Recently Michael Pascoe released an article on Yahoo7 Finance that was one of the worst economic commentary fails in recent memory.  If you want to laugh and get angry at the same time, wander over and enjoy.

Here is highlight #1:

There are other less obvious cases though that seep into the collective memory unless challenged. For example, the idea that there is a lethal housing bubble in Australia and China that spells doom for our economy. These are important ideas to understand, so please bear with me as I deal with both of them by stealing the hard work of others.

There have been some credible and high-profile proponents of the Australian bubble argument - and some less credible. In my opinion, Dr Steve Keen falls into the latter category - he's the fella who predicted Australian housing prices would collapse by 40 per cent and that we'd have 20 per cent unemployment. 

That probably made him Australia's most famous economist for a little while during the GFC when he was given uncritical free runs on the likes of 60 Minutes and the 7.30 Report. He was also demonstrably wrong.

Far be it from a proponent of the Austrian school to defend a post-Keynesian, but Pascoe is twisting the facts himself.  Steve Keen made this fantastic prediction with a time horizon of 10-15 years, similar to the protracted deflation Japan suffered, rather than an overnight disaster that his critics continue to spin.  Moreover, the authors of this website are not as optimistic as Dr Keen over the speed of the decline.  I happen to believe that it is more likely that we'll experience a sharp decline over the next 5 years (due to rising interest rates, unemployment and the continued deflationary decline overseas).  But, regardless of it takes place 5, 10, 15 or 20 years from now, the test of a good economist is to see past his feet... something which Pascoe seems to clearly fail at despite the huge wave of data.  I'd like to remind him of another prophet of doom that experienced the same ridicule, Peter Schiff, who for over 5 years was mocked for predicting the collapse of house prices, employment and the general economy.  And despite house prices continuing to rise here, while everywhere else in the world they collapsed, both Schiff and Keen were dead right about the economic collapse while Pascoe was making statements like these in January 2007:

Most forecasters believe the US will manage to achieve a soft landing without tipping into recession, that China and India will continue to power ahead, that Japan is finally recovering and that Europe will do all right.... That's pretty much the view of the "official family" here - the Federal Treasury and the Reserve Bank. It's also the OECD and World Bank view and most of the major banks' chief economists don't stray too far from the path.  With forecasting of course, the majority is by no means always right, but the official family's collected wisdom tends to have a better track record than most.

Well it was right until it was wrong... and it's the same thing with house prices Mr Pascoe.  

He continues:

There are two essential parts to the question of whether Australia is suffering an unsustainable housing bubble. One is a simple matter of supply and demand - have we over-built housing thanks to a speculative investment boom the way housing was overbuilt in the US, Ireland, Spain et al?  The answer to that is easy: no. We have a shortage of housing, we've underbuilt. Our investment in housing, as a percentage of GDP, has been pretty much flat for the past six years despite record population growth. That's the main reason housing prices have risen.

This is laughable... and not in a funny way.  We have already repeatedly demonstrated that the shortage of housing is fiction (check our archives) and that house prices have sharply risen above 100 year inflation adjusted average that just happened to coincide with a massive expansion of money and credit, co-orchestrated by the central bank, banks and the government.  No mention of credit expansion by Michael Pascoe or that house prices are 6.5-7 times the earnings (which is usually 3 over 100 years).  Yet this and more data seems to not exist in the mind of Mr Pascoe.  

Instead he points to a speech by Ric Battellino, which apparently is supposed to prove that Australian households are not overburdened with debt.  Let's examine some of the statements in this speech:

As you know, household debt has risen significantly faster than household income since the early 1990s. At that time, households on average had debt equal to half a year’s disposable income; by 2006, debt had risen to around one and a half years’ income. Since then, however, the ratio of debt to income has stabilised... The current household debt ratio in Australia is similar to that in most developed countries (Graph 2).1  

Significant exceptions are Germany and France, where the ratios are lower, at around one year’s income, and the Netherlands, where the ratio is much higher – almost 2½ years’ income – due to the tax incentives for households to stay geared up.  All countries have experienced rises in household debt ratios over recent decades. Clearly, therefore, the forces that drove the rise in household debt ratios were not unique to Australia. The two biggest contributing factors were financial deregulation and the structural decline in interest rates.

What an admission... the central bank has acknowledged that lowering the interest rates and financial 'deregulation' (which really means government housing subsidies) has directly contributed to one the largest (if not the largest) gain in household debt in Australia's history, which wholeheartedly supports the contention of the Austrian theory of the business cycle that highlights the connection between interest rates, the expansion of money and credit with financial and productive discoordination in the economy.

The speech goes on:

Another factor that has contributed to the resilience of household finances is that, by and large, the debt has not been used to increase consumption. Apart from some brief periods, household consumption has not been unusually elevated during this period of rising debt. Rather, the debt has mainly been used to acquire assets.

This statement should make you laugh aloud.  I wonder what we call the accumulation of assets... consumption, I don't know?  Continuing...:

In summary, if we look at the way the increase in household debt has been distributed, what households have done with the money, and the arrears rates on loans, it is reasonable to conclude that the household sector has the capacity to support the current level of debt. Having said that, the higher the level of debt the more vulnerable households are to shocks that might affect the economy.

Let's really look at what this remarkable speech is summarising... household debt has risen according to the same pattern as the US and UK (both of which had an acknowledged housing bubble), but because house prices haven't collapsed here it must mean that we can sustain this level of debt far into the future.  The lesson from both the US and the UK is that everything seems like it will last forever until it all comes crashing down.  The speech also continues to talk about foreign investment and other factors and concludes that actually, the RBA isn't sure whether there is a housing bubble, but given that we've weathered the storm pretty well so far, it just might pan out.  This is far from convincing evidence and Mr Pascoe should know this.  There are specific reasons why the party is still happening in the Australian property market, the extension of the first home owners grant and the $900 cash splash are two big ones... but nothing lasts forever, as Mr Pascoe will soon find out.

God bless,

Washo