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“Bubble Economics: Australian Land Speculation”

Bubble Economics: Australian Land Speculation 1830 – 2013

Paul D. Egan and Philip Soos

Published 30 March 2015 by BooksWEA Books, $10.00
This book is available to download in PDF.

Australia has experienced rapid housing price inflation since the mid-1990s, leading to claims that a bubble has formed in the residential property market. Between the low in 1996 and apparent peak in 2010, real housing prices soared by 123 per cent. Rampant overvaluation has become the norm across the capital cities and housing prices have become detached from economic fundamentals. Total land values relative to GDP doubled between 1996 and 2010, driven by rising residential land values. Gross and net rental yields have compressed to a historical low. In 2013, the gross and estimated net yields of houses were a miniscule 3.9 and 1.9 per cent nationwide. Conversely, the net price to earnings ratio is 53, indicating investors are paying massive premiums far in excess of rental income. Investment property rental income has not covered expenses, principal and interest since 2001. In combination, these factors suggest investment strategies are fixated on capital gain…

Table of Contents

About ……………………………………………………………………………………………………. i

Executive Summary  …………………………………………………………………………….. iii

Table of Contents …………………………………………………………………………………. vi

Acronyms …………………………………………………………………………………………….. ix

Introduction ………………………………………………………………………………………….. 1

Part 1: Australia’s Three Depressions ……………………………………………………. 5

1.1 Australia’s First Depression: 1840 – 1845 ………………………………………………………….. 9

1.2 The Second Depression: 1892 – 1899 ……………………………………………………………… 18

1.3 The Third Depression: 1931 – 1934 …………………………………………………………………. 41

1.4 The 1890s as Australia’s Great Depression………………………………………………………. 56

1.5 Factors Facilitating Financial Instability and Economic Crisis ……………………………… 65

Part 2: Understanding How Asset Bubbles Form

2.1 The Financial Instability Hypothesis and Debt Deflation Theory Revisited ……. 86

2.1.1 The Expansionary (Boom) Phase of the Asset Cycle ………………………………… 87

2.1.2 The Contraction (Bust) Phase of the Asset Cycle …………………………………….. 94

2.2 Characteristics of a Credit-Based Capitalist Economy ………………………………. 104

2.2.1 Evidence for Endogenous Monetary Creation ………………………………………. 110

2.2.2 Modelling Disequilibrium and the Instability of Capitalism ……………………. 123

2.2.3 Debt Acceleration and GDP Growth ……………………………………………………. 129

2.2.4 Debt Acceleration, Asset Prices and Employment ………………………………… 135

2.3 Mechanisms for Deflation in a Credit-Based Economy …………………………….. 142

2.4 Ponzi Financing and Declining Debt Productivity …………………………………….. 154

2.5 Herding Behaviour and the Development of Asset Bubbles ……………………… 161

2.5.1 Asset Bubbles: A Brief History ……………………………………………………………. 163

2.5.2 Psychological Biases Amplifying Asset Bubbles …………………………………….. 168

2.5.3 A Psychological Framework Explaining Asset Bubbles …………………………… 179

2.6 Incorporating the Rentier Sector into a Model of Financial Instability ……….. 191

2.6.1 Rentier Economics Promoting Inequality and Inefficiency ……………………… 199

2.6.2 Rentier Behaviour in the Financial Sector ……………………………………………. 224

2.6.3 Economic Rent Found in Land and Other Resources ……………………………… 263

2.6.4 FIRE Sector Strategies Reinforcing Plutonomy ……………………………………… 282

2.6.5 A Post Keynesian-Georgist Perspective of the Rentier Economy …………….. 292

Part 3: Modern Australian Economic and Financial Settings

3.1 Australia’s Housing Bubble as Minsky’s Ponzi Scheme ……………………………… 314

3.1.1 Real Housing Prices …………………………………………………………………………… 315

3.1.2 Private Debt …………………………………………………………………………………….. 321

3.1.3 Net Rental Income Flows …………………………………………………………………… 329

3.1.4 Price to Rent Ratio and Rental Yields…………………………………………………… 337

3.1.5 Price to Income Ratios ………………………………………………………………………. 347

3.1.6 Kavanagh-Putland Index ……………………………………………………………………. 361

3.1.7 Total Land and Housing Stock Values to GDP Ratios ……………………………… 366

3.1.8 Debt to Cash Flow Ratios …………………………………………………………………… 375

3.1.9 Overview of Housing Valuation Metrics ………………………………………………. 379

3.2 The Australian Financial Sector ……………………………………………………………… 384

3.2.1 Indicators of Systemic Fragility …………………………………………………………… 386

3.2.2 An Overview of the Australian Banking Sector: Key Statistics …………………. 398

3.2.3 Key Banking Sector Trends…………………………………………………………………. 409

3.2.4 Bank Capital Ratios and Risk-Weighted Asset Methodology ………………….. 425

3.2.5 Banking Concentration, Competition and Systemic Risk Factors …………….. 444

3.2.6 Sources of Bank Funding ……………………………………………………………………. 458

3.2.7 Cumulative Current Account Deficits ………………………………………………….. 469

3.2.8 RMBS, Covered Bonds and the Conditional Liquidity Facility………………….. 482

3.2.9 Prudential Regulation and Bank Stress Testing …………………………………….. 497

3.2.10 Government Action During a Future Banking Crisis …………………………….. 511

3.3 Australian Trade Settings and Global Economic Conditions………………………. 522

3.3.1 A Brief History of Australian Mining Booms …………………………………………. 522

3.3.2 Key Mining Sector Statistics ……………………………………………………………….. 532

3.3.3 The Mining Boom Phase I: A Rising Terms-of-Trade ……………………………… 544

3.3.4 The Mining Boom Phases II-III: Capital Investment and Export Volumes …. 552

3.3.5 Productivity and Gross Domestic/National Income ………………………………. 563

3.3.6 Risks Facing Key Export Partners ………………………………………………………… 580

3.4 Ponzi-Amplification Mechanisms…………………………………………………………… 595

3.5 Why Economists Always Get It Wrong …………………………………………………… 608

3.6 The Emergence of Fraudulent Mortgage Lending ……………………………………. 621

3.7 The History of Australian Government Debt …………………………………………… 649

3.8 Examining the Urban Containment Hypothesis ………………………………………. 657

3.8.1 Evidence of Land Bubbles in the Absence of Urban Containment Policies .. 662

3.8.2 The Divergence between Prices and Rents during Land Price Cycles ………. 667

3.8.3 Theoretical Issues Regarding Housing Models ……………………………………… 672

3.8.4 Conclusion ……………………………………………………………………………………….. 681

Recommendations

R.1 Taxation, Property and Mining Sector Recommendations ………………………………. 686

R.2 FIRE Sector Recommendations …………………………………………………………………….. 691

R.3 Government Policy, Political and Institutional Recommendations ……………………. 697

R.4 Theoretical and Economic Modelling Reforms ……………………………………………….. 701

Conclusion ……………………………………………………………………………………….. 703

References ……………………………………………………………………………………….. 716

List of Figures  ………………………………………………………………………………….. 775

List of Tables    ………………………………………………………………………………….. 781

Glossary ……………………………………………………………………………………………. 784

 

  1. March 31, 2015 at 1:58 am

    And the only people who really benefit from price inflation are the financiers who create credit out of nothing, while the speculators are hammering nails into their own coffins.

  2. Macrocompassion
    March 31, 2015 at 7:52 am

    Helge obviously has not read this book! The scourge of our present-day society is the gap between the rich and the poor (and the resulting poverty and homelessness etc.,) which is basically caused by land-value speculation, as described here. This is not obvious which is why books like this have value.

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