TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH UNIVERSITY OF WESTERN SYDNEY ASSCOIATE PROFESSOR OF ECONOMICS AND FINANCE, STEVE KEEN
Emma Pearson: Hello Emma Pearson reporting for the Finance News Network. Joining me today from the University of Western Sydney for an update on house prices and the property sector, is Associate Professor of Economics and Finance, Steve Keen.
Steve welcome back. Now the last time we spoke to you your view was that Australian house prices were likely to fall, yet twelve months on they’ve continued to rise. Do you still hold on to that view and if so, when are they likely to fall?
Steve Keen: I hold onto the view and the reason they continued rising in the last year is of course, the Government’s intervention in the market with what they call the first homeowners’ boost and I call the first home vendors’ boost, because the money actually went to the vendors. And every time the Government’s brought in - and that particular programme, either initiating it for the first time or increasing the level, there’s been a house price bubble.I wasn’t quite aware of how large it was last time we spoke but when I took a look at the data and one of my blog entries pulls it apart, literally when the boost comes in, bang up go house prices and this time round the bang was actually a 20% bang. And the way it works effectively, is that you give money to the first home buyer - $7,000 more than they would have had otherwise – they take it to the bank and lever it up to a $100,000, they don’t spend that much of course in the market. That then becomes cash in the hand of the person who’s sold the house to them and that person then takes that and buys their next property. So it doesn’t just hit the one time, it gets a two or three time boost and I estimate that at about a $100 billion to the amount of money that households would have put into the mortgage market, over what was going to happen at the time before the boost came in, when household mortgage levels were starting to reduce compared to incomes.
Emma Pearson: RBA Deputy Governor Ric Battellino recently commented that Australian house prices relative to income are reasonable, although prices in the cities are quite elevated. What’s your view on this?
Steve Keen: Various people in the RBA have got very different positions they put forward. Richard’s I think I could actually quite like the way he prospends himself. Glen Stevens in his last set of speeches is actually expressing a worry about whether his own children would ever afford to buy a house and that’s good to see. Ric Battellino I regard as a spin bowler of the RBA. He is cherry picking the data. In some cases you can find information to support what he is saying, but that’s exactly what the spruikers and the property market are doing themselves. And I see this as quite an invalid way for a regulator to behave. If you look at the broad parameter of data on housing, there are various indicators scream over valuation which is why people like Jeremy Grantham are saying house prices in Australia are 40% above value. It’s why the Financial Times is saying that. It’s why most investors that I spoke to in America when I was there recently, were also saying they’re wondering how they can profit from a falling housing market in Australia.So that’s the expectations of the actual speculators in the system and to me it’s worrisome that members of the Reserve Bank are playing more of a spin about saying don’t worry about it or always look on the brighter side of house prices. That to me is irresponsible management, so I’m critical of Battellino on that and I’m not afraid of saying so on camera.
Emma Pearson: He also commented that house prices outside of the capital cities are reasonably priced, what good is that?
Steve Keen: No it’s not, if that says that houses outside the capital cities are reasonably priced that means that 85% of Australian house prices are overvalued. And if you can go and move and live in Bathurst or Geelong - Geelong is actually a fairly large size, but you know some small town in country Victoria, that’s fine but if you can’t afford to make the move, then it’s no great solace to say that the 15% of houses in the non major capital cities are reasonably valued. There’s no particular solace to the 85% or more of us who live in the major capitals.
Emma Pearson: Steve what do you think the RBA should be doing?
Steve Keen: I think the RBA should be doing – it seems to be drifting in this direction - first of all, worrying about asset prices not ignoring them and we’ve had central banks around the world obsessed by trying to control consumer price inflation, and championing inflation in asset prices which I think is ultimately insane policy. Ultimately asset prices have to be supported by the sale of commodities and if you’re cheering rising asset prices while trying to dampen down consumer prices, you’re making it harder and harder ultimately for anybody to service the debt they go into to buy an asset. So that’s irresponsible management by central banks.So start worrying about asset prices and start being concerned about the ratio of debt to income. Because again, by ignoring that we’re seeing debt levels in Australia blow out from 25% of GDP back in the mid 1960’s to 165% now. And that is the major reason we’ve had a bubble economy and the major reason our financial crises have occurred, including the last one.
Emma Pearson: The Housing Industry Association’s latest quarterly report showed a 28.7% drop in its housing affordability index over the last twelve months. Now in response, Family First Senator Steve Fielding has said that first home buyers should be allowed access to their super, what’s your view on this?
Steve Keen: That would be throwing more good money after bad and actually only moderately good money because most of the superannuation money’s been invested in speculation anyway, rather than actually increasing the productive capacity of our economy. So that would be a very dangerous move for first home buyers to find that they’ve got what’s supposed to be there for their retirement, and actually need to access it to be able to buy somewhere to live.Now, to me we have to find some way of removing housing from speculative class of assets, that’s what we need to do. And by simply providing more money to enable people to buy houses, we’re simply adding an additional source of finance to drive up house prices. We simply have to stop trying to make remedies on the buyers’ side, giving buyers more money and start actually making it such that people don’t buy house prices because they’re rising. And that’s why people are in there speculating right now, I think it’s a very foolish idea.
Emma Pearson: And Steve what do you think needs to be done to tackle housing affordability?Steve Keen: This is a financial crisis, the third major one Australia’s suffered from in the last 120 years and in each case, what we had was a financial sector which found it more profitable to finance speculation on assets, than it did to actually finance genuine investment. And that’s always going to happen so long as you can make money by borrowing cash off a bank or off a lender and speculating on rising asset prices, because the actual borrowing is what drives up the asset prices. So it’s a Ponzi scheme, a disguised Ponzi scheme. We have to redefine capital assets so that doesn’t happen anymore and my proposal in the housing sector is twofold. First of all, it is to enforce the old English law of tradition, what’s called caveat emptor – buyer beware. That might sound strange, but the buyer in a mortgage is the lender – think about the terminology. We talk about a mortgagee sale, that’s the person who bought it. The bank buys it from us, off the borrower – by giving a loan they say here’s $200,000, we believe your promise to supply us $20,000 a year for the next 25 years. Now if you actually impose caveat emptor on many of the loans that are issued there and said, what capacity did the borrower have to actually meet that promise, the answer is very little, in which case the bank shouldn’t have a remedy, for the same reason as somebody who goes out and buys an obvious lemon. In the market you know, if you buy car and you see it’s got slashed tyres, then you complain it won’t drive on the road, your bad luck for being a bad buyer – that’s one thing.More important change is that I would limit the amount of leverage that can be applied to a property to ten times the annual rental of that property. That means if you have a house like the one I am living in now that I’m renting where I’m paying roughly $26,000 a year in rent, that the maximum anybody could take out to borrow to buy that property would be $260,000. And of course, if it just so happened that Jamie Packer wanted to buy my place, well he could obviously outbid me but if he did, that would reduce leverage.So the whole idea is to set up mechanisms that mean that rather than having a positive feedback between leverage and asset prices, we have a negative feedback. And ultimately if that happened, people would no longer buy houses simply because they expect the house price to rise and therefore we’d get rid of the actual causal factor in these interminable bubbles we have. And if we can’t learn from this one, then what hope is there for us?
Emma Pearson: Was there anything in the Henry Tax Review that is likely to provide relief from soaring house prices?
Steve Keen: I have to confess to not having read the Henry Tax Review. I’ve seen the press coverage of it and like most of these things; to me it’s a bit like rearranging the deck chairs on the Titanic. I’d rather say what has actually caused the crisis we’re in, and therefore what reforms can we make, so we don’t get these runaway levels of debt once more. And I doubt that there was anything of that nature in the Henry report. So I’m willing to be corrected but I haven’t been told of that so far.
Emma Pearson: Now Steve with prices so stubbornly high, how is the younger generation expected to enter the housing market?
Steve Keen: By political change. If the younger generation wants to do something about housing prices, the best thing is to become a political lobby group against the whole interest that everybody else in society has in rising house prices. Now the reality is, the only people who really make money out of rising house prices are lenders because they extend you more debt and therefore, they get a greater profit out of it, and real estate agents and the associated property market spruikers who make money out of the turnover.If you actually are buying houses - all people who are lucky to buy into a market, sell out through a bubble and continue doing that and then get out and downsize, so if you ride a Ponzi scheme and jump out of it before it crashes, you can also make a profit. Those to me are three very illicit sources of income. I’d far rather see people base their income earning capacity on the productive contribution they make to society rather than the speculative contributions.Now the only people in society who’ve got a very, very strongly vested interest in fighting that is as you say, the younger part of the population which are now completely excluded because this bubble has gone on for so long, that now the entry costs of jumping onto that Ponzi scheme is so great, people say forget it, I’m going to avoid the scheme completely. They’re the ones who’ve got the strongest political interest in overthrowing this and I think it’s only going to be political change and getting those sorts of legal reforms I’m talking about, that’ll work. Don’t bother saving money for it.
Emma Pearson: Steve with everything that we’ve spoken about today, what’s the good news?
Steve Keen: Well the good news is that it finally seems to have stopped rising and that turndown in prices might be happening. The trouble is, with that good news comes a very bad bang bad news. I know from political feedback that both sides of Parliament believe that the reason the financial crisis occurred in the rest of the world, was because house prices fell. And therefore, they’re doing their best to support it which is why the first vendors boost was brought in and why. There were no objections from the Liberal Party when that was done. Now - all they did was inflate it by an extra 20% and give it more to fall from ultimately and add more debt to the system as well.When it starts coming down, there will then be some of the feedback effects people are worried about because the real cause of the crisis wasn’t how house prices then falling, it was the debt that drove the house prices up in the first place - stopping rising then going down, causing what is now being widely called the de-leveraging. And when you de-lever, you spend less than you earn because you are using part of your income to pay your debt down, so there’s a drop in aggregate demand – that’s what actually causes the crisis. So the good news of falling house prices unfortunately has a bad news punch that when it starts to happen, there’ll be people who start reducing their debt levels and by doing that there’ll be less demand in the economy, and we’ll start facing the same sort of downturn that we’ve seen in America.
Emma Pearson: Steve thanks again for your insight today.
