Did you see economist Stephen Keen on 7.30 report last night?
All this focus on interest rates is meaningless and deceptive.
Full Transcript
Some excerpts:
STEVE KEEN: Value of housing over the - when you cite, define the, really, the latest boom which began about '94, house values have increased by about 250 per cent over that period of time. At the same time, debt has increased about 600 per cent. Now prices have been driven up because people are willing to borrow more money than you did to buy the place in the first instance. What happens actually is debt rises faster than prices. I think this latest rise is likely to be a sting in the tale because you get to a certain point where people look at the price rise and think, can I believe there'll be another price rise again, that means that somebody that can borrow more money than I did to buy this place off me in two or three years time. I think this might be the one that breaks the camel's back and people lose that expectation and then we will see prices falling here as we have seen in America.
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STEVE KEEN: Not as much. You see, again, when you take a look at the comparisons of the real increase in wages, yes there has been a substantial rise in real wages in the last 17 years since the depths of the 1990s recession, so if you go back to the 1990s recession and compare real wages now to real wages, then you see they've rise by a bout 25 per cent, which is quite substantial, but across the same time period the real interest burden has gone up by over 250 per cent, more than 10 times as much. Even if you look at the last election, since the last election, real wages have risen by about five per cent, which is a significant achievement, but across that same time period the real interest rate that households are facing has gone up by almost 50 per cent, so interest rates are cutting more and more into the costs of living, which is why people are not feeling that they're better off than they've ever been before.
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KERRY O'BRIEN: But I heard the point put to Peter Costello, the Treasurer, tonight on ABC radio about household debt, and he said that you don't just look at debt, you look at assets, and while people's debt may have risen, so in many cases is the value of their assets, in particular, the family homes.
STEVE KEEN: Assets, I think the first three words of that - the letters of that word are quite important because the way we measure assets is nowhere near as real as the way they measure debt. If you - I say I've got a debt of $100,000, I owe somebody that gives me a permanent commitment to pay based on that $100,000. If they say my house is worth $500,000, I have to find someone who's willing to buy it. Now the asset market is nowhere near as broad as the market for goods and so. So these prices are all imputed and it's quite possible that those prices won't be realised when you actually have to sell, and certainly that's what's happening to a large number of Americans now. And it simply is not possible to have asset price rising forever faster than consumer prices, and America's learning that lesson, and I think we're going to learn it somewhat later.
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STEVE KEEN: Well, household debt back in 1977, for example, was equivalent to about 18 per cent of household disposable income, so let's say if you take round figures and say you had a disposable income of $100,000, you'd owe $18,000 on a mortgage. Now you come forward to today and if you have a disposable income of $100,000, again I know that's high but let's take a round number, you owe $137,000.
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