1 / 16

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

ingrid-fry
Download Presentation

Thinking— really thinking —about house prices

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  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?

More Related