australian house prices - again 070112

7/31/2019 Australian House Prices - Again 070112

1/13

Jan07

Australian House Pricesagain

by Steve Keen on January 7th, 2012 at 3:36 pm

Posted In:Debtwatch

Mortgage debt is by far the largest component of debt in Australia todaygovernment

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, ifthis claim, sourced fromMorgan Stanley, is accuratesince it shows Australias aggregate private debt ratio as

almost equal to the USAs).

Figure 1

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 debtgiven by the First Home Vendors Boost, 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.
http://www.debtdeflation.com/blogs/author/admin/http://www.debtdeflation.com/blogs/category/debtwatch/http://www.debtdeflation.com/blogs/category/debtwatch/http://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdphttp://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdphttp://www.debtdeflation.com/blogs/2009/03/22/fhb-boost-is-australias-sub-prime-lite/http://www.debtdeflation.com/blogs/category/debtwatch/http://www.zerohedge.com/news/psssst-france-here-why-you-may-want-cool-it-britain-bashing-uks-950-debt-gdphttp://www.debtdeflation.com/blogs/2009/03/22/fhb-boost-is-australias-sub-prime-lite/http://www.debtdeflation.com/blogs/author/admin/


2/13

Figure 2

This huge rise in household debt compared to income has more than offset the falls ininterest rates that occurred since the 1990s. The perennial argument from property

spruikers that the rise in debt has simply been a rational reaction to the fall in interest rates

is pure bunkumespecially when you take a less-than-myopic look at the data, and

consider mortgage rates back in the 1960s, which were well below todays rates (see Figure3).

Figure 3
http://en.wiktionary.org/wiki/spruikerhttp://en.wiktionary.org/wiki/spruiker


3/13

This comparison stands even when inflation is taken into account. The average realmortgage rate in the relatively low-inflation 1960s was 3 percenta full percent below the

low inflation level of the last decade (see Figure 4). Why wasnt mortgage debt higherback

then, if the increase since the 1990s was a rational response to lower interest rates?

Figure 4


4/13

I date the Australian house price bubble from 1988, when it was spiked by thereintroduction of the First Home Owners Scheme by the Hawke Government in reaction to

the Stock 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 vendorswhich iswhy I prefer to call it the First Home Vendors Scheme [FHVS]). It then really took off in

2001, when Howard doubled the Grant in response to a feared recession (see Figure 5,

which combinesNigel Stapledons long term index with the ABS data from 1976 on;Hawke and Howard respectively mark the re-introduction of the grant in 1988 and

Howards doubling of it in 2001), though it was already running hot again from 1997 when

without any additional help from the governmentthe financial sector had enticed

Australians to go from a 50% to a 70% mortgage debt to GDP ratio (at a time ofrisinginterest rates).

Figure 5
http://www.debtdeflation.com/blogs/2011/09/09/hand-of-gov-report-on-the-australian-housing-bubble/http://www.debtdeflation.com/blogs/2009/04/06/steve-keens-debtwatch-no-33-april-2009-lies-damned-lies-and-housing-statistics/http://www.debtdeflation.com/blogs/2011/09/09/hand-of-gov-report-on-the-australian-housing-bubble/http://www.debtdeflation.com/blogs/2009/04/06/steve-keens-debtwatch-no-33-april-2009-lies-damned-lies-and-housing-statistics/


5/13

The combination of higher rates and much higher debt levels means that paying themortgage 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 spruikermyopia, Ive estimated pre-1976 mortgage debt as 30% of total debt, from the RBAs long-

term data (the average from 1977-1980 was 31%). Interest payments on mortgage debt are

as much as ten times as high now as in the 1960s (see Figure 6).

Figure 6
http://www.rba.gov.au/statistics/frequency/occ-paper-8.htmlhttp://www.rba.gov.au/statistics/frequency/occ-paper-8.htmlhttp://www.rba.gov.au/statistics/frequency/occ-paper-8.htmlhttp://www.rba.gov.au/statistics/frequency/occ-paper-8.html


6/13

Spruikers also prefer to ignore the fact that debt has to be repaid, and focus on the interestpayments alone. In the past mortgages been paid off after 5-7 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 beingrepaid 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 now2.5 times as burdensome.

Figure 7


7/13

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 forhousing doesnt 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 Vendors Boost merely delayed this process withoutstopping it.

Figure 8


8/13

That in turn is the main factor driving house prices downjust as rising mortgage debtdrove prices up, falling mortgage debt is driving them down. As Ive 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 ofcreditwhich 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 assetsbasically, shares and property.

Part of demand for housing thus comes from incomethe focus of the property spruikers

and part comes from the increase in mortgage debtwhich they ignore.

Figure 9


9/13

For prices to rise, demand must also be rising, and this requires not merely rising mortgagedebt 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).

Figure 10


10/13

This is especially so since such a large percentage of buyers are so-called investorsso-called because a better description is speculators. Actual investors aim to make a profit

out of the income flow generated by an investment. Australias property investors instead

lose money on their rental income, and hope to recoup the loss as capital gains via a latersale. 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.

Figure 11


11/13

Both sources of demand are now falling strongly from the artificial boost given by Ruddsspin of the FHVS sauce bottle.

Figure 12


12/13

One of the worlds last and greatest house price bubbles is thus finally ending.

Figure 13


13/13

australian house prices - again 070112

Documents