Housing: Bubble or Boom?

1
Housing Bubble or Boom?

• Steve Keen
• www.debtdeflation.com/blogs
• www.keenwalk.com.au

2
Great Debate, or talking past each other?

• House price debate a welter of confusing stats
• Prices high relative to incomes?
• Or prices reflect supply demand?
• Each side supports case with selective statistics
• My approach Housing a side-issue
• Main issue whats driving the economy
• House prices a symptom of this
• Economic growth debt-dependent
• Debt-induced downturn caused GFC
• Housing market main target of Ponzi Lending
• Australia avoided crisis by piling on yet more
  debt
• Housing will suffer fate of debt-dependent economy

3
The global debt bubble

• Global economy carrying more debt than ever
  before

Start of Global Financial Crisis
Start of Great Depression
4
The global debt bubble

• Ditto Australia lower debt than USA, but same
  pattern

Half USA level today
But twice our GD level
5
Whats wrong with debt?

• Debt for productive purposes good
• Working capital for firms
• Loans for new technology, factories, markets
• But debt for speculation on asset prices
• Drives up asset prices
• Positive feedback loop between debt price
• Doesnt add to capacity of economy to service
  debts
• If debt high relative to GDP, change in debt
  dominates economy
• Crash inevitable when debt stops growing
• Above ignored by conventional neoclassical
  economics
• Main explanation of Great Depression by mavericks
  Irving Fisher Hyman Minsky

6
Whats wrong with debt?

• Aggregate Demand equals GDP plus the change in
  debt
• Debt-based demand unemployment in Great
  Depression

Plunge in demand
Fall in debt

• Reduction in debt made the Great Depression
  Great

7
Whats wrong with debt?

• Change in debt explains 77 of 1930s unemployment

8
Whats wrong with debt?

• Same factor only just begun today

Far higher debt
Bigger boost to demand during boom
Slump less than half GD levels but increasing
9
What about Australia?

• Half US private debt levels
• Benefit from China
• Huge government stimulus (10 increase in
  household income during recession)
• BUT
• Same deleveraging processes afoot here

• HOWEVER
• Deleveraging reversed by First Home Owners
  Boost

10
House prices mortgage debt

• FHVB definitely boosted house prices

• Worked because reversed fall in mortgage debt to
  GDP

11
What about Australia?

• Mortgage debt trend reversed by The Boost

Mortgage debt 100 billion higher than pre-Boost
trend

• Australia increasing private debt while USA
  delevers
• Hair of the Dog cure for a hangover?

12
What about Australia?

• Fastest turnaround in debt ever

FHVB
Business
Now
1970s
1990s

• But only mortgage debt rising

• Is this sustainable? 5-fold increase in mortgage
  debt in 20 years

13
House prices mortgage debt

• Aim of House price speculation is unearned income
• Sources of unearned income are
• Someone elses income
• Increased debt
• If everyone tries to do it
• Either offshore income (Chinese buyers?) or
• Increased debt
• House prices rise so long as debt rises faster
• Real problem with economy is it is debt dependent
• Continued prosperity now dependent on ever-rising
  debt

14
House prices mortgage debt

• Its worked so far

• But can debt keep rising forever?
• In our debt-dependent economy, it has to if we
  are to avoid recession

4-fold increase in debt per house
2.5 increase in house prices
15
The real problem with Deleveraging

• Hypothetical economy Year 0
• GDP 1 trillion, growing at 10 p.a.
• Debt 1.25 trillion at start of year
• Increase in debt in 250 billion
• Total spending on all markets 1.25 trillion
• Hypothetical economy Year 1
• GDP 1.1 trillion
• Increase in debt zero
• Total spending on all markets 1.1 trillion
• 150 billion fall in demand because debt
  stabilises
• Markets must take a hit from fall in turnover
• Similar but smaller effect even if debt grows 10
• No growth in nominal demandrise in unemployment

16
The real problem with Deleveraging

• Problem with large debt isnt just servicing it
• When debt
• Grows faster than economy for many years
• Becomes much larger than GDP
• Then debt has to keep growing faster than GDP to
  sustain economy
• Servicing crisis inevitable
• Then slowdown in debt growth causes recession
• Turnaround in debt causes Depression
• Deleveraging delayed by government policy here to
  date
• When it hits, all markets will sufferincluding
  housing
• For more information, see www.debtdeflation.com/bl
  ogs