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Thinking— really thinking —about house prices

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

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Thinking— really thinking —about house prices

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  1. Thinking—really thinking—about house prices Steve Keen University of Western Sydney Debunking Economics www.debtdeflation.com/blogs www.debunkingeconomics.com

  2. 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:

  3. 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?

  4. House Prices and Population Density • Population Per Dwelling Change vs House Price Change • 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… • But maybe “this time is different?” ?? • Supply flow has exceeded population flow • Except for 2006-2010 • Correlation lower when supply also considered: 0.1 versus already low 0.21

  5. 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…

  6. 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

  7. 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…

  8. 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…

  9. 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…

  10. 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)

  11. Decelerating Debt Makes House Prices Fall • Recent house price boom caused by “First Home Vendors Boost” • Turned decelerating mortgage debt in 2008 into accelerating debt • Mortgage debt is decelerating: • We “sidestepped” GFC by recreating housing bubble • But Australia’s different, isn’t it?

  12. Decelerating Debt Makes House Prices Fall • Yes, China apart, it’s worse… • Bigger mortgage bubble than USA: • Australian households now more indebted than Americans

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

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

  15. 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

  16. Tony Hayek • House prices always rise?

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