees credit as the key motive economic force, and believes the economy is always in disequilibrium).
The majority of economic pundits lined up with me for a change because there was a range of data that implied the economy was stalling. Firstly, unemployment has been trending up, and the “steady over recent months” phenomenon that the RBA referred to above was entirely due to a fall in the participation rate. Had this remained at the November level, the ABS unemployment rate would have jumped to 5.6% last month.
<img src="/images/stories/keenfeb171.gif">
And that’s the good news: as was widely reported, employment fell by almost 30,000 last month, so that net job growth in 2011 was zero – the <a target="_blank" href="https://www.theaustralian.com.au/business/economics/zero-jobs-growth-worst-in-20-years/story-e6frg926-1226248875725">worst</a> outcome in 20 years.
Secondly, a broader measure of unemployment maintained by Roy Morgan Research hit 10.3% – 5% above the ABS figure. The ABS treats someone who has worked for one hour in the previous two weeks as employed, a definition that Roy Morgan rightly <a target="_blank" href="https://www.roymorgan.com/news/polls/2002/3490/">rejects</a>:
“Surely if someone is not working, is looking for work and considers themselves to be unemployed, then they should be considered unemployed regardless of whether they happen to have done a couple of hours work here and there during the month?”
The ludicrous official definition of unemployment is a classic case of bureaucracies (including the <a target="_blank" href="https://www.ilo.org/global/lang--en/index.htm">United Nations International Labor Organization</a> in this case) eliminating a problem by redefining it rather than solving it. Many people have criticised this definition (including <a target="_blank" href="https://www.henrythornton.com/article.asp?article_id=4182">Peter Brain</a> from the<a target="_blank" href="https://www.nieir.com.au/">National Institute for Economic and Industry Research</a>, who found that over a dozen official redefinitions of unemployment had all reduced the recorded level); since the <a target="_blank" href="https://www.roymorgan.com/resources/pdf/papers/20030801/AGE%20-%20Is%20unemployment%20at%2010%20per%20cent.pdf">late 1990s</a>, Roy Morgan has gone one better and conducted a monthly <a target="_blank" href="https://www.roymorgan.com/news/polls/2001/3452/">survey</a> using a definition of unemployment that actually makes sense:
”According to the ABS definition, a person who has worked for one hour or more for payment or someone who has worked without pay in a family business, is considered employed regardless of whether they consider themselves employed or not.
"The ABS definition also details that if a respondent is not actively looking for work (ie: applying for work, answering job advertisements, being registered with Centrelink or tendering for work), they are not considered to be unemployed.
"The Roy Morgan survey, in contrast, defines any respondent who is not employed full or part-time and who is looking for paid employment as being unemployed.”
Roy Morgan’s definition therefore necessarily records a higher level of unemployment than the ABS – and they are also a more legitimate measure of real unemployment. However their results are also more volatile, since their sample is smaller than the ABS’s, and the results are not seasonally adjusted.
<img src="/images/stories/keenfeb172.gif">
Overall however, Roy Morgan’s figures are a more accurate indicator of the level of unemployment than the ABS’s, and also as a harbinger of where the ABS data may move in the future. The current gap between the two measures is the highest it has ever been – over 5 per cent, when the average gap has been about 2.5 per cent – and this implies that the next move in the ABS figures could be substantially upwards. Gary Morgan <a href="https://www.roymorgan.com/news/polls/2012/4742/" target="_blank">warned</a> prior to the RBA's meeting that the economy is a lot weaker than the central bank seems to think:
“Today’s Roy Morgan unemployment estimates strongly support anecdotal evidence of continuing job losses throughout Australia. Just in the past week we have been told that Westpac has announced 550 jobs to go; ANZ is axing 130 jobs; Holden will cut 200 jobs at its Adelaide plant; Toyota will cut 350 jobs in Melbourne; Reckitt Benckiser (maker of Mortein &amp; Dettol) is to retrench 200 jobs at its Sydney operations; defence firm Thales shedding 50 jobs in Bendigo – these are just the most prominent examples of job losses occurring in the Australian economy!
“Economists and politicians are wrong to talk about a ‘tight’ labour market in Australia driving wage pressures. Wage demands (inflation) at the moment are being driven by unions – a small minority of the Australian workforce – not by a tight labour market with workers changing jobs to secure better wages and conditions. Today’s Roy Morgan employment estimates show why inflation in Australia is contained, and will remain contained – at its meeting next Tuesday the RBA must drop interest rates by at least 0.5% and probably more.”
<img src="/images/stories/keenfeb173.gif">
If Gary Morgan is right, the RBA’s rosy forecast for the future will be shown to be in error. The primary source of that error will be not merely misplaced optimism, but reliance upon neoclassical economic models about the economy that ignore the role of credit just at the moment that decelerating credit is finally setting in in earnest in Australia, after being delayed by the first-home vendor’s boost.
<img src="/images/stories/keenfeb174.gif">
The first-home vendor’s boost was the sole cause of the reversal of deleveraging in Australia after the crisis began, with the growth in mortgages more than offsetting the reduction in debt by the business sector.
<img src="/images/stories/keenfeb175.gif">
With that artificial stimulus to credit growth over, credit growth is now decelerating in Australia, and causing unemployment to rise despite the offsetting impact of the resources boom.
<img src="/images/stories/keenfeb176.gif">
 
Mortgage debt is now decelerating strongly, and taking house prices down with it.
<img src="/images/stories/keenfeb177.gif">
From its comment that “Housing prices showed some sign of stabilising at the end of 2011?, the RBA appears to be buying the RPData spin that a one month upwards blip in their data series after 11 months of decline signals a bottom to the housing market. However a simple comparison of house prices here to those in Japan and the US after their bubble economies burst makes it hard to argue that “Australia is different”.
<img src="/images/stories/keenfeb178.gif">
Of course, at this stage it is too early to tell whether we’ll follow the long slow decline of Japanese prices, or the sudden fall that marked the US. But by the end of 2012, Australia’s house price decline profile should be apparent.
<img src="/images/stories/keenfeb179.gif">
Steve Keen is Associate Professor of Economics and Finance at the University of Western Sydney and author of <a target="_blank" href="https://debunkingeconomics.com/">Debunking Economics</a> and the blog <a style="text-decoration: none; color: #287bce; background-color: transparent; margin-top: 3px; margin-right: 0px; margin-bottom: 3px; margin-left: 0px; background-image: initial; background-attachment: initial; background-origin: initial; background-clip: initial; line-height: 14px; padding: 0px;" target="_blank" class="=article" href="https://www.debtdeflation.com/blogs/">Debtwatch</a>.
This article originally appeared on <a href="https://www.businessspectator.com.au/" target="_blank">Business Spectator.</a>
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The RBA is overly optimistic: Steve Keen

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The <a href="https://www.propertyobserver.com.au/residential/capital-city-house-price-slide-slows-in-december-quarter-with-melbourne-worst-performer-abs/2012020153211">ABS house price data for December 2011</a> has just been released, and it shows that house prices fell 4.8% in nominal terms between December 2010 and December 2011. The <a target="_blank" href="https://smh.domain.com.au/real-estate-news/house-prices-may-have-bottomed-out-20120131-1qqs0">usual suspects</a> are already trying to see this as marking the bottom, while “<a target="_blank" href="https://www.smh.com.au/business/property/record-slump-in-house-prices-in-2011-20120201-1qsid">just the facts, ma’am</a>” reporting simply emphasises the scale of the downturn. A couple of media outlets have asked my views on the next calendar year, so here they are – along with some historical perspective on the house price bubble.
Figure 1 deflates the ABS series by the CPI and sets the real price index at 100 in mid-1986, when the ABS Data began. The peak was 261 (which means that real house prices were 2.6 times as high in 2010 as they were in 1986), the December 2011 value was 237, a fall of 9.3%. That’s in the ballpark of the figure I anticipated at the beginning of 2011 for the fall from the peak; over the calendar year of 2011, real house prices fell 7.7% (from 256 to 237), which is still in the range of 10% (see Figure 1; the vertical blue lines on this chart mark the beginning of four or five incarnations of the first-home owner’s scheme [its introduction was under Hawke in 1983; its last spin was the doubling and trebling of it by Rudd in 2008-10]).
<img src="/images/stories/keenfeb31.gif">
I expect this rate of decline to keep up for 2012, so I’d expect prices to be of up to 10% lower than they are now by the end of 2012, in inflation-adjusted terms.
The force driving prices down is the same one that drove them up. Houses are overwhelmingly bought with borrowed money, so keeping house prices where they are requires a constant supply of new mortgages at the same level (relative to GDP per household) as now; rising house prices require new mortgages to be growing compared with income; and house prices fall if mortgages grow more slowly than income. That we’re now in a period of mortgage debt falling relative to income is finally obvious; only the first-home vendor’s boost delayed this happening.
<img src="/images/stories/keenfeb32.gif">
The key indicator of the direction in which house prices are likely to move is the Mortgage Accelerator, which is the change in the change in mortgage debt (scaled by GDP). The logic is that since the rate of change of mortgages determines the demand for houses – and hence the price level – the acceleration of mortgages determines the change in the demand for housing – and hence the change in the price level.
Mortgage debt is now decelerating almost as much as it was before the introduction of the first-home vendor’s boost – the rate of acceleration is now about minus 1.5% of GDP, versus -2% before the Rudd government meddled with house prices in its attempt to sidestep the GFC. The annual rate of decline of house prices is also of much the same rate as it was before that intervention: they are now falling at a rate of about 8% per annum in real terms. So a fall of that magnitude – somewhere between 6% and 10% over 2012 – is quite likely.
<img src="/images/stories/keenfeb33.gif">
The government might well attempt to intervene again as it has in the past, but I don’t think it will, and I doubt that intervention would work anyway.
The 2008 squeeze of the first-home vendor’s sauce bottle was very successful, which makes another squeeze much less likely to work: potential buyers from 2011 and beyond were already dragged forward into 2009-10 by the last squeeze, and house prices rose so much – by more than 18% in real terms from the early 2009 trough to the peak early 2010 peak – that another scheme would be hard pressed to entice new buyers in.
The NSW state government did its bit for the bubble by abolishing stamp duty for first-home buyers in 2011, but that’s so expensive for the bottom line of state budgets that I don’t think they’d contemplate a repeat.
So overall, the likely outcome is a fall of 6% 10% in real terms over calendar year 2012.
Steve Keen is Associate Professor of Economics and Finance at the University of Western Sydney and author of   <a href="https://debunkingeconomics.com/" target="_blank">Debunking Economics</a>  and the blog <a style="text-decoration: none; color: #287bce; background-color: transparent; margin-top: 3px; margin-right: 0px; margin-bottom: 3px; margin-left: 0px; background-image: initial; background-attachment: initial; background-origin: initial; background-clip: initial; line-height: 14px; padding: 0px;" href="https://www.debtdeflation.com/blogs/" class="=article" target="_blank">Debtwatch</a>.
 
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House prices will be 10% lower by the end of the year: Steve Keen

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Mortgage debt is by far the largest component of debt in Australia today—government debt, which is the focus of political debate, is trivial by comparison (a quick caveat though—finance sector debt may be larger again than mortgage debt, if <a href="https://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdp" target="_blank">this claim</a>, sourced from Morgan Stanley, is accurate— since it shows Australia’s aggregate private debt ratio as almost equal to the USA’s).
<img width="470px" src="/images/stories/keenjan1.png">
The household debt to income ratio may have topped out now, after growing fivefold in the last two decades. Figure 2 shows the ratio of household debt to disposable income, which peaked at 149% of disposable income back in late 2008. Despite the enticement into debt given by the <a href="https://www.debtdeflation.com/blogs/2009/03/22/fhb-boost-is-australias-sub-prime-lite/" target="_blank">first-home vendor's boost</a>, aggregate household debt never exceeded this pre-boost peak as a percentage of disposable income, since the fall in personal debt outweighed the rise in mortgage debt.
<img width="470px" src="/images/stories/keenjan2.png">
This huge rise in household debt compared to income has more than offset the falls in interest rates that occurred since the 1990s. The perennial argument from property <a href="https://en.wiktionary.org/wiki/spruiker" target="_blank">spruikers</a> that the rise in debt has simply been a rational reaction to the fall in interest rates is pure bunkum—especially when you take a less-than-myopic look at the data, and consider mortgage rates back in the 1960s, which were well below today’s rates (see Figure 3). <img width="470px" src="/images/stories/keenjan3.png">
This comparison stands even when inflation is taken into account. The average real mortgage rate in the relatively low-inflation 1960s was 3% — a full percentage point below the low inflation level of the last decade (see Figure 4). Why wasn’t mortgage debt higher back then, if the increase since the 1990s was a “rational response to lower interest rates”?
<img src="/images/stories/keenjan4.png">
I date the Australian house price bubble from 1988, when it was spiked by the reintroduction of the first home owner's scheme by the Hawke government in reaction to the share market crash of 1987 (the scheme works by encouraging would-be buyers to take on mortgage debt, and then hand the leveraged sum over to the vendors—which is why I prefer to call it the <a href="https://www.debtdeflation.com/blogs/2011/09/09/hand-of-gov-report-on-the-australian-housing-bubble/" target="_blank">first-home vendors scheme</a> [FHVS]). It then really took off in 2001, when Howard doubled the grant in response to a feared recession (see Figure 5, which combines <a href="https://www.debtdeflation.com/blogs/2009/04/06/steve-keens-debtwatch-no-33-april-2009-lies-damned-lies-and-housing-statistics/" target="_blank">Nigel Stapledon’s long-term index</a>with the ABS data from 1976 on; “Hawke” and “Howard” respectively mark the re-introduction of the grant in 1988 and Howard’s doubling of it in 2001), though it was already running hot again from 1997 when — without any additional help from the government — the financial sector had enticed Australians to go from a 50% to a 70% mortgage debt to GDP ratio (at a time of rising interest rates). <img width="470px" src="/images/stories/keenjan5.png">
The combination of higher rates and much higher debt levels means that paying the mortgage is taking far more out of the family purse than it used to do back in the pre-housing bubble years. Readily available data from the RBA shows that interest payments on household debt are five times as high as they were back in the 1970s.
The RBA data for mortgage debt only start in 1976; in the spirit of countering spruiker myopia, I’ve estimated pre-1976 mortgage debt as 30% of total debt, from the <a href="https://www.rba.gov.au/statistics/frequency/occ-paper-8">RBA’s long-term data</a> (the average from 1977-1980 was 31%). Interest payments on mortgage debt are as much as 10 times as high now as in the 1960s (see Figure 6).
<img width="470px" src="/images/stories/keenjan6.png">
Spruikers also prefer to ignore the fact that debt has to be repaid, and focus on the interest payments alone. In the past mortgages been paid off after five to seven years via the resale of the property, but that will be a lot more difficult in future as house prices fall. Figure 7 shows household debt service as a percentage of disposable income with mortgage debt being repaid over 25 years and personal debt over 10. On this basis, there has been a twelve-fold increase in the proportion of family income that has to be devoted to servicing mortgages since 1970. Even compared to the high-interest days of 1990, mortgage debt service is now 2.5 times as burdensome.
<img src="/images/stories/keenjan7.png">
There is clearly no capacity for debt service to take a larger slice of the family income pie, which in turn is taking the wind out of the housing market. Spruikers happily make a “supply and demand” argument about why house prices have risen, but obsess about regulation-impaired supply and equate demand with population growth. In fact, demand for housing doesn’t come from population growth: it comes from the growth in the number and value of mortgages. That growth rate in fact peaked back in 2004, and it has been trending down ever since: the first-home vendor's boost merely delayed this process without stopping it.
<img width="470px" src="/images/stories/keenjan8.png">
That in turn is the main factor driving house prices down — just as rising mortgage debt drove prices up, falling mortgage debt is driving them down. As I’ve explained elsewhere, the causal factor behind asset prices is not just rising but acceleratingdebt. This is an extension of my basic proposition that macroeconomic analysis must include the role of credit — which is ignored by conventional neoclassical economics. In a credit-driven economy, aggregate demand is the sum of incomes plus the change in debt, and this monetary demand is expended buying commodities and claims on existing assets — basically, shares and property.
Part of demand for housing thus comes from income — the focus of the property spruikers — and part comes from the increase in mortgage debt —which they ignore.
<img width="470px" src="/images/stories/keenjan9.png">
For prices to rise, demand must also be rising, and this requires not merely rising mortgage debt but accelerating debt. Of course variations in income (and variations in supply, too) can play a role, but in the overwhelmingly speculative, overly-leveraged market that Australian housing has become, accelerating mortgage debt trumps the lot (see Figure 10).
<img width="470px" src="/images/stories/keenjan10.png">
This is especially so since such a large percentage of buyers are so-called investors — "so-called” because a better description is speculators. Actual investors aim to make a profit out of the income flow generated by an investment. Australia’s property “investors” instead lose money on their rental income, and hope to recoup the loss as capital gains via a later sale. With the days of house prices rising faster than incomes well and truly over, this percentage of the market could drop back to pre-1990s levels.
<img width="470px" src="/images/stories/keenjan11.png">
Both sources of demand are now falling strongly from the artificial boost given by Rudd’s spin of the FHVS sauce bottle.
<img width="470px" src="/images/stories/keenjan12.png">
One of the world’s last and greatest house price bubbles is thus finally ending.
<img width="470px" src="/images/stories/keenjan13.png">
Steve Keen is Associate Professor of Economics and Finance at the University of Western Sydney and author of <a href="https://debunkingeconomics.com/" target="_blank">Debunking Economics</a> and the blog <a style="text-decoration: none; color: #287bce; background-color: transparent; margin-top: 3px; margin-right: 0px; margin-bottom: 3px; margin-left: 0px; background-image: initial; background-attachment: initial; background-origin: initial; background-clip: initial; line-height: 14px; padding: 0px;" href="https://www.debtdeflation.com/blogs/" class="=article" target="_blank">Debtwatch</a>.
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Australia's housing bubble is finally ending: Steve Keen

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During the past four days days the latest monthly data on credit growth in Australia from the RBA and the latest quarterly house prices data and monthly building approvals data from the ABS have ll been released. Together, these confirm trends that I’ve identified on numerous occasions between the acceleration of mortgage debt and the change in house prices.
Building approvals plunged 13.9% in September, while housing credit increased by 0.5% over September (see the <a target="_blank" href="https://www.rba.gov.au/statistics/frequency/fin-agg/2011/fin-agg-0911">RBA release</a> for details), but this involved a further deceleration of mortgage debt, as figure 1 shows.
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Figure 1: Change and Acceleration of Mortgage Debt in Australia
<div style="text-align: center; font-family: Arial, sans-serif; color: #3d66ab; font-size: 12px; width: 380px;"><img src="/images/stories/keen1.gif"> </div>
 As I explained in <a target="_blank" href="https://www.debtdeflation.com/blogs/2011/09/04/%E2%80%9Ca-much-more-nebulous-conception%E2%80%9D/">A Much More Nebulous Conception</a>, there is a complex causal link between the acceleration of mortgage debt and the change in house prices. In a nutshell, the two sources of monetary demand are income and the change in debt; these then finance the purchases of both newly produced goods and services, and the turnover of existing assets. There is thus a causal link flowing from change in debt to the level of asset prices, and consequently a link between the acceleration of debt and the change in asset prices.
That relationship is evident in the pattern of change in Australian house prices over the last two decades. The most recent figures – that prices fell 1.2% over the June to September 2011 quarter, and 2.2% from September 2010 to September 2011 (see the <a target="_blank" href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6416.0Main+Features1Sep%202011?OpenDocument">ABS Release</a> for details) – confirm that mortgage debt acceleration, and not “population pressure” etc., is the key determinant of house prices.
Figure 2: The Mortgage Acceleration and House Prices Change Relationship (R^2 = 0.54)
<img src="/images/stories/keen2.gif"> 
Of course, one can’t forget the role of government intervention in sustaining an asset bubble either, and here the Australian government has a peerless record – whether the conservatives (Liberal Party) or progressives (Labor Party) have been in power. Whenever the economy was facing a recession, its favourite tool of macroeconomic policy has not been fiscal stimulus, but stimulating the housing sector via the 'First Home Owners Scheme'.
It was first introduced by the Hawke Labor government in 1983, in response to the recession that had swept the previous Liberal government from power; it was reintroduced by the Hawke government after the share market crash of 1987, given fears then of a serious recession; the Howard Liberal government brought it back as a "temporary" measure to counter the impact of the GST in 2000 (and it has never been removed!), and then doubled it in 2001 to counter an imminent recession; and finally Rudd doubled (and for new homes, tripled) the grant as a counter-measure to the Global Financial Crisis in late 2008.
<img src="/images/stories/keen3.gif">
<div style="text-align: center; font-family: Arial, sans-serif; color: #3d66ab; font-size: 12px; width: 380px;"></div>
Though restarting the housing bubble wasn’t the express intent of government policy, its 'collateral damage' included spikes in house prices as well (see figure 3). The turnaround from an 8% per annum rate of fall in real house prices to a 15% rate of increase was merely the latest (but not the greatest) such instance of government manipulation of house prices that has given Australia the most expensive housing in the Western world.
Figure 3: The First Home Vendors Scheme and House Prices
<div style="text-align: center; font-family: Arial, sans-serif; color: #3d66ab; font-size: 12px; width: 380px;"><img src="/images/stories/keen4.gif"> </div>
 
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 So will they try again? I’m sure they will be sorely tempted should yesterday's unemployment data reveal a rise in unemployment – against the conventional expectation that Australian unemployment should be falling. But I doubt that they will, for two reasons.
 
Firstly the “collateral damage” of such a policy – a further boost to our house prices – would be political suicide today. Though house price inflation was initially very popular – and it remains popular with those who are highly levered into house prices today – it would evoke huge opposition from the many who are now locked out of home ownership. The entry costs into home ownership in Australia are now prohibitive – even after the fall from its peak level, houses are still more expensive in real terms than they were before the Rudd government’s spin of the house price boost bottle.
Figure 4: Real House Prices are still above the pre-FHVB peak
<div style="text-align: center; font-family: Arial, sans-serif; color: #3d66ab; font-size: 12px; width: 380px;"><img src="/images/stories/keen5.gif"> </div>
Buying a first home therefore involves taking out a mortgage that consumes a prohibitive share of the average wage – when First Home Buyers can be expected to be earning below average wages.
<img src="/images/stories/keen6.gif">
 Secondly, the policy has only worked because it has gone in concert with the banking sector’s willingness to lever the grant with additional mortgage debt. The very success of this process is now the best reason why it won’t be tried again – or why, if it is tried, it might not work as it has in the past. Australian mortgage debt is now substantially higher than American (when compared to GDP), and though banks may still be willing to lend, willing borrowers are much harder to find. Our mortgage debt is once again falling when compared to GDP, and I doubt that anything the government can do can make it rise yet again from its already unprecedented peak.
Figure 5: Australian mortgage debt grew more rapidly than US, and now exceeds it
<div style="text-align: center; font-family: Arial, sans-serif; color: #3d66ab; font-size: 12px; width: 380px;"><img src="/images/stories/keen7.gif"> </div>
The one trick that Australia does have up its sleeve for re-inflating the house price bubble is interest rate policy. Since the vast majority of Australian mortgages are floating rate, a cut to official interest rates rapidly translates into falling mortgage payments for borrowers (see figure 6). If rates fell substantially, this could encourage Australians to take on yet more mortgage debt, and thus re-ignite the Australian housing bubble.
Figure 6
<img src="/images/stories/keen8.gif">
 Even this is, I think, unlikely – again, because the past success of this “asset price inflation as macroeconomic policy” game has made it unlikely that the same play will work again. Australian private debt levels have risen from the historically low level of 25% of GDP in the period from 1945-1965 to an unprecedented peak of almost 160 percent in early 2008. Government policy – especially the First Home Vendors Boost – merely temporarily delayed the deleveraging process from Peak Debt.
Figure 7: Private debt ratio now falling from unprecedented level
<div style="text-align: center; font-family: Arial, sans-serif; color: #3d66ab; font-size: 12px; width: 380px;"><img src="/images/stories/keen9.gif"> </div>
 Since deleveraging results in falling asset prices as well as rising unemployment, it is unlikely that even substantially lowering interest rates will encourage Australians back into debt once more. Australia’s apparently stellar economic performance over the last two decades, which was primarily driven by accelerating private debt, may soon drop back to the pack now that the inevitable deleveraging can no longer be delayed.
Figure 8: Credit Accelerator drives change in unemployment (R^2 = -0.65)
<img src="/images/stories/keen91.gif">
 Steve Keen is Associate Professor of Economics and Finance at the University of Western Sydney and author of   <a href="https://debunkingeconomics.com/" target="_blank">Debunking Economics</a>  and the blog <a href="https://www.debtdeflation.com/blogs/" class="=article" target="_blank" style="text-decoration: none; color: #287bce; margin-top: 3px; margin-right: 0px; margin-bottom: 3px; margin-left: 0px; background-image: initial; background-attachment: initial; background-origin: initial; background-clip: initial; background-color: transparent; line-height: 14px; padding: 0px;">Debtwatch</a>.
This article originally appeared on <a href="https://www.businessspectator.com.au" title="Business Spectator" target="_blank">Business Spectator</a>. 
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Australia's housing bubble will burst eventually, with debt the main cause

China our one saving grace as Australia’s debt-driven love affair with house prices faces the chopping block

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It seems that people were happy to be in the audience, but no one wanted to regret their 15 minutes of fame by committing to 25 years of debt on overvalued properties at The Block’s weekend auction. 
I think they should name the next series "The Chopping Block" – though it's more likely the series itself will be on the chopping block given that dismal final day. 
The ratings may have been fantastic for Nine, but how would it look if next year's lot lost a bundle on their renovations? 
I like one comment I saw on the SMH story about this: the writer remarked that the only real winner was the vendor who sold those four places to the show for $3.6 million in the first place! 
The auction reserve prices were over the top, a clear sign that prices are in a bubble when cottages like that are expected to go for close to a million. 
The buyers may end up being the "canaries in the coal mine" – or rather the starlings pretending to be canaries.
Steve Keen is an associate professor of economics and finance at the University of Western Sydney. He maintains a blog on the economy, <a href="https://www.debtdeflation.com/blogs/" title="Steve Keen's Debtwatch" target="_blank">Steve Keen's Debtwatch.</a>
This article was written before the <a href="https://www.propertyobserver.com.au/residential/auctions/take-two-auction-frenzy-as-only-one-offering-left-on-the-block/2011082351266" title="Rod and Tania's house sells" target="_blank">recent sale of the final two Block properties</a>.
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Block buyers may end up being starlings in the coalmine: Steve Keen

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The main point I'd make about the international debt situation as it affects property is something of a curly one.
I'm going to be a bit of a long-winded academic here, but I think I need to do that because otherwise what I say will sound weird compared with the conventional reactions to the US debt "crisis".
Demand in our economy comes from either incomes or the change in debt.
It then buys either goods and services or existing assets.
So there's a link between change in debt and the level of asset prices.
Change in demand – which drives both change in output and change in asset prices – depends on change in income and (drum roll) the acceleration of debt.
This then drives change in purchases of goods and services and change in demand for existing assets.
There is thus a link between the acceleration of debt and change in asset prices.
The conclusion is that for asset prices to rise (including of course property), private debt levels have to accelerate.
That in fact has been happening for the last 20 years in Australia – and that's when the biggest boom in house prices occurred.
Now that the global economy has private debt levels falling, private debt is decelerating – and that's the primary factor that is causing share and property prices to fall.
In all this, the shenanigans over public debt are a bit of a sideshow.
Public debt is rising not because governments are being irresponsible now, but because the private sector was during the subprime bubble (and its equivalents in Iceland, Ireland, England, Spain, and Australia to name a few).
Now that the private sector has gone from gambling on rising asset prices with borrowed money – which drove asset prices up – to reducing its debt, both sales of goods and services and asset prices are plunging.
That necessarily causes government deficits to rise, tax receipts fall and welfare payments increase.
That's what mainly caused the US public debt to blow out.
Private debt fell from 300% of GDP to 258% in the last two years; public debt increased from 60% to 100%.
The US “debt ceiling” thing too is a bit of nonsense: the US has hit and moved its ceiling more than 100 times since World War II.
It's sometimes involved brinkmanship between the Republicans and the Democrats; this time has been amplified by all the Tea Party types.
I don't believe this crisis can be stopped by government spending, but I do believe that if the government tries to cut its spending while the private sector is also deleveraging, it will make things worse rather than better.
So the austerity measures being imposed around the globe will amplify the impact of private sector deleveraging on reducing property and share prices.
Steve Keen is an associate professor of economics and finance at the University of Western Sydney. He maintains a blog on the economy, <a target="_blank" title="Steve Keen's Debtwatch" href="https://www.debtdeflation.com/blogs/">Steve Keen's Debtwatch.</a>
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Steve Keen

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