Updated Credit Accelerators

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As I’ve not­ed in ear­li­er posts, the con­cept of the Cred­it Accel­er­a­tor is still a work in progress. A major objec­tive is to be able to use month­ly data and remove the noise that gen­er­ates, but for now I’m work­ing with the change in the change in debt over a year, divid­ed by GDP at the mid­point of that year. In order to be able to still use the lat­est month­ly debt data from Aus­tralia (and quar­ter­ly from the USA), I’ve revised the for­mu­la to “freeze” the last avail­able val­ue of GDP six months in advance of the last data for debt. This gives an accu­rate mea­sure of the change in the change in debt, but divides it by a GDP fig­ure that will lat­er need revi­sion.

The result for Aus­tralia is shown in Fig­ure 1 below, using debt data released by the RBA on Fri­day: the Mort­gage Accel­er­a­tor is now neg­a­tive (though not as neg­a­tive as it has pre­vi­ous­ly been). The cor­re­la­tion coef­fi­cient is also high­er than I report­ed in the pre­vi­ous post—0.53 rather than 0.42 (the pre­vi­ous fig­ure was derived from data includ­ing a dis­con­ti­nu­ity in the mort­gage data caused by a reclas­si­fi­ca­tion of house­hold debt data by the RBA in the ear­ly 90s)

Fig­ure 1: The Mort­gage Debt Accel­er­a­tor and change in real house prices

On the oth­er hand, the US Mort­gage Accel­er­a­tor is now pos­i­tive, though only barely—see Fig­ure 2. It will be inter­est­ing to see whether this is main­tained in the next release of the Flow of Funds, due out on Sep­tem­ber 16^th, and if so whether there is any slow­down in the rate of decline of US house prices (though the recent extreme volatil­i­ty on share mar­kets may be enough in itself to renew the trend to falling debt, thus turn­ing the Accel­er­a­tor neg­a­tive once more).

Fig­ure 2: Debt accel­er­a­tion deter­mines change in US house prices

Final­ly, one thing I omit­ted from yes­ter­day’s blog was evi­dence of the role of the First Home Ven­dors’ Boost in caus­ing and reignit­ing the hous­ing bub­ble. I can pro­vide sta­tis­ti­cal evi­dence as well, but the visu­al evi­dence in Fig­ure 3 is stark enough.

Fig­ure 3: First Home Ven­dors Scheme starts, reignites & res­cues the hous­ing bub­ble