From Steven Keen today at BS:
In a nutshell, I got the cause of the Aussie House Price Bubble right, but the direction of the cause wrong. The fundamental determinant of house prices is mortgage debt. I thought that — as had happened in Japan after its bubble economy burst — the Australian economy would start to de-lever after the GFC, and that this process would take house prices down with it. This is what happened in the USA and most of the First World.
But in Australia, the rate of change of mortgage debt never went negative and deliberate government policy played a major role in stopping that from happening on two separate occasions: The Rudd stimulus package in October 2008 and the reversal of the RBA’s “fight the inflation bogeyman” policy of rising interest rates in November 2011. Both policies allowed — and indeed encouraged — mortgage growth to continue long after it would have stopped without government intervention, and long after it did stop in most of the rest of the First World.
Though they didn’t quite know why it worked, Treasury knew from experience that a boost to the housing market stimulated the economy — so they advised Rudd to throw in what I nicknamed the “First Home Vendors Boost” into his rescue package. The $7,000 Federal Government grant doubled to $14,000 for buyers of existing properties, and trebled to $21,000 for those buying new properties (State governments threw in their own debt sweeteners as well — with Victoria purchasers being given up to $36,500 in total). First home buyers flooded into the market, leveraging up the grant by a factor of ten or more in additional mortgage debt. This stopped the decline in mortgage debt in its tracks and growth in mortgage lending — and house prices — resumed until the grant ended in mid-2010.
You’re a glutton for punishment, Steve. Running up Kosciuszko was enough. For future reference, my sources tell me that the FHOG grant was not installed by Treasury but was inserted by Cabinet. Treasury either understood and did not want to exacerbate the housing imbalance or did not understand how at risk it was. Pollies knew though!
Incidentally, this is same set of reasons for why I did not think that the bubble would pop post-GFC. And is the same set of reasons that MB sees it as much more at risk now. When the pollies can no longer prop it up, it will go:
- running out of policy ammunition is closer than many realise with the RBA nearing exhaustion (one reason it does not want to cut again). Assuming we need to keep a spread to other nations of 50-75bps to fund the current account deficit, and banks will keep half of whatever cuts come from the RBA as offshore debt prices rise, households are left with only 50-75bps of potential relief if the Mining GFC (or some other shock) deteriorates. Fiscal policy is also limited and has scope for another stimulus perhaps half the size of the Rudd Government’s GFC effort before the AAA rating is lost. And if that happens then the first problem gets much worse.
- second, when global markets wake up to this growing precariousness they’ll simply ask for higher spreads on bank debt to offset the risks. Thus it will be a rupture in global Australian exceptionalism that will end the bubble with higher interest rates at the most inopportune moment.
For more on that you should read this is you haven’t already: Australia and the 100 year bust.
