housing: bubble or boom? steve keen
TRANSCRIPT
Housing: Bubble or Boom?
Steve Keenwww.debtdeflation.com/blogs
www.keenwalk.com.au
“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: what’s 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
The global debt bubble
• Global economy carrying more debt than ever before:
1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
50
100
150
200
250
300
US Private Debt to GDP Ratio
Year
Per
cent
of
GD
P
The global debt bubble
• Ditto Australia: lower debt than USA, but same pattern:
1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 20100
25
50
75
100
125
150
175
Year
Per
cent
of
GD
P
What’s 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– Doesn’t 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…
What’s wrong with debt?
• Aggregate Demand equals GDP plus the change in debt• Debt-based demand & unemployment in Great Depression:
1920 1925 1930 1935 194050000
100000
150000
200000
Private DebtNominal GDP
US Private Debt and GDP
Year
US
$ m
illio
n
1920 1925 1930 1935100000
0
100000
Change in Private DebtNominal GDPAggregate Demand
Change in US private debt and aggregate demand
Year
US
$ m
illio
n
0
• Reduction in debt made the Great Depression “Great”
What’s wrong with debt?
• Change in debt explains 77% of 1930s unemployment:
1920 1925 1930 1935 194030
20
10
0
10 0
21
14
7
0
Debt Contribution to DemandUnemployment (inverted, RHS)
US Debt financed demand and unemployment
Year
Per
cent
of A
ggre
gate
Dem
and
Per
cent
of
wor
kfor
ce
0
What’s wrong with debt?
• Same factor only just begun today:
1990 1995 2000 2005 20100
1 107
2 107
3 107
4 107
5 107
Private DebtNominal GDP
US Private Debt and GDP
Year
US
$ m
illio
n
1990 1995 2000 2005 2010
0
1 107
2 107
Change in Private DebtNominal GDPAggregate Demand
Change in US private debt and aggregate demand
Year
US
$ m
illio
n
0
1990 1995 2000 2005 201010
3
4
11
18
25 0
12
9
6
3
0
US Debt financed demand and unemployment
Year
Per
cent
of A
ggre
gate
Dem
and
Une
mpl
oym
ent (
inve
rted
)
0
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:1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 20155
0
5
10
15
20 0
10
7.5
5
2.5
0
Debt Based DemandUnemployment Rate
Annual Change in Private Debt and Unemployment
Year
Ann
ual c
hang
e in
deb
t as
shar
e of
agg
rega
te d
eman
d
Une
mpl
oym
ent R
ate
(inv
erte
d)
• HOWEVER– Deleveraging reversed by “First Home Owners
Boost”…
House prices & mortgage debt
• FHVB definitely boosted house prices
1985 1990 1995 2000 2005 2010 201570
80
90
100
110
120
130
140
150
IndexHoward Introduces FHOGHoward doubles FHOGRudd doubles FHOG
Ratio of House Prices to Household Disposable Income
CP
I D
efla
ted
Indi
ces,
Jun
e 19
86=
100
• Worked because reversed fall in mortgage debt to GDP
1985 1990 1995 2000 2005 2010 201575
100
125
150
175
200
225
250
275
300
House PricesHousehold Disposable IncomeHoward Introduces FHOGHoward doubles FHOGRudd doubles FHOG
Real House Prices and Real Incomes
CP
I D
efla
ted
Indi
ces,
Jun
e 19
86=
100
2006 2007 2008 2009 201070
75
80
85
90
Ratio (extrapolated to 2010)Deleveraging trend
Mortgage debt with and without The Boost
Year
Per
cent
of
GD
P
What about Australia?
• Mortgage debt trend reversed by The Boost
2005 2006 2007 2008 2009 2010120
130
140
150
160
240
260
280
300
320
AustraliaUSA (Right Hand Scale)
Private debt to GDP ratios 2005-2010
Year
Aus
tral
ia
US
A
• Australia increasing private debt while USA delevers• “Hair of the Dog” cure for a hangover…?
What about Australia?
• Fastest turnaround in debt ever…
0 1 2 3 4 592
94
96
98
100
102
1974-761990-942008-2010
Recessions and the debt to GDP ratio
Years since peak debt ratio
Inde
x P
eak
Deb
t = 1
00
1975 1980 1985 1990 1995 2000 2005 2010 20150
10
20
30
40
50
60
70
80
90
100
0
50
100
150
200
BusinessMortgagePersonalGovernmentTotal Private (RHS)
Debt by sector
Per
cent
of
GD
P
Tot
al P
riva
te D
ebt
• But only mortgage debt rising• Is this sustainable? 5-fold increase in mortgage debt in 20 years…
House prices & mortgage debt
• Aim of House price speculation is unearned income• Sources of unearned income are
– Someone else’s 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
House prices & mortgage debt
• It’s worked so far…
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010100
125
150
175
200
225
250
275
300
325
350
375
400
Mortgage debt per houseHouse Price IndexConsumer Price IndexDisposable income per person
Growth in debt per house vs prices & incomes
Year
Inde
x 19
98=
100
• But can debt keep rising forever?
• In our debt-dependent economy, it has to if we are to avoid recession…
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 demand—rise in unemployment
The real problem with Deleveraging• Problem with large debt isn’t 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 suffer—including housing• For more information, see www.debtdeflation.com/blogs