Debt-financed demand percent of aggregate demand
25
20
15
Percent
10
5
0
0
5
Great Depression
including Governm ent
Great Recession
including Governm ent
 10
 15
 20
 25
0
1
2
3
4
5
6
7
8
9
10
11
12
13
Years sin ce peak rat e of growt h of debt (m id-1928 & Dec. 2 007 res
Thinking—really thinking—about house prices
Steve Keen
University of Western Sydney
Debunking Economics
www.debtdeflation.com/blogs
www.debunkingeconomics.com
What drives house prices?
• Conventional case:
– Population pressure drives house prices
• Booming population
• Sluggish dwelling construction
• “Demand exceeds supply”—prices will rise
• My case
– Money pressure drives house prices
• Booming credit drives prices up
• Stagnant credit will drive prices down
• Checking the numbers:
House Prices and Population
• Population Change vs House Price Change
40
2.5
40
• Volatile prices,
P opulat ion Change
House Pr ice Change
not much
302
30
variation in
population;
20
1.5
20
• Let’s zoom in…
• Sometimes
101
10
correlated
• Sometimes not
0
0 0
0.5
0
P opulat ion Change
House P rice Change
 100
 10
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
• Overall correlation coefficient quite low: 0.21
– (versus maximum possible of 1.0)
• But this is just demand side; what about supply side?
House Prices and Population Density
• Population Per Dwelling Change vs House Price Change
40
2.5
40
40
P opulat ion Densit y Change • More volatility in
House
Pr icePrice
Change
Real House
Change 32
2
population density,
30
2
30
• But maybe “this time
1.5
24
but something
is different?”
strange:
1
16
20
1.5
20
Housing grew faster
0.5
8 •
than population?
10
1
10
0 0
0
??
– Isn’t supply
 0.5
8
00
0 0
0.5
“sticky”?
1
 16
P opulat ion Den sit y Change
Real House Price Change
• Density falling while
10
 1.5
24
0
 10
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
2006 2008
2008 2010
2010 2012
2012
prices rising?
• Supply flow has exceeded population flow
– Let’s zoom in…
– Except for 2006-2010
• Correlation lower when supply also considered: 0.1 versus
already low 0.21
House Prices and Population Density
• Yes, “this time is different”—it’s worse…
2.5
40
P opulat ion Densit y Change • Correlation now
Real House Price Change 32
2
large and negative
1.5
24
(-0.5)
1
16 •
Huh? “Rising
population density
0.5
8
means falling house
0 0
0
prices”?
 0.5
8
• No—it means
1
 16
population pressure
 1.5
 24
2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011
doesn’t determine
house prices
• What does then?
– Money pressure does
• “People” don’t buy houses
– “People with mortgages” do…
Money makes the world go round…
• A little thinking: where do mortgages come from?
– Conventional economists think “from savings”
• Savers’ money lent to borrowers
• Therefore “(mortgage) debt doesn’t matter”
– Saver can spend less
– Borrower can spend more
– Overall, no change in spending power
– Therefore private debt has no impact on economy
• E.g., Nobel Prize winner Paul Krugman:
– “the overall level of debt makes no difference …
one person's liability is another person's asset.”
(Krugman 2010, p. 3)
– They’re wrong
• In our banking system, loans create spending power
Money makes the world go round…
• Vice President of New York Fed put it this way in 1969:
– “In the real world, banks extend credit, creating
deposits in the process, and look for the reserves
later” (Holmes 1969, p. 73)
• Ignored by conventional (“Neoclassical”) economists
– Which is why they didn’t see the GFC coming
• Essential part of my approach
– Which is why I did see it coming
• Impact on house prices:
– Rising house prices need accelerating debt
• The logic:
– Aggregate demand = Income + Change in Debt
– Change in debt plays crucial role in macroeconomics
and asset bubbles…
Accelerating Debt Makes House Prices Rise
• Aggregate Demand = Aggregate Supply + Change in Debt
– In symbols, “AD = AS + DDebt”
• Greek “Delta” (D) stands for “Change in”
• Spent on both goods & services and assets
– AD = AS + DDebt = AS + Net Asset Sales (“NAS”)
– NAS = Price, times Fraction Sold, times Quantity
• In symbols, “NAS = PA.sA.QA”
– Since level of demand determines prices
• Change in demand cause change in prices
• Rising house prices require accelerating debt:
– DAD = D GDP + DDDebt = DGDP + D(PA.sA.QA)
• So change in house prices should be correlated with
accelerating private debt—especially mortgage debt…
Accelerating Debt Makes House Prices Rise
• Is there a correlation?
• “Mortgage Impulse”—(Acceleration Mortgage Debt)/GDP
30
Mortgage "Credit Impulse"• Correlation = 0.42
Real House Price Change
– Twice the level of
20
the “rising
population causes
rising house prices”
10
argument
– Four times the
0
level of “rising
0
population density”
argument
 10
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
• Accelerating debt also leads house price changes
– Acceleration of mortgage debt now tells us where
prices will go in 2-4 months time…
Accelerating Debt Makes House Prices Rise
• Accelerating mortgage debt leads house price change:
0.6
4
0
P opulat ion Change
Mort gage Accelerat ion
Correlation Coefficient
0.5
0.4
0.3
0.2
0.1
0
 10
0
• In contrast,
“Population
density” useless
as leading
indicator
• Correlation
falls when
“lead”
considered
10
Lag in M ont hs
• Upshot: to know what house prices will do in next 2-4
months, look at accelerating of mortgage debt now
– (Lag has fallen in more recent data)
Decelerating Debt Makes House Prices Fall
• Mortgage debt is decelerating:
4
3
2
1
0
1
2
3
FHVB
• Recent house price
20
boom caused by
“First Home
15
Vendors Boost”
10
• Turned
5
decelerating
00
mortgage debt in
2008 into
5
accelerating debt
 10
Accelerat ion in Mort gage Debt
 15
Real House Price Change
4
 20
2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5 2012
• We “sidestepped” GFC by recreating housing bubble
– But Australia’s different, isn’t it?
Decelerating Debt Makes House Prices Fall
• Yes, China apart, it’s worse…
• Bigger mortgage bubble than USA:
USA
Australia
5
20
5
4
16
4
16
3
12
3
12
2
8
2
8
1
4
1
4
0
00
0
00
End
20
End
1
4
1
4
2
8
2
8
3
 12
3
 12
 16
4
Mortgage Credit Impulse (Average 0.49)
Real House Price Change
4
5
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
 20
2012
5
1990
Mortgage Credit Impulse (Average 0.72)
Real House Price Change
1992
1994
1996
1998
2000
2002
2004
2006
 16
2008
2010
 20
2012
• Australian households now more indebted than Americans
Responsible lending ???
• Australian banks financed a bigger bubble than did USA
90
Mortgage Debt Percent of GDP
80
Australia
USA
70
60
50
40
30
20
10
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Not a bubble???
• A bigger bubble with further to fall…
Index 1990 = 100
Real House Prices
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
1990
Australia
USA
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
For more background (if you can cope!)
• My blog
– www.debtdeflation.com/blogs
• My book (out in September)
• What’ll happen to the banks?
• Our banks more exposed than US
Real Estate Loans Percent of All Loans
Percent of Commercial Bank Loans
60
55
Aust ralia
USA
FHVB
50
45
40
35
30
25
20
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Tony Hayek
• House prices always rise?
Real House Prices 1880-2011
400
Index 1880=100 (1997=100 for All Ords)
Aust ralia
USA
300
200
100
100
0
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Robert Shiller; Nigel St apledon H ouse P rice Index + A BS