Review: Australia’s Bubble Economics

Paul Egan and Philip Soos [1] have a new book out. It available for free here (pdf), and it’s called Bubble Economics: Australian Land Speculation 1830-2013.

Some reviews and reactions have started to flow in – locally, internationally, and even some critical reactions. This post gives my take on this very detailed and topical book.

A short review would go something like this: Read this book if you want a very rich long term view of Australia’s economic history, particularly regarding land use and land cycles, mining booms, taxation, banking and finance. Think of it as a reference book that brings together historical data, institutional context, and economic analysis in manageable sections that can be easily referred back to.

As an example of the scope of topics covered, Soos and Egan conclude with 57 (yes, 57) recommendations about tax reform, financial regulation, public policy, and economic practice which are derived from the analysis in earlier chapters. As expected, the no-brainer reforms are all in there – transition to land and resource taxation, improve macro-prudential regulations, consciously plan for counter-cyclical government spending, and adopt more secure rental tenancy controls. But they also take hints from a broad range of perspectives, suggesting, for example, the possibility of a job-guarantee style scheme popularised by modern monetary theorists.

The book consists of three sections – Australia’s Three Depressions, Understanding How Asset Bubbles Form, and Modern Australian Economic and Financial Settings.

Part 1 introduces the reader to a long term perspective of Australia’s economy and the asset cycles that dominate the long run trends. As its heading suggests, this section details the economic situation prior to, and during the depressions of the 1840s, 1890s, and 1930s. This is important historical context that we often ignore in modern debates about the business cycle.

I was particularly impressed with their research on the 19th century Australian economy. Since land was such a major component of economic activity in that era, the role of land prices and impacts of land speculation were even more pronounced.

One element dominating that process, which is not a feature of the modern cycle, was the privatisation of public lands by State governors, which, prior to the 1830s, involved discretionary gifts of land to private individuals. Later, lands were sold at auction into private possession. Although there was an effectively endless supply of land to the private sector by government through this auction process, there was still a massive land boom and bust cycle during that period. The chart below, taken from p14, shows the land bust of that era quite clearly.

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You notice many similarities across Australia’s three depressions – an asset price boom, followed inexplicably by a bust where asset prices fall at the same time as turnover plummets. In the latter two depressions we can see a clear pattern of deflating prices across the whole economy (chart below), with retail prices falling around 35% in the 1890s, and around 20% in the 1930s. It makes you appreciate the automatic stabilisers that come with a larger government sector and the willingness to conduct counter-cyclical policy (including guaranteeing bank deposits).

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Part 2 of the book provides a number of perspectives on asset bubble formation. Soos and Egan detail a decent range of ideas from different schools of economic thought – from Minsky’s description of an economy with increasingly speculative uses of debt during stable periods which later stifle investment, to the many micro-economic behavioural explanations that result in speculative herding in the aggregate.

In this part I was impressed by the effort to clarify the role of economic rent, both as part of the economic cycle, but also as a permanent feature of political machinations. If one is to believe that the use of debt for speculation is an inherent driver of booms and busts, then one must consider the political situation that allows, or sometimes encourages, this to occur. Obviously speculative asset price booms are in the interests of the rentiers who gain immense value from the risks taken by new speculative entrants in their respective asset markets. I don’t think we can really understand why certain countries seem able to stabilise their economies so well, while others do not, unless we understand this political element.

For example, in the section about debt dynamics and asset price cycles Soos and Egan test the simple correlation between housing debt acceleration and changes in housing asset prices. For most countries where it is well known that housing bubbles formed during the 2000s boom, the correlation is very significant (see table below). But then we have a number of outliers – Italy, Austria, Germany and Portugal. This analysis, to me, generated more questions than it answered. For example, where can we look for explanations of the apparent asset price stability of these outliers.

Screen Shot 2014-07-17 at 10.03.25 am

We know that Portugal suffered a housing boom and bust while Germany has seen prices a flat as a pancake. Could it be foreign euro buyers herding into Portugal’s housing market, which disguise the domestic relationship between housing debt and pries?

And what of Germany? Which part of the political or institutional structure can we emulate if we want stable prices? Does it matter that German housing is 60% rental, and there is a major institutional sector operating in the rental market? Is it their tax incentives that promote long term investment over speculation? Or all of the above?

At the end of the second part of the book Soos and Egan settle on their preferred model of asset price cycles that they call a synthesis of ‘post-Keynesianism, Georgism and behavioural finance’, which they present as a summary to this section. I find this synthesis compelling. Indeed, it seems quite obvious when you think about it (though I don’t know why Minsky was not acknowledged in the title).

But their treatment of this synthesis is a little vague for my liking; then again, I enjoy the nerdy technical details maybe a little too much. The reason I still like their attempt at reconciliation of theories is that it seems obvious to me that people are irrational in the pure sense used in economics, hence the behavioural element, and that if we are not in a static equilibrium, then we are in the dynamic world of the Post-Keynesians, and if debt can be used for speculation instead of productive new capital, a la Minsky, then we are in a Georgist world with economic rents as well as competitive markets in capital goods.

Lastly, Part 3 begins with 40 pages of detailed historical Australian housing metrics, some of which have been published in various articles around the web by the authors. This is followed by a similarly detailed treatment of Australian banks, where I took the main message to be that banks have become much morehousing focussed in their lending operations than ever before.

In this part of the book Soos and Egan delve into trends in modern lending standards and cases of fraud. We get a brief introduction to the US situation of subprime lending and securitisation, then move back to Australia, with very balanced overview of the alleged widespread fraud of loan application forms by banks and brokers, which contributed to the rise of no-doc lending.

Soos and Egan’s refute the ‘urban containment hypothesis’ at the end of this part of the book, which does not come as a surprise. After all, onceyou have read a detailed account of the three Australian depressions that occurred prior to any town planning, one of which occurred in an era of essentially unlimited supply of land from government to the private sector through the land auction process, then it would seem strange to turn around and invoke planning as a key factor in the current cycle. Indeed, after reading this book you can’t help but see the current land cycle as one of the least volatile in our history. Soos and Egan make their point here very clearly, and bring very compelling evidence and logic to support their position.

While Bubble Economics deals mostly with events that occurred over a century ago, it is nevertheless a timely contribution to the public debate around land, banking and the business cycle in Australia. The book is very detailed and you may find the style a little dry, but as I said, best thought of as a reference book. Again, Bubble Economics is free and available here.

fn. [1] Readers may recognise Philip from his work assembling long term data on the Australian housing market. I’ll also disclaim that I provided feedback on some draft sections from Part 3 of the book.


  1. moderate mouse

    Nice work Cameron. I was dreading I would actually have to read the whole thing but now I’ll content myself that its been downloaded ‘as a reference’. Guilt be gone!

  2. moderate mouse

    More seriously though, in light of this report and its conclusions on supply-side housing impacts, I find it amazing that MB still continues to treat the supply-side theory so seriously. It is for crack-pots and vested interests, as I’ve stated too many times already.

    Steve Keen used the term ‘economic naivety’ in an article the other day about the Murray Inquiry, and its continuation of the blind faith put in neo-classical competition theory that characterised so much of the Wallis Inquiry.

    I feel the same term applies in the blind faith shown at MB in relation to supply-side models of housing and land, and the attendant policy prescription they imply.

    Look to the past people….bubbles are made by the herd high on credit and dreams, and when the herd turns, lookout.

      • moderate mouse

        Obvious? As in ‘we hold these truths to be self-evident’ obvious? As in ‘the sun clearly goes around the earth’ obvious?

        When fifty percent of mortgage demand is for investment properties, and when there is downward pressure on rents that have been static for 20 years…..the only thing that is obvious is that supply-side is a crock of shite.

      • HnH, what you say is true but only to a small degree. The fundamental truth is “No money no fun”.

    • “Vested interests”? On WHICH side, pal?

      Where are the GAINS to be made out of reform that lowers urban land prices to what they are in affordable US cities, that is even within the same order of magnitude as the zero-sum gains made by rentiers in property and finance under the status quo? At least the so-called “profiteers of sprawl” actually build stuff and provide jobs if they are to even make profits at all, and these profits are mostly modest and honest returns on the effort and risk taken.

      If loose credit does it, why stable house prices in more than half of US cities when the same loose credit was available to all at the same time?

      Why median multiples of 14+ in Seoul in spite of LVR’s of around 50%?

      Your kind of supply-role denial in another time and place would be used to excuse mass starvations while food rotted in oligarchs storehouses.

    • Herd and the capacity to fund, but also on the underlying real economic context.

      Land does create. And it places an individual at particular utility.

      On the utility point consider this: Bourke and Wills died 100’s of years ago because location utility was starkly contrasting in basic land value components.

      Today you can just turn on the CD player and drive from anywhere to anywhere and be there by the next sunrise.

    • Finally finished reading most of this chunky read. Very worthwhile.

      @MM: While I accept your point (and others) about the content of this reports conclusions, I find it interesting that the authors have addressed supply side concerns raised by H&H et al in the recommendations. Recs 17-20 are clearly aimed at aspects that act as a break on housing supply and inflate costs.

    • Oooops, just to clarify my points above MM; I am referring to the recommendations for Taxation, Property and Mining Sector. Indeed, other recommendations there also seem to embrace some of the supply side concerns expressed by writers here at MB (eg land tax)

  3. Gavin R. Putland goes to the top of the class for displaying understanding of the role of “supply of land” with this succinct comment:

    “Given the conflicting interests of landbankers and builders, the HIA must always talk out both sides of its mouth. Calling for a greater supply of land is consistent with that position, provided that “supply” refers to the position of the UGB and “landbankers” include those who hold call options on land outside the current UGB.”

  4. TheRedEconomistMEMBER

    Owner occupier have no chance when they are crowded out by investors like this.

    This tired old 3 bedder on a through street in Sydney North West sells before auction for $800K. Stamp duty and legals on top and it has cost $835K before you even fix anything.

    This location is zoned residential as I recently bought around the corner also. Fortunately my vendor wanted a young family to buy off them and were not overly greedy

    It is then list for rent through the same agents for $560 per week

    So based on these number .. the yield is sub 3.5%

    It would be even lower once you start paying for rates, sewerage, rental fees and maintenance.

    You would get a better return just leaving you money in a normal high interest on line account.

  5. Although it’s clear that recent land bubbles were created by demand side regulatory expansion most of Libertarians would still argue that letting everyone built whatever they want wherever they want is key solution. Their reasoning is purely ideological and it doesn’t take into account any of the well known externalities of urban sprawl.

    It’s is true that this policy would bring prices down but at what cost? billions wasted into unused homes, excessive unused infrastructure, destroyed environment, huge social cost, … It may even be cheaper to pay existing “land rent” than to implement this solution.

    Luckily there are alternatives that cost very little (if anything) and can be implemented overnight: prevent capital gain speculations, prevent easy credit formation, prevent tax benefits, prevent land banking, … all regulatory policies that cost less that paper used to print them.

    • It always speaks volumes that so many people who list their preferred “alternatives” to allowing sprawl, don’t suggest anything that can be used INSTEAD of UGB’s, only things that they think will restore housing affordability in spite of the continued blunt instrument containment policy.

      None of your list, DrX, will restore affordability, I can promise you that. Conspicuous by their absence on your list, is land taxes and better pricing of use of roads and infrastructure.

      Please read this if you have never done so before:

      “Containment Policies for Urban Sprawl” – Mason Gaffney, 1964.

      Still 100% true today.

      • “None of your list, DrX, will restore affordability, I can promise you that.”

        So a promise is your only argument that is left?

        I can assure you that no Australian would be willing to pay $0.7m dollar for an average house in West Sydney if he/she knows that no capital gain can be made (even if price goes up). Adequate taxation of capital gains alone would bring prices down to the levels where an average income family would be able to buy an average home without sacrificing lifestyle

    • “……It may even be cheaper to pay existing “land rent” than to implement this solution……”

      I can tell you that is absolutely not the case. The externalities to sprawl are grossly over-hyped, and your mention of unused homes and unused infrastructure is just hysteria.

      The amount of land that used to be used to grow food for horses and draft animals, that has been retired from that use, is a lot more than the urban sprawl that has taken place since. Source: Robin Best: “Land Use and Living Space”.

      • Urban sprawl is just an unnecessary compromise between rural living and urban living that makes everyone unhappy, equally people who desire secluded open-air lifestyle and people who desire vibrant culture urban lifestyle.

        Urban sprawl was unavoidable compromise of industrial era, when large number of people had to live close to factories and consume all the stuff these factories produced. Historically, nothing similar ever existed (people lived in dense cities or open rural areas).

        Today, urban sprawls are completely irrelevant – changes in economy and IT technology changed people’s needs. People do not need to live close to factories anymore.

      • I am promising you because I know my stuff, not because I think I am god.

        Bank of International Settlements: “Can non-interest rate policies stabilise housing markets? Evidence from a panel of 57 economies”

        There is no evidence that CGT’s stabilise house prices. Or evidence that a whole lot of other favourite red-herring suggested silver bullets do so.

        In the conclusion of the study they say:

        “….This has implications for the degree to which credit-constrained households are the marginal purchasers of housing or for the importance of housing SUPPLY, which is not explicitly considered in this Study……”

        Hammer, nail, head.