mining boom

Post #45 – The Five Stages of Australia’s Housing Bubble

So recently I blogged about some of the common myths surrounding the Australian housing market. That post also hinted that I believe our housing market is entering a very fragile phase, where finally, after many false prophecies of collapse, our luck might finally run out. I am predicting that the Australian housing market will enter a volatile period within the next 9-12 months, with a drop of approximately 20-40% in the next two to three years after that. And I’m going to borrow the theory of an obscure and oft-forgotten 1960’s economist by the name of Hyman Minsky to explain exactly how this housing market bubble will pop and collapse.


Hyman Minksy

This man’s ideas have never really been applied to a housing market though, dabbling predominantly in the world of finance. However, I believe that the financialisation of the housing market in Australia means that the leap between his theory and the housing market in Australia can be made. Let me quote BBC News to give you a brief introduction to this man:

American economist Hyman Minsky, who died in 1996, grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented…

Minsky spent his life on the margins of economics but his ideas suddenly gained currency with the 2007-08 financial crisis. To many, it seemed to offer one of the most plausible accounts of why it had happened.

He referred to his theory as the Financial Instability Hypothesis (FIH), and argued that lending goes through certain stages in a capitalist economy. Considering housing in Australia is no longer just a roof over your head, but rather seen as an investment and an asset, it’s easy to apply his different approach to finance to the housing market here. This is how it flows:

1. THE HEDGE POSITION: Your expected inflows are expected to be less than your committed outflows for the foreseeable future. You’re good.

2. THE SPECULATIVE POSITION: Your committed outflows are larger than your inflows, but enough to pay interest. You must refinance to pay the principal. You’re playing with fire, but still… you’re good.

3. THE PONZI POSITION: Your interest payments are greater than your inflows. You’re fucked.

I’m going to outline the steps below, and explain how they can be applied to what we have seen, and what we are currently seeing in the Australian housing market.


This is the first stage, when banks and borrowers are cautious. They’re usually cautious because the inherent contradictions of capitalism have once again fucked things up, the housing market is a shambles and everybody is broke. You can take your pick which economic downturn you’d like to focus on. For example, (more…)

Post #32 – How Australia Can Avoid Being the Next Greece and Create a ‘Good Society’ Pt. 1

Tony Abbott has stated a couple of times recently that if Australia doesn’t change course we’re destined to adopt a ‘Greek-style economic future‘ (i.e. contraction, stagnation etc.), pointing to his ‘deficit reduction’ as the remedy. Sadly his efforts are falling well short due to the fact he’s actually DOUBLED the deficit since coming to power. But never mind that embarrassing fact for the moment, I actually agree with Abbott – we are heading towards a social and economic calamity in this country sometime in the near future. But it won’t be the result of a trifle amount of debt left by his political fore-bearers. Oh no, it’s much worse…

It’s much more likely the economic impacts of a rapid deflation of housing and asset bubbles, the cooling of the Chinese economy, the very real possibility of further turmoil in Europe, the ramifications of peak oil, an ageing population, food and water shortages coupled with a dramatic decrease in biodiversity and the collapse of ecosystems, the end of the mining boom or the compounding effects of climate change will challenge not just our current economic system, but the very fabric of society itself in the next couple of decades. So what is one to do when faced with such challenges? Since most of the problems listed are not only the product but a result of capitalism, it would seem odd to suggest that ‘more’ capitalism would be the answer. We need to think outside the box…