Thinkingreally thinkingabout house prices Steve Keen University of

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 • Volatile prices, not much variation in population; • Let’s zoom in… • Sometimes correlated • Sometimes not • 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 • More volatility in population density, • But maybe “this time but something is different? ” strange: • Housing grew faster than population? ? ? – Isn’t supply “sticky”? • Density falling while 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… • Correlation now large and negative ( -0. 5) • Huh? “Rising population density means falling house prices”? • No—it means population pressure 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. s. A. 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. s. A. 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 • Correlation = 0. 42 – Twice the level of the “rising population causes rising house prices” argument – Four times the level of “rising population density” argument • 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: • In contrast, “Population density” useless as leading indicator • Correlation falls when “lead” considered • 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: • Recent house price boom caused by “First Home Vendors Boost” • Turned decelerating mortgage debt in 2008 into accelerating debt • 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: • Australian households now more indebted than Americans

Responsible lending ? ? ? • Australian banks financed a bigger bubble than did USA

Not a bubble? ? ? • A bigger bubble with further to fall…

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

Tony Hayek • House prices always rise?