Thinking—really thinking—about house prices

Steve KeenUniversity of Western Sydney

Debunking Economicswww.debtdeflation.com/blogs

www.debunkingeconomics.com

0 1 2 3 4 5 6 7 8 9 10 11 12 1325

20

15

10

5

0

5

10

15

20

25

Great Depressionincluding GovernmentGreat Recessionincluding Government

Debt-financed demand percent of aggregate demand

Years since peak rate of growth of debt (mid-1928 & Dec. 2007 resp.)

Per

cent

0

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

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 201210

0

10

20

30

40

Population ChangeHouse Price Change

0

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20120

0.5

1

1.5

2

2.5

10

0

10

20

30

40

Population ChangeHouse Price Change

0

• 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

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 201210

0

10

20

30

40

Population Density ChangeHouse Price Change

0

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20120

0.5

1

1.5

2

2.5

10

0

10

20

30

40

Population Density ChangeReal House Price Change

0

• More volatility in population density, but something strange:

• Housing grew faster than population?– Isn’t supply

“sticky”?• Density falling

while prices rising?– Let’s zoom in…

• Supply flow has exceeded population flow– Except for 2006-2010

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20121.5

1

0.5

0

0.5

1

1.5

2

2.5

24

16

8

0

8

16

24

32

40

Population Density ChangeReal House Price Change

0

• Correlation lower when supply also considered: 0.1 versus already low 0.21

• But maybe “this time is different?”

House Prices and Population Density• Yes, “this time is different”—it’s worse…

2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 20111.5

1

0.5

0

0.5

1

1.5

2

2.5

24

16

8

0

8

16

24

32

40

Population Density ChangeReal House Price Change

0

• 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 + Debt”

• Greek “Delta” () stands for “Change in”• Spent on both goods & services and assets

– AD = AS + Debt = AS + Net Asset Sales (“NAS”)– NAS = Price, times Fraction Sold, times Quantity

• In symbols, “NAS = PA.A.QA”

– Since level of demand determines prices• Change in demand cause change in prices• Rising house prices require accelerating debt:

– AD = GDP + Debt = GDP + (PA.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…

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 201210

0

10

20

30

Mortgage "Credit Impulse"Real House Price Change

0

Accelerating Debt Makes House Prices Rise• Accelerating mortgage debt leads house price change:

10 0 100

0.1

0.2

0.3

0.4

0.5

0.6

Population ChangeMortgage Acceleration

Lag in Months

Cor

rela

tion

Coe

ffic

ient

4 0

• 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?

2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5 2011 2011.5 20124

3

2

1

0

1

2

3

4

20

15

10

5

0

5

10

15

20

Acceleration in Mortgage DebtReal House Price Change

0

FHVB

Decelerating Debt Makes House Prices Fall• Yes, China apart, it’s worse…• Bigger mortgage bubble than USA:

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20125

4

3

2

1

0

1

2

3

4

5

20

16

12

8

4

0

4

8

12

16

20

Mortgage Credit Impulse (Average 0.49)Real House Price Change

USA

0

End

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20125

4

3

2

1

0

1

2

3

4

5

20

16

12

8

4

0

4

8

12

16

20

Mortgage Credit Impulse (Average 0.72)Real House Price Change

Australia

0

End

• Australian households now more indebted than Americans

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

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20120

10

20

30

40

50

60

70

80

90

AustraliaUSA

Mor

tgag

e D

ebt P

erce

nt o

f G

DP

Not a bubble???

• A bigger bubble with further to fall…

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012506070

8090

100110120

130140

150160170

180190200

210220

230240

250

AustraliaUSA

Real House Prices

Inde

x 19

90 =

100

For more background (if you can cope!)• My blog

– www.debtdeflation.com/blogs

• My book (out in September)

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 201220

25

30

35

40

45

50

55

60

AustraliaUSA

Real Estate Loans Percent of All Loans

Per

cent

of

Com

mer

cial

Ban

k L

oans

FHVB

• What’ll happen to the banks?• Our banks more exposed than

US

Tony Hayek• House prices always rise?

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20200

100

200

300

400

AustraliaUSA

Real House Prices 1880-2011

Robert Shiller; Nigel Stapledon House Price Index + ABS

Ind

ex

18

80

=1

00

(1

99

7=

100

fo

r A

ll O

rds)

100