The rise of unproductive debt

Cross-posted from Mark the Graph.

Most people who come here will be familiar with the Australian private sector debt story over the past 35 years. Since Q4-1976, private sector debt has risen from a touch over 40 per cent of nominal GDP. It peaked with the onset of the Great Recession at around 155 per cent and is currently a touch over 140 per cent.

Nominal credit growth ran at between 15 and 20 per cent prior to the early 1990s recession. It ran between 10 and 15 per cent prior to the Great Recession.

Of concern is the productivity of that debt. The next chart looks at the annual change in credit and compares it with the annual change in nominal GDP.

While this comparison (a flow compared with an acceleration) is problematic; we can divide the two lines to find out what an extra dollar in debt contributed in terms of the change in GDP – a measure of productivity.

In the late 1970s an extra dollar in private debt delivered around $1.80 in GDP growth. In the period immediately prior to the Great Recession (what Australians call the global financial crisis) an extra dollar in debt was giving us around 40 cents more in GDP – not the best return on investment.

Why was our debt becoming increasing non-productive over time? It’s a good question and I am not sure I know the answer. But my suspicion is that over time our debt was increasingly being used to finance non-productive housing asset acquisition. Business as a proportion of our aggregate credit shrunk, while housing grew.


The ABS housing finance data suggests a compositional change that would have also impacted on credit productivity – a substantial increase in borrowings to purchase established dwellings, combined with a decline in the purchase of new dwellings and a long period of little growth in the construction of dwellings. Of note, the purchase of existing dwellings is not counted in GDP: it is not an addition to national output.



The thing that intrigues me is those people who hope for a cut in interest rates to restart the housing boom (in the hope this will boost the economy). I am not convinced. Australia is undergoing a structural change. We are saving more – and this propensity to save appears entrenched.

House prices are falling (some argue they were well over-valued). Apologies on the heading for the next chart – it is the index for established houses over 8 capital cities.

In part at least, because of the fall in house prices, the debt to assets ratio continues to rise.

For these reasons, I am not convinced we will see a return to burgeoning housing credit growth, even with more cuts in official interest rates.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. Deus Forex Machina

    A brilliant piece…

    The take on the productivity of debt is something that is all too often glossed over.

      • The distinction between productive and unproductive debt can often be in the eye of the beholder, and passes through many shades of grey.

        A buy to let investor mortgage on an existing house?

        A car loan that allows someone to widen their job search?

        A margin loan to buy second-hand shares? To buy a new issue?

        A manufacturer’s loan to buy new machinery? What if the new machine is the CES’s Mercedes Benz? What if that shiny car gives others confidence to invest in the manufacturer?

        One barrel on my waterfall of wild predictions is
        that a substantial cohort of indebted homeowners will be so injured by the big falls in land prices
        they will spend the rest of their lives collecting brown paper and string (obsessively practicing personal thrift).

        The root cause will be debt made by mature adults in the private sector, later revealed to be unproductive.

        • No this is one of the mantra he chants to meditate along with “houses double in value every 7 to 10 years”, he also has a shrine to Michael Pascoe.

    • Unfortunately this only reinforces Australia’s image as the stupid blond of the developed world—consistently refusing learn from others’ mistakes at the same time wasting away the new found, one-time resources fortune.

      • Given that you guys in Australia are only spending $2.50 for each dollar of increase in GDP, and we in the US are spending $6, (this figure comes from link below, lachlan says: May 28, 2012 at 9:42 am) it looks like Australia is hardly deserving of the stupid blond prize.

        By the way, I am blond, but I hardly believe we have a monopoly on stupidity.

    • Whilst i agree that Australians have been too willing to take on debt for quite unproductive use in the first instance, you would have to perform a forensic audit on the trail of every dollar to see whether the funds were entirely unproductive, or whether some of the funds found their way into businesses that produce, employ, and invest in our national good. On that basis the op doesn’t answer all of the questions.

      There is also the unspoken issue of the many small home loans and top ups being used for small business cash flow and startups. Whilst that lending is collected as part of the housing loans data, it is in fact business lending and in a prior period it would have been treated as business lending, and recorded accordingly.

      I don’t know what the level of hidden business lending would be, but it is not insubstantial.

      • And here’s a compounding problem, Peter. In an environment where small businesses of all sorts are going to the wall ( think retail, of many varieties, here) the supporting asset will have to be sold to meet the debt. What was then once a “productive” loan, becomes a non productive debt to be discharged, and the property sold. The lending to businesses backed by property is only as good as the economic environment in which the loan is made.

        • Dont forget all the personal guarantees that get signed.

          The mortgage that dare not speak its name.

          When businesses go belly up those guarantees will start to sting.

      • Yes but ‘hidden’ business lending was already occurring before housing debt sky-rocketed.

        It would be an absurd stretch to assume that the increase in housing debt since 1991 is all just business debt disguised as housing debt. Are you seriously denying that household debt has increased a heck of a lot?

        • I didn’t argue that it accounts for 100% of residential lending, it is probably about 1% to 5% of residential lending, although even that is a wild guess.

          But it exists, and some people like to know those things.

      • Peter,

        By your own logic, a significant portion of the productive /business loan also goes to pay for non-productive credit. Businesses when they start, have to seek credit to pay for employee salaries, half of which goes to pay for, ahem, housing credit. So let’s also not ignore this hidden unproductive debt.

        • Tell me coolnick – how does a business avoid paying fair wages, and how does any business control what an employee does with the money they earn in exchange for their toil?

          It’s just not true to assume that every business will fail, and that all working capital is to pay wages whilst delaying the inevitable. Business invests in stock, technology, employee training, and a myriad of very productive pursuits.

          Some businesses succeed beyond even the business owners expectation. Would you deny them access to capital to expand, employ more people, and invest within our society?

          You appear to agree with this op, and yet the basic tenet of this op is that a greater share of finance should have gone to the business sector, why are you arguing against that?

          • Please try not to obfuscate Peter.

            I am merely countering your point that says there is a lot hidden productive debt classified under non-productive debt by suggesting that there may also be a lot of non-productive hidden under productive debt.

          • Coolnick – what I am saying is that if we had a graph of lending to the residential sector, combined with a graph of lending to the business sector, then the reality is that the data for residential lending should decrease slightly, and the data for business lending should increase proportionately.

            It would be a lifetimes work for a good forensic accountant to determine the use of any borrowed monies in the second instance, third instance, etc etc etc. How money changes hands and the uses that the money is put to after the initial transaction is difficult to predict.

            What do you do with your money, and what happens to it after you spend it?

            Do you really think that it all goes to pay off other peoples homes? Nothing ever finds it’s way to a primary producer for food, or a manufacturer for motor vehicles, electrical equipment etc?


            Think about it.

          • PF: “Do you really think that it all goes to pay off other peoples homes? ”

            Can you point me where I have said this?

            My point is simply to suggest that there may also be hidden unproductive debt that falls under productive debt to go along with your assertion that says a substantial part of non-productive debt goes to businesses/productive causes.

            If you cannot point me to where I said what you think I said, you need to come back to reality. Trying to argue against imaginary arguments and always having the last word will get you some brownie points (does it really?), but it also makes you look a foolish paid housingbot—which we know you are not.

          • Coolnick – it is a question.

            I haven’t claimed anywhere that you said that.


          • Jumping jack flash

            coolnik, this is exactly how the Australian economy is broken.

            Half of wages are used to pay down the massive debts that were borrowed cheaply from overseas banks, and the other half is spent on imported trinkets.

            Not much of the wages stays in Australia at all. If debt is used to pay the wages, then that is adding lighter fluid to the fire.

            This is the hole that needs to be filled with some productive manufacturing of competitively priced useful items.

            To get to that level though, after a decade or more of dismantling our productive base and relying on services to make money, there needs to be a lot of change in people’s perceptions and expectations.

            Working in a factory is not an ignominous job. It is an essential job.

            You can’t expect to attend 4+ years of relatively easy university and then earn 6 figures after 2.5 – 5 years of doing essentially nothing productive. Yet this has happened to me. It shouldn’t ever happen in a properly functioning economy and society, based on sound fundamentals.

            I was disgusted and left to work in a factory.

    • Rumplestatskin

      As a side note, we are presented this challenge –

      “…if people are going to argue that fundamentals-based house price rises are bad for society, they also have to explain to us why rising share prices are bad too.”

      Well, I thought that was easy. Shares represent a proportion of business ownership. One would hope that a rising price is reflective of that business accumulating more capital, and expanding production. Thus a fixed proportion of the business will grow in value as the business expands its output.

      For example, if own a share in a construction business, the value of my shares can reflect the fundamental increase in the number of homes constructed. But each home (and the land they are build on) doesn’t necessarily have to increase in value. A single house/apartment can’t grow its productive output like a business can.

        • thomickersMEMBER

          I prefer P/B ratio for shares but mostly cashflow.

          Median cashflow is at over full power to service the median home purchase.

          When you have job loss, its all over and hardly any young family has a backstop when they have a home & mortgage.

      • +1

        Wasn’t much of a challenge, and I can’t believe this was the man who was once talked up as potential prime minister material. Pity he doesn’t allow comments on his blog.

          • Alexandra Chapman

            I think it was Chris Joye who touted it!

            Look – I admit to a guilty secret enjoyment when I read Chris Joye’s columns. I always have a giggle when I do.

            It reminds me of being at school at a convent and listening to the nuns discuss why the Pill was a bad thing. The logic is often so astonishing as to be irresistible to read. And his delightful sense of self importance just adds to the feast. OK, i’ll admit it – I can’t help myself – I just have to read him, thereby adding to his google adsense revenue and thus feeding the beast.

          • russellsmith55

            I read his blog from a ‘devils advocate’ point of view. Its an easier way to ensure I’m getting a balanced view on the whole Aus property thing. If he started to agree with MB blogs, I’d have to read someone else that is stubbornly sticking to the ‘strong fundamentals’/’undersupply’ meme.

            Always good to challenge what you think/believe, even if you’re 100% certain of it at the time. It either strengthens your own argument or shows you where you’re actually wrong.

      • This guy has the cheek to ignore events overseas (including the Great recession) and say:

        They will also know that I’ve regularly highlighted here the higher default and loss severity risks associated with corporate vis-a-vis residential lending

        Well, that is because the defaults and the losses from residential lending come in the form of one giant [email protected]&$… aka Minsky moment..

        I don’t know what parallel universe does one have to live in order to ignore the weekend admission from Spain’s Bankia that they need $19 b of taxpayer handouts because of losses from their residential lending.

    • Hoe Jockey and Aony Tbbott

      Can understand housing construction but given we’re more into buying and selling existing properties to each other, I’m at a loss to see how this is in any way productive beyond employing a real estate agent, lawyer and and a couple of bank Johnnies plus the $5 billion negative gearing bill drain on the economy. Not really to sure what we’re worried about here, private debt doesn’t matter….until it does.

      • You have forgotten to mention public servants funded by stamp duty, accountants, buyers advocates, property spruikers (otherwise referred to as MSM). Nothing material gets produced and so many jobs are created, a real economic miracle 🙂

        • thomickersMEMBER

          $20,000 for a bit of “hot ink” on a $500,000 home in VIC.

          Much productivity achieved!

  2. Rumplestatskin

    It should really up to the lender to realise what sort of debt is being extended. Buying an existing house is just borrowing to give money to the previous owners. As Mark says “the purchase of existing dwellings is not counted in GDP: it is not an addition to national output.”

    • Rumplestatskin, in a monetary system based on credit/debt I don’t think the banks care. Credit expansion with the resultant profit is their prime directive.

      • Rumplestatskin

        Yeah, that’s the catch. If lending is not regulated in the interests of society as whole (not a straightforward task) you end up with self-interested lenders taking show term profits at the expense of social risk. Classic Minsky.

      • Tru dat.

        Only if the profits generated from credit for the productive purposes are taxed at lower rate, then this behaviour will change. Banks never cared about productivity and they never will.

        • Alex Heyworth

          For banks, it is about risk vs reward. They don’t care if the reward comes from lower tax rates or higher interest rates.

          Housing loans and credit cards offer the best (lowest) risk/reward ratios.

          • If the profits made from issuing debts that enables flipping houses are taxed at higher rate, wouldn’t the rewards for doing so go down? I am no expert in banking and taxation, but merely curious.

          • Alex Heyworth

            Yes, but I am pointing out that adjusting tax rates is only one method (and not necessarily the best) to influence the risk/reward ratio.

      • Rumplestatskin, in a monetary system based on credit/debt I don’t think the banks care. Credit expansion with the resultant profit is their prime directive.

        They do care if you permit, or even encourage, failure of poor performers.

        This has to be looked at agency behaviour. Bankers lend out money which isn’t theirs.

        From the perspective that houses are worth 3 times wages, and we have a long enough time frame to view as much, why are banks lending out YOUR money (ignoring the recalibration of prices with an expanding monetary supply) to allow someone to buy a house worth 7 times wages.

        Long term risk analysis says it is 3, in the event of having to sell the secured asset against debt, you’re only going to get 3 times wages back.

        Lend for 7, how are you supposed to get ther other 4 back?

        Simply you either punish the agents (bankers), which should occur prior to a crash by the shareholders/board, or if too late you let the bank fail for not taking care of their agents properly.

  3. Great data and analysis. The answer of the question “Why was our debt becoming increasing non-productive over time?” is a question for the whole Western world and can be found much deeper in the limitations the capitalism creates itself. The illusion that financial capitalism has created is that everything in our life is a capital and must grow as such. But consumption goods aren’t a capital for the consumer, the wage isn’t a capital for the average employee, but a mean of living. The same illusion is running about our existing homes, they are not a capital, they can’t produce anything, which can be sold on the market for a profit to growing consumer masses, so they can’t add anything to the real growth. Once upon a time the economics was taught properly and it was clear where the markets are heading with parasitic growth of monopolies, especially the universal monopoly of the financial sector and finance in the era of fiat money.

    So, it is not so trilling to see why we went wrong and why the whole western world went wrong.

    There is a simple anecdote about wealth growth, which I will polish a little bit to make it politically correct: on an island two people lived and the one found a big diamond, which he sold to the other person for the amount of $100. The next year the second person sold the diamond back to the first one for $200. The next year a third transaction went again and the diamond was sold to the second person for $300. Has this small society become richer as the value of the diamond grew exponentially?

    The monopolies always exploit human stupidity. On a free market everyone want to establish a monopoly, but we all together MUST be against it and must defend genuine competition in order to have organically growing competitive economy and genuine democracy.

    • invest-magicMEMBER


      I have no problem with a monopoly…

      except where it is guaranteed by govt regulations.

      A monopoly can not exist in a true free market. And if it does it is because no one can provide a better service/product.

      BTW, democracy is a failed concept. Julia/Bob combo is a fine example.

      Not including the vote buying that takes place in every ‘democratic’ country (handouts/bailouts)… and our politicians are for sale (lobby-groups).

      Banks stranglehold is guaranteed by Govt regulations – don’t blame capitalism.

      The best outcome is to abolish ARPA and the RBA.

      Before people start screaming about who will help the little people… it’s called insurance.

      You want your money to be safe accept a lower return – it’s really simple.

      • I have accepted the lowest return the last 5 years and that is why my money are safe and I didn’t lose anything during the GFC. I am not screaming as you suppose and I am not greedy. My point is no one wants financial capitalism, where the greatest part of the economy belongs to the financial industry, which doesn’t create ANYTHING, but distribution and allocation of the capital. Productivity in real economy creates wealth. BTW, the temporary monopoly of a new company or product is a natural part of the free market. We don’t suffer from this kind of monopoly, but from state-monopoly marriage, which is the worst.

        If democracy is a fail concept then which concept is better than democracy – dictatorship, communism, totalitarianism, socialism, monarchy, plutocracy, theocracy etc.?

        • And from when capitalism is something different from the political democratic system? Where is the capitalism without a government support for the business? In which historical period you can observe the pure capitalism?

          • invest-magicMEMBER

            Responses embedded below your comments

            “My point is no one wants financial capitalism…”

            No one wants financial capitalism?? I do.

            “…where the greatest part of the economy belongs to the financial industry, which doesn’t create ANYTHING, but distribution and allocation of the capital.”

            How is this any different to what Woolies, Coles, Bunnings or the local thai restaurant does?

            Acting as an intermediary is valuable task. Providing services that facilitate trade is a valuable task. What’s not valuable is passing bank losses to tax payers? The reason banks take so much risk is because they have ‘get-out-of-gaol’ card — bailouts AND are permitted by regulations to do so (fractional banking).

            How do you suppose this has come about? The real culprit are regulations (which are heavily influenced by banks of course). Allegedly regulators can forecast and regulate market movements and risk. If banks with have far bigger budgets with 100’s of Phds can’t forcast their own failure, then no regulator ever will be.

            The problem is that regulators are giving the banks a free pass to fail – Basel I, II and now III. This allows banks to game the system. Banks have a bias towards home mortgages due to lower capital adequacy requirements.

            In a free market, there would be no regulation – there wouldn’t even be a reserve bank (fractional banking is another free pass).

            Consider fractional reserve banking vs full reserve banking.

            The point is that in a free market there would be choice of the consumer to the level of risk they want to take. Currently under bank laws, our money is a demand deposit (automatically available for use by the bank less a ‘fractional reserve’ – we’re giving the bank an unsecured loan) vs our money sitting at the bank as a bailment contract (i.e. they are a custodian only – and can’t use it unless we put the funds into a term deposit).

            “And from when capitalism is something different from the political democratic system? Where is the capitalism without a government support for the business?”

            You are assuming that people can’t voluntarily trade with each other without Govts – happens everyday and it been happening since the dawn of time.

            “In which historical period you can observe the pure capitalism?”

            Here’s an excellent historical:
            Iceland from 932 – 1262 AD


            This is a historical record of no Govt and society of private. This is be no means a suggestion that we need to go there but we could all do with less intrusions in the marketplace.

          • invest-magicMEMBER

            Yup… you get to keep the risk and the reward.

            That’s the whole point.

            Any bank that is reckless will lose customers and meet its maker – we don’t need a govt passing their losses onto us – normally that’s called theft and fraud.

            One more thing: It’s immoral. Govt debt is not extinguished once the generation that makes those mistakes passes. It’s the children and grandchildren who are stuck with it. Since when is it ok to enslave generations that aren’t even born yet with our incompetence and self-preservation?

            The moral hazard argument is just a big con and disingenuous attempt at disguising gross incompetence.

            Ultimately, most of us want a free-lunch and that is the curse of democracy.

            Capitalism forces you to be nice and valuable. No customers = no business — including Govts.

            “There never was a democracy that did not commit suicide”.
            Samuel Adams

            Deep inside we are all Greeks – it’s only a matter of time.

          • Unless the mistakes you make does not lead you to fail, but others. Whilst I believe capitalism is a wonderful invention, I don’t think it is perfect. There has to be a balance with some form of social obligation.

          • invest-magicMEMBER


            Would you mind if I forced you to pay for my health?

            The social obligation meme which has been crystallised into ‘cradle to grave care’ is only 50-60 years old.

            Social obligations only move in one direction… more and more… and each advance is justified as ‘social justice’.

            The fundamental question is: How were the needy looked after before Govts got involved in this business of socialised care?

            The answer is that with low tax rates = more philanthropy.

            Which suburb gives the most in Australia? Mosman.

            The more you make, the more you give. Also when individuals give there are greater checks and balances – money is not only more efficiently ultilised but also more effectively – think of this as private welfare. When so much is taken via the tax system, how can one afford to donate – no wonder we’re a nation of battlers.

            Huge sums are wasted by the ‘system’ – no surprise here.

            Humanity is far more caring – and we’ll be do a damn better job than the central-planners — who somehow are more driven by vote buying than genuine care.

            More, shovel ready projects… anyone? Or NBN or Killer Insulation or Solar-something. 10 years paid maternity leave etc etc.

            What would you do with your savings if your tax rate was 10% (for example)?

          • drsmithyMEMBER

            Since when is it ok to enslave generations that aren’t even born yet with our incompetence and self-preservation?

            When that “enslavement” delivers multi-generational benefits. Like, say, the Snowy Scheme, or the Sydney Harbour Bridge.

          • drsmithyMEMBER

            Would you mind if I forced you to pay for my health?
            Since the real question you’re asking is “are you OK with paying taxes” [to pay for public services that other people may use], my answer is “yes”.

            The fundamental question is: How were the needy looked after before Govts got involved in this business of socialised care?The answer is that with low tax rates = more philanthropy.
            No, the answer is “they weren’t”. They were left to starve in the street, get sick, grow up illiterate and die after barely making it out of middle age.

            Which suburb gives the most in Australia? Mosman.
            Some math and history exercises for you:

            If every suburb in Australia gave the same percentage proportional to its median income, would that fund current public services (education, health, legal assistance, police, etc) ?

            Is that level of “giving” stable and consistent regardless of other economic conditions (boom, bust, recession, etc) ?

            When so much is taken via the tax system, how can one afford to donate – no wonder we’re a nation of battlers.
            We have one of the lowest levels of taxation in the OECD.

            Huge sums are wasted by the ‘system’ – no surprise here.
            I know. Golden parachutes, bonuses with no ties to long-term performance, increasingly large salary gaps between workers and upper management. Declining levels of investment in workers leading to employee churn and “skills shortages”. Productivity losses due to the stresses of longer hours and inflexible working conditions. Etc.

            You were talking about the waste in contemporary private industry, right ?

            Humanity is far more caring – and we’ll be do a damn better job than the central-planners — who somehow are more driven by vote buying than genuine care.
            In reality, rather than Libertarian Opposites World, the most “caring” societies with the lowest levels of inequality, highest levels of happiness, widest accessibility to healthcare, education, legal assistance, and eveything else that makes up a happy, civilised society, are the social democracies of Northern Europe.

            What would you do with your savings if your tax rate was 10% (for example)?
            Nothing, because they’d be soaked up by paying for the rapaciousness of private industry stepping in where public services had previously existed.

  4. Interestingly in the interview of Ann Pettifor you guys posted the other week it was mentioned that over 90% of total debt issued in the UK last year went into non-productive part of the economy. I assume this would mean most of it went into shares and housing.

  5. Jumping jack flash

    Long ago debt was feared. Revered. To take on debt you needed to convince an angry and fastidious bank manager that what you wanted to do with it was not only productive, but exactly how you were going to repay the debt, and what you would do if anything went wrong with your plan.

    And even then it was highly unlikely to get the full amount asked for.

    These days they give you what you want and then ask if you want more. No plan required. No consideration about what will happen if something goes wrong.

    There is a good reason why debt was respected and avoided in all but the most dire circumstances. We are just discovering it.

    • I think it is because these days financial companies issuing debt can delute it into all these unregulated financial products and sell the risk on. The hot potato changes hands and the last person holding it gets burnt. This is the only reason I can understand why the debt issuer doesn’t care much about your long term capacity to service the loan.

    • plus obviously there is the moral hazard of the ‘private gains, socialised losses’ mentality that permiates the world right now

  6. Alex Heyworth

    “my suspicion is that over time our debt was increasingly being used to finance non-productive housing asset acquisition.”

    And the rise of credit cards. There was no such animal in the 1970s.

    Excellent article which goes to the heart of the problem for both Australia and western nations in general.

    Time to remove all the incentives for non-productive debt (NG, FHOG etc) and introduce incentives for investment.

    • “And the rise of credit cards. There was no such animal in the 1970s.”

      Bankcard was launched in 1974.

      Credit cards weren’t the problem; that came later, when banks realised that they would make more money if they lent more to people who *don’t* pay off the balance every month.

      • Alex Heyworth

        OK, strictly speaking I was wrong on the timing. My recollection is that nobody actually had a credit card until the 1980s, but maybe you moved in different circles.

      • That is one of the interesting things about these graphs, contrary to many (most?) peoples opinions, credit card debt isn’t the major problem, nor does it look like it has grown uncontrollably. I have to admit I would have expected to see a dramatic increase over the past 10-15 years. Whilst there may be individuals who have serious problems with it, overall it looks to be under control, and I’ve also seen this on many of Steve Keen’s graphs as well.

        My conspiratorial side wonders if credit card debt has been a useful scapegoat for the FIRE sector, drawing attention away from the real problem, excessive housing debt.

        I do have one question, how much of that housing debt has gone on ‘equity maaate’ discretionary spending? That could be what people are confusing a lot of credit card debt with. I wouldn’t be surprised if that has been overstated as well.

        • Alex Heyworth

          hamish, good spot. The chart showing the relative shares of various forms of credit actually shows personal debt declining in share. Housing is definitely the culprit.

  7. Endogenous money supply? Check!
    Historically low interest rates? Check!
    Inflation targeting (minus assets)? Check!
    Government-supported speculation? Check!

    Up,up and away…

    (Picture of Willy Wonker in his glass elevator here)

  8. The biggest problem is the banks, they are willing to lend against property no problem, but not willing to lend/having higher requirements to business. I had a home loan and wanted to start a business, they wouldnt lend me the money for my business despite having a lot of equity in the house, so we sold our house and started the business, the business is doing 300% better than I ever predicted, 3 years later we applied for a home loan and got the loan no problem.

    • Alex Heyworth

      Good on you. Don’t be too hard on the banks, though. 50% of start ups fail in the first year. They weren’t to know you wouldn’t be one of them.

      • Yes. But I also think a lot of small businesses operate in cash economy and doing quite well but this not registering in any of the official reports.

  9. It would be interesting to see what relationship exists between changes in GDP and changes in debt that is not related to housing, especially the trade in existing housing.

    As you point out, trading in existing goods (houses) by definition adds only very marginally to GDP, so we should expect that if lending/borrowing for this purpose increases faster than GDP (or household income for that matter) then the data will tend to demonstrate what we have already assumed to be the case – that is, that borrowing has become less “productive” over time.

    If we could see the relationship between borrowing for business purposes and GDP then we could get a better idea of what returns apply to production-related borrowing/investment.

    If we also included equity investment, we would have an even clearer picture of the relationship between changes in investment and changes in GDP.

    If we further looked at both private and public sector investment in relation to changes in GDP, we would really be able to measure changes in the productivity of capital and start to investigate what influences these changes.

    If we want to focus on borrowing for the purposes of trading in existing housing, we should be comparing household assets with liabilities. This might offer an explanation of changes in borrowing patterns over time. Changes in the composition and distribution of “household wealth” might also go some way to explaining changes in consumption patterns, savings rates and therefore GDP.

  10. Rule No.1: A nation’s inhabitants buying and selling houses from one another does not make that nation wealthy.

    Rule No.2: distorting housing prices with government subsidies and handouts (FHOG, NG etc.) creates massives bubbles in unproductive debt – and those bubbles ALWAYS pop!. See the US, Spain, Ireland, UK etc. etc… why are we still debating this? It’s sooooo bleeding obvious!!!

    • russellsmith55

      One person’s bleeding obvious is the inconvenient truth that threatens another person’s real estate agent career, and threatens another’s investment strategy to easy wealth.

      Some people simply can’t accept what the figures are telling us, because it means they have to re-evaluate their whole life plan.

      The rather unstable rule of thumb became a self-fulfilling prophecy and a whole system was built around it being true. We’re now watching the system trying to come to terms with the fact that it was never true.

  11. rob barrattMEMBER

    The conclusion about housing has to be correct. People don’t work for their country, they work for themselves. Like water finding the lowest point people will look for the biggest profit (that’s legal) with the least work. When house prices were inexorably rising in the early 2000s everyone was trying to cash in, with government(s) piling on the jam.

    It’s evolution. Evolution is selfish & ruthless. The shrewdest competitor wins. If it weren’t houses it would be something else.

    And now? – there are a lot of three legged zebras out there with negative equity and the lions are moving in. They’re about to discover the nasty side of evolution – what happens to the losers. And you can bet your life it will happen all over again.

    • “The shrewdest competitor wins.”

      You misunderstand how evolution works. The correct statement is: “The winning competitor is decided by chance.”

      • russellsmith55

        “… and over many generations, shrewdness traits are ‘selected’.”

        I think the three-legged zebra analogy still works if you view it from the point of view that many who have not learnt the ‘naturally selected’ wisdom from previous generations (market cycles) are not survival fit – as long as the environment has not changed enough to make the ‘excessive risk taking’ trait advantageous (which it clearly hasn’t – like every cycle before it, this time isn’t different).

        • As Taleb (who’s far smarter than me) pointed out, evolution in hiumans favours risk-taking, not “shrewdness” (which is just another word for “luck”, anyway).

      • In my view evolution works by more than one process..

        random mutations to genes occasionally confer some advantage relative to other genes in the pool leading to reproductive success for that gene which then increases in the population over time…this is the process of natural selection.
        random mutations to genes do not confer any advantage or disadvantage relative to other genes, but over time random drift (chance) leads to the eventual success of some genes and the loss of others…this is most likely to occur in small isolated populations of genes

    • rob barrattMEMBER

      natural selection is a non-random process.
      Of course, I’ve no doubt this is the last thought in the slowest zebra’s mind as the lion catches up with him..

  12. Shouldn’t it be pointed out that deindustrialization and the rise of unproductive debt are not accidents of neoliberalism and neoclassicism—-the religious faiths practiced by the merchants of debt—-but features, as Miguel Teubal explains in “Rise and Collapse of Neoliberalism in Argentina”:

    “This enormous indebtedness had nothing to do with industrialization or investments; on the contrary, it was contracted in a context of overall stagnation and deindustrialization. It was used: a) to finance military and repressive expenditures and operations; b) for the construction of several highways and a gas pipeline; c) to finance the 1978 world football cup played in Argentina; and d) the bulk of this indebtedness was used to finance speculative financial activities and capital flight.”

    Or Paul Cooney explains in “Argentina’s Quarter Century Experiment with Neoliberalism: From Dictatorship to Depression”:

    “The shift toward neoliberalism began during the dictatorship of 1976, deepened during the Menem administration, and was supported
    throughout by the IMF…

    Despite mainstream economists being in denial, the drive toward a neoliberal
    economic model, as advocated by both the Argentinian elite and the IMF, has had a clear class bias and thus led to a marked decline in the standard of living for the majority of Argentinians. The particular type of neoliberalism, which Argentina pursued, promoted agroindustry and finance at the expense of manufacturing, and thus produced two waves of deindustrialization…”