The End Result of Decades of Fiat Money

We have recently come across a few house price charts – the Economist has a handy tool that allows one to compare global house prices and a few related indicators, like price/rental yield and price/income. Based on house price indexes alone, the cheapest real estate is currently available in Japan (where prices have been declining since 1989 in spite of the fact that they are not making any new land there – imagine that!), while the by far biggest real estate bubble appears to be underway in South Africa.


Two large bubbles on black background

Photo credit: Getty Images


However, one needs to consider that the South African Rand has declined quite a bit since the 1970s, and the country had very high relative price inflation rates both during and after the apartheid era. As a result, prices are actually not all that stretched in real terms.


1-South Africa vs. Japan, nominalNominal house price indexes, South Africa and Japan, 1975 – 2014: the strongest and weakest nominal house price indexes in the world – click to enlarge.


Prices in Japan look even cheaper in real terms though, no doubt a result of Japan’s demographic situation (the population is shrinking) and the fact that the pre-Kuroda BoJ wasn’t totally crazy and didn’t inflate all out. In spite of running several QE programs, the BoJ for a long time failed to produce high money supply growth rates (this may be changing now, see our recent comments here). It also turns out that real house prices in South Africa were actually higher in the early 1980s than they are today – presumably this was the after-glow of the 1970s gold boom.


2-S'Africa vs Japan, real pricesReal house prices in South Africa and Japan, 1975 to 2014 – click to enlarge.


If one plays around a bit with the Economist’s tool, one soon notices that the current world leader in house price insanity is actually Great Britain. However, the UK data are heavily skewed by prices in London, one of the prime refuges of Russian oligarchs (of course only responsible oligarchs are welcome in London) and assorted oil sheiks (valued allies who are lauded for the great political progress they are making, even while critical bloggers are sentenced to a thousand lashes and beheadings are a daily spectacle. Responsible sheiks, in other words).

Most other countries are not far behind though – it is practically impossible to find a house price index chart apart from Japan’s that doesn’t look positively hyper-inflationary. So if you are among the people wondering why there is “so little price inflation” in spite of all the money printing and the huge credit expansion of recent decades, rest assured that there is actually plenty of price inflation – you only need to look for it in places other than consumer price indexes. And frankly, consumer goods price indexes are heavily skewed downward by electronic gadgetry, while many or even most of the necessities of life have actually exhibited rather impressive price increases.

The point we want to make here is this though: We are continually told by the people who are responsible for this inflation in money and credit and the associated vast rise in prices that their inflationary policies are “good for us” and that it would be a total disaster if prices were to actually decline a little bit for a change. This strikes us as one of the most repulsive and irresponsible lies of the many propaganda lies that have attained the status of conventional wisdom in our central planned, ever more etatiste so-called “free world”.

The result of rising house prices specifically is that they have made a large part of the dwindling middle class into debt slaves for life. No average citizen can possibly afford an abode of his own, plus a car and all the other accoutrements of modern civilization solely on the basis of his for decades stagnant or declining real income and the meager savings it allows him to put aside. This stagnation in incomes has begun precisely at the point in time when the world moved to full-fledged fiat money after Nixon unilaterally and selectively defaulted on the US gold obligations.

The average citizen could of course save until he is 80 years old (if he makes it that long), and maybe then buy a house free and clear. Young couples starting a family do not have that luxury – today’s house prices are forcing them to go into debt up to their eyebrows if they want a home of their own. And so the fiat money system has created a vast class of debt slaves. These debt slaves as a rule are also politically apathetic, until they have nothing to lose anymore (as has happened recently in several countries in the European periphery). After all, it doesn’t behoove a slave to be too uppity. It is in fact probably quite risky these days, with everyone under Stasi-like close surveillance.


Australia and Canada

The two real estate bubbles we want to specifically look at are however those in the commodity exporting countries Australia and Canada. If one plays around with the Economist’s house price tool, one can see that prices in these countries have risen enormously not only in nominal, but also in real terms and in terms of relative yardsticks like price/income and price/yield. In short, these are bubble-like advances in every respect.

Nomura’s Richard Koo has recently published a chart comparing urban house prices in the two countries since the beginning of the recently expired commodities boom. It looks like this:


3-Koo-fig1Australian and Canadian house prices since 1999, via Richard Koo – click to enlarge.


What makes Australia and Canada especially interesting to us is that the two countries in a way are special test cases these days. The large decline in industrial commodity prices is beginning to impact the economies of both countries noticeably. For instance, in Australia entire mining towns have become “ghost towns” as Mish recently pointed out.

The central banks of both countries have reacted to the commodities bust by lowering administered interest rates to record low levels, following other developed nations down the rabbit hole toward “ZIRP”. This has weakened their currencies and since both countries are attracting many immigrants and overseas buyers of real estate, the weakening of their exchange rates should in theory give a boost to these sources of demand. Alas, China’s government has begun to crack down on corrupt officials, who have hitherto reportedly represented a sizable component of this overseas demand.

Analytically real estate can be regarded as equivalent to capital goods, as it renders its services over a very long time period. J.H. de Soto has formulated this fact as follows in his book “Money, Bank Credit and Economic Cycles”:


“[…] durable consumer goods are ultimately comparable to capital goods maintained over a number of consecutive stages of production, while the durable consumer good’s capacity to provide services to its owner lasts.”


Interest rates therefore obviously play a major role in real estate price formation. Similar to what happens with capital goods that are temporally far removed from the lower (consumer) stages, a decline in interest rates will ceteris paribus tend to push the price of real estate up disproportionately relative to other prices in the economy.

So there are now two important influencing factors in evidence in Australia’s and Canada’s real estate markets. It is a good bet that mining towns that are turning into ghost towns won’t see a lot of house price appreciation anymore. The question is though whether the weakness in the commodities sector will spread to the economy at large to such an extent that house prices will come under pressure in spite of the concomitant decline in interest rates.

To this it should be noted that households in both Canada and Australia are already highly indebted (see also our previous report on Canada: “Carney’s Legacy: Canada’s Credit and Housing Bubble”). According to a survey conducted in 2012, about one third of Canadians reportedly stated that they “couldn’t sleep properly anymore due to worrying about their debt”. The bigger the indebtedness of households becomes, the less likely it is that further decreases in interest rates will add to incremental demand for already overpriced real estate. Lower rates will certainly make it easier for existing debtors to carry their debt, as they can refinance it at the now lower rates, but obviously the questions “what else can I buy by taking on even more debt” and “how can I best survive the debt burden weighing me down already” are two entirely different cups of tea.

It will be very interesting to see over the coming few years how the situation is resolved. Will the bubbles continue to grow as interest rates decline, or is the commodities bust going to prove their undoing? Our hunch is actually that it is not exactly the most opportune moment in history to buy real estate in Canada or Australia, but we have said so for the past several years already, and house prices have obviously continued to climb. However, given the sharp decline in industrial commodity prices, the situation is now quite different to that of two or three years ago.



Some of the most enduring sectoral booms in the world that have been driven by the enormous expansion in money and credit since the 1970s may finally be running out of fuel. If this happens, it will have grave repercussions for the banking systems in the countries concerned, as these assets serve as collateral for a gargantuan mountain of debt. Given the interconnectedness of the global economy, any problems developing there are likely going to affect other countries as well. Stay tuned.


Charts by: Economist, Richard Koo / Nomura




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2 Responses to “A Tale of Two Bubbles”

  • Kreditanstalt:

    While “house prices” have been “rising” here in Canada, take that with two grains of salt.

    Firstly, the measured prices are only in selected major urban centres. My house here in a small town has actually fallen in assessed “value” and had I borrowed to buy it I would be underwater. Houses in ‘job-short’ rural and small town areas remain attractively priced, but the inability of many to move for work – let alone actually FIND another job – locks many into debt serfdom in urban areas.

    The second problem with this “rising prices” meme is that those prices ignore both the soaring supply of places being put on the market and, more importantly, the shrinking number of actual sales – and sales figurest are skewed by a preponderance of high-end properties changing hands. Thus, ‘time-on-the-market’ for most trying to sell a place is now lengthening…

    Looks like one sick puppy of a housing market from this end…

  • jimmyjames:

    Some of the most enduring sectoral booms in the world that have been driven by the enormous expansion in money and credit since the 1970s may finally be running out of fuel. If this happens, it will have grave repercussions for the banking systems in the countries concerned, as these assets serve as collateral for a gargantuan mountain of debt.


    In a normal world there would be severe repercussions for irresponsible banks .. but .. as far as canadian banks go .. there is a cool $1 trillion or so sitting in “the peoples bank” so called CMHC which of course is fully taxpayer backed and they’re just waiting for the private banks to hand over the losses in exchange for full reimbursement .. plus there is the newly indorsed “bail in” clause which of course the government says will “never” be needed because of their responsible lending practices and pristine balance sheets ..
    I would be leery of shorting those crooks ..

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