Transcription
Helping people buy their own homes should be a goal of any government, based entirely on profit rather than balanced with the needs of people.
14 times the annual disposable income, making it the world's second most expensive city to buy property. This is a con job. The impact of these policies over time has been to do the exact opposite of what the policies claim to do.
This will make it easier for Australians to get a foot onto the property ladder. This is actually going to do the opposite. Your wages haven't risen by a factor of five or six, but the price of the houses you're trying to buy have risen that much.
The rules of the game have not been properly set and they've been based entirely on profit rather than balanced with the needs of people. The Australian government's just released a new housing policy and like all the other housing policies it's released is they're encouraging young people to take out larger mortgages and therefore drive up house prices. Let's, but that's not exactly how it was sold by the Australian prime minister, or should I call the Australian prime real estate salesman, Anthony Abenezy. Let's have a listen to how he pitched this on Twitter.
"Mortgage insurance, you need it, but adds tens of thousands of dollars to your home loan. From October, we're making it easy to buy your first home with just a 5% deposit. You don't have to pay a single dollar in mortgage insurance. That's because we'll cover it because we want you to buy your first home sooner."
This is a con job which encourages young people to borrow more money than they'd otherwise do to hand it over to the vendor and that helps drive up the house prices and that benefits the wealth levels of older Australians like Balanesei himself who are landlords. So this is something which benefits the landlords while you pretend to help out the tenants convert from being tenants house owners. It is an insane policy but it's indicative of what's been done worldwide.
Governments across the planet have treated housing as an asset class rather than as a vital consumer service. And they've caused asset price inflation to far exceed commodity price inflation in all but a handful of countries. The Bank of International Settlements maintains a database on house prices. And of the 14 countries that they've got data going back to the early 1970s, houses are far more expensive in real terms in all but three of them. Let's have a look at that. So the rise has been incredible. These are prices which have been deflated by consumer prices. So it's showing how much house prices have risen relative to consumer prices. And the most extreme which happens to be the United Kingdom at the moment but it was New Zealand have risen by five or six times in real terms. And that of course relates to your wages as well. Your wages haven't risen by a factor of five or six but the price of the houses you're trying to buy with those wages have risen that much. And even though we've all focused upon America because of its subprime bubble and and the impact that had on the global economy with the global financial crisis, it's only in the middle of the pack. It's number eight of the 14 countries in terms of the increase in prices relative to the 1970s. So this has been something which has been done across the planet.
So the mechanism behind this rise in house prices is something that's too complicated for mainstream economists to understand because they think in equilibrium terms. They ignore the banking sector. These rising house prices have been caused by rising levels of mortgage debt and that again is a global phenomenon. Now first place in this case belongs to Switzerland which is strange country because there's so many other elements of money being hidden but they nonetheless take our first place. Australia's number two in terms of how much household debt is taken on by households to buy properties. Number three Canada again America even though it was the center of the subprime bubble in the global financial crisis. its level of mortgage debt peaked at less than 100% of GDP whereas all these countries exceeded 100% of GDP.
Now this causes rising house prices by a mechanism that simply escapes the ability of mainstream economists to understand because that first of all they insist on a mythical model of banking in which banks don't actually lend money. They imagine banks are intermediaries who transfer spending power from one person to another and therefore the change in debt should have no significant macroeconomic impact. Now in the real world, banks create money when they lend. That money is used to buy goods and services and also assets. So the rising level of household debt drives up the level of house prices and share prices and so on. And we can see that here by breaking down both the house price index and the level of household debt. So if you look at the two together, and I'm doing this for America here, there's been generally speaking rising house prices and rising mortgage debt at the same time. But there are cases where there's been rising house prices and falling household debt. So if just look at that level, you can't really see what's going on.
The demand for housing fundamentally is new mortgage debt. That's the change in the level of mortgage debt. If you divide that by the price level, you get a rough indication of how many average houses can be bought per year with that amount of monetary demand. That gives you a relationship between the change in level of mortgage debt and the level of house prices. When you put this through statistical analysis, there's no point doing a correlation of these two because they're both rising. When you look at the change in house prices versus the change in mortgage debt, you get a reasonable correlation. But the main one comes when you look in the change in house prices and the change in the change in the level of mortgage debt. That's what I identify as the cause of housing prices rising and the correlation coefficient is crazy high for something which if you've done first and second differencing to data which is only collected on a quarterly basis.
Now that's the American situation. Nobody denies America had a housing bubble. It's burst and it's now rising once more. But the the burst is definitely there. Australians will claim they haven't had a housing bubble because their house prices are still rising. But you do the same analysis with the Australian data and you find the same pattern. Almost always rising house prices and rising mortgage debt. A reasonable relationship between change in house prices, change in the level of mortgage debt. But the causal one, which is the change in the change in mortgage debt and the change in house prices, that's got an even higher higher correlation than the American data.
And now let's take a look at how Australia has managed to keep these prices rising. So the very first one was under the Labor government back in 1983 over 40 years ago. And this is Labour's supposedly the progressive party in Australia. And you had another policy by them. They were going to abolish what's called negative gearing but they reintroduced it in 1987. And negative gearing is a peculiar Australian policy where a landlord is allowed to write off the expenses of maintaining a property, including interest payments on it against not just the income from the property itself, but their entire income.
House prices might fall. Not if the Australian government's got anything to do with it. Look at all these policies. In January 1988, shortly after the stock market crash of 87, they brought in the second version. They call it the first homeowner scheme. I called it the first home vendor scheme. In July of 2000, which is the time of the stock market crash in America, a 14% fall in the market then, which people were afraid was going to lead to a collapse. In fact, the bubble continued on until 2007. They brought it back again. This is now the so-called liberal government. Liberal in Australia means conservative. Just to confuse things, you have two three so-called progressive changes here. Then two liberal, then a progressive, then two conservative. It's this is a bipartisan policy to push house prices up.
October 2008 is particularly significant for me because I was warning about the global financial crisis and because it was being driven by rising levels of mortgage debt. I inevitably got asked about house prices. And by the way, if you want to use my proprietary software, Ravvel, for economic analysis, you get it as a free bonus inside my 7-week rebel economist challenge like over 600 people have already done. To learn more, apply at steveken.com. So all all these schemes are designed to pump up prices and you can see their impact when you look at the timing of these policies against what happened to the rate of change of house prices in Australia. All these policies have done is encourage people to borrow money and buy a house with that borrowed money. Look what they did to the level of household credit. Household credit was falling before the first time that Hawk brought in this policy. Bang. Household credits increases. The second change, bang, up goes the level of of increase in household debt. You then have some lull years and then the rise into the end of the end of the telecommunications bubble of the 1990s. And then when there's a fear of of a serious downturn, the Conservative government, so-called the Howard government, brings in and does it twice in a very short period of time and then makes the change permanent, boosting the money they give to the house to first-time buyers to buy a home, encouraging to take on mortgages. The increase in household debt that year was more than 14% of GDP. Now that increase of borrowing by the private sector has the same stimulating impact upon the economy as a government deficit of 14% of GDP. So that looks like the economy is doing really well and the politicians take the credit but it's all because they're encouraging the household sector into higher and higher levels of debt.
Now the one that most matters to me is this one here which is done by Kevin Rudd because I was warning of the global financial crisis for one and a half years before it happened. I'm recognized as one of the dozen or so economists who actually predicted the global financial crisis. But in Australia, because so much of this was driven by rising house prices, that's what I got asked on the 7:30 report. And this is in October of 2008.
"Associate Professor Steven Keane has been come increasingly to prominence over the past couple of years, specializing in the economics of Australia's spiraling household debt burden. Initially, he was almost a lone voice with his pessimistic view of how dramatically that burden could impact on us all. He's not alone now, and he believes Australia faces its own savage correction, including an inevitable housing slump. I spoke with Professor Keane earlier tonight."
Now, the comments that I made in that speech were then used by the presenter Kerry O'Brien to savage the prime minister the very next day about what I was saying was going to happen as a result of increasing house prices and increasing levels of mortgage debt. So, economist Steven Keane pointed out in this program last night that America's private debt levels are way beyond what they were going into and during the 29 great depression and so are Australia's. that must worry you and the prime minister rattled said well we continue to provide a strong budget surplus which is actually partly causing this problem here and knocking the public debt again as usual politicians focus upon public debt rather than private debt which is the real worry but then Brian comes back and says do you agree with my assessment I've been warning about it for quite some time well what happened six days later the RD government doubled and trebled the amount of money they gave to the firm owners buying an existing home or buying a new home. And to even top that out, the Victorian state government gave another $14,000 on top of the $21,000 you could get from the federal government to encourage people to buy new houses on the periphery of Melbourne. When the Australian economy's recovery began, the major growth in employment in Australia at the time was real estate agents in Victoria. Whenever there's a danger of a falling level of house prices, the Australian government pumps it up again with a scheme of this nature. And you can see the impact of Rudd's change on this comparison of Australia versus America. Because before the crisis broke, the rate of change of Australian private debt was far higher than America. The change in private debt in America was peaked at about 15% of GDP. Australia was 23%. So I had every reason to expect Australia to have a bigger crisis than America had. You had the declining levels of house prices in Australia and a declining level of credit up the top here, but it stopped because of the first home vendors boost. People went back into buying housing. That stimulated credit based demand and credit in Australia, which is the black line here, never went below zero. Whereas for America, it went from plus 15% of GDP to minus 5%. So a 20% change in the level of credit based demand in the American economy. Australia had much the same scale, but it didn't go negative. And that's the reason that Australia avoided the recession during the global financial crisis. But the price that Australians paid, and this is price paid by young Australians rather than rich old Australians, was higher house prices, making it even harder for them to get into the housing market.
The impact of these policies over time has been to do the exact opposite of what the policies claim to do. And that's it's reduced the level of home ownership, increase the level of people who have a mortgage against their home and increase the percentage that are renting housing rather than owning it outright. So this is a policy which looks good to the individual but is disastrous collectively and makes the world a harder place in which to survive.
If you go back to the stage when only a few of these policies been introduced, this is data from 1988. Unfortunately, there wasn't data from earlier, almost 44% of Australians owned their own home outright and less than 30% had a mortgage and less than 20% were renting. You fast forward to the last to date the data was collected, which is 2018, the number of Australians owned their own homes outright had fallen from 43% to 30 31%. Those who had a mortgage went from under 30 to about 38%. The renters were about 7 about 17% of the population. Now they're about 27%. It would be worse now. All these policies have had the exact opposite effect to the one that the politicians pushing them have claimed they would have. This is a case where the government has been using its crew power to create money, not to build infrastructure, not to build schools, not to have welfare, but to drive up house prices, which makes one generation very well off at the expense of other generations as it is a disastrous policy. And I am frankly disgusted that the Albani government is going and doing exactly the same thing as all the predecessors have done. This is a policy which is designed to inflate the asset prices to the benefit of old people the expense of young people and it gives an illusion of economic progress when it's actually locking the the countries that do this into a form of penury because once you're paying the level of prices that come out of these policies, you own the house. You spend all your money servicing the debt. You're giving your money to the banking sector. You can't afford to go shopping. You can't afford to invest. and you get stagnant economies coming out of it.
There's no way that politicians are going to stop doing this until we have political parties that represent the majority by being people who are renting rather than owning properties. So, it's in your own self-interest and it's in the interest of the economy and society in general to vote for political parties that intend to bring house prices down rather than pumping them up. And if this video gets lots of interest, I'll explain how it would work in a subsequent video. So like, subscribe, and share because it's time it stopped.
"You're like many other truth seekers and want to learn 50 years of real economics from me in only seven weeks, you'll love my new 7-week rebel economist challenge as well. To apply, go to stevekang.com. If you qualify, you can attend my lectures, ask me questions personally every week, and make friends with a great group of like-minded people. So again, like many others, go to stevekang.com to apply as well for the 7-week Rebel Economist Challenge. Good luck."