Cage match 2: Steve Keen weighs in on house prices
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So according to Chris Joye, I’m “poor old Steve Keen”. The only reason I’m sorry for myself is for letting this exchange (Macquarie Group interest rate strategist Rory Robertson sprang the bet on me in front of an audience at Parliament House) distract me from my main focus on the macroeconomy. This bet has taken on a life of its own and undergone more redefinitions than Phyllis Diller had facelifts (for those of you too young to know, Diller is a comedienne who once remarked that if she had one more facelift, she’d be sporting a goatee). So let’s set the record straight. Firstly, it wasn’t a prediction but a historical analogy. In an interview with Kerry O’Brien I was asked what my expectations were for house prices in the economic downturn that I correctly predicted. I stated that house prices had fallen by about 40% over the 10-15 years after Japan’s Bubble Economy collapsed, and I saw no reason that Australia would avoid the same fate.
From its peak to its current level the Japanese index has fallen 42%, and the 40% fall took 14 years. Secondly my analogy was on a peak to trough fall in nominal house prices. I didn’t make it in real terms, nor was I trying to call the peak itself. When the bet was made in November of 2008, that peak was 131. I was not claiming that 131 would be the peak, but that when this financial crisis had played itself out, house prices would have fallen by something like what they have done in Japan.
Later, for the sake of closure I agreed that if the index ended above 131 by the end of 2009, I would walk, even if I still expected it to fall 40% from that any new peak. Discussions between Chris, Rory and I led to the following clarification from Rory:
That’s where the bet stands — and it could well have me walking in the next year. The peak could well be higher than 131 after the governments’ First Home Vendors Boosts pumped up the sub-$500K range by as much as $40K, and the return of speculators at that lower to median range. But I expect the bubble to burst as it has elsewhere on the planet, so that Rory will have to follow that trail some years hence. Finally, Chris claims that those expecting a price collapse ignore “the fact that house prices are determined by demand and supply”. No we don’t. We focus on something Chris seems to ignore: that in asset markets, prices are determined by demand and supply and leverage. To use the silly static logic of neoclassical economic thinking, the “demand curve” can shift out because of the volume of demand—supporting the “prices will rise” camp. But it can also shift down because banks’ willingness to lend drops. With a LVR of 95%, leverage transforms a $50,000 deposit into $1,000,000 buying power; but if LVRs drop to 80% (say), that “demand curve” will fall vertically from the million dollar level to $250K. So physical demand and supply imbalances can favour rising prices, while monetary leverage-based demand trends can favour collapsing prices. In that tag team contest, I back leverage every time. |
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12 Comments
I dont know if Mr Joye has a point as I cannot locate it amongst the “play the man” abuse
For example:Reserve Bank governor Glenn Stevens’ housing speech will inevitably trigger a lot of uninformed comment, says Christopher Joye, but here it is straight…
He has it straight and anyone who doesn’t agree with him is uninformed.
I’d be more interested if he actually took on their point of view before the emotive terms.
But thats just me
Hi Steve, glad you could clarify that you meant nominal as opposed to real house prices. Some of your impassioned followers have been trying to redefine the bet for you.
As for the index, I recall you telling me you were happy to use the RP Data-Rismark Index since we noted that the ABS Index excludes apartments, terraces and semis — or 20% of the housing stock.
I’m not exactly sure what you agreed with Rory.
Steve:
To even compare the Japanese housing bubble with Australian housing prices is incredibly silly. At one time the Emperor’s place was worth more in value than the entire state of California. The australian government sold its embassy for A$600 million (from memory).
Even suggesting they resemble each other in amplitude is hubris of the worst order.
(((investors will emerge to fill the gap posed by the demise of First Home Owners Grant. )))
Huhh!!!..I dunno how anybody can arrive at that when creeping unemployment turns into an avalanche, so I suspect it’s wishful thinking and more real estate industry hocus pocus.
The realestate industry will have us believe anything and will do anything, to hang on to those big fat commissions they recieved over the last few years from those ramped-up prices for those broken down ol shacks.
The real estate industry hates the idea of selling 10 properties at $350,000.00 when previously they only had to sell one property at $350,000.00 to get the same take home commission…the maths might be out there but I am sure you get my point.
The word from the street ( the most reliable and trustworthy economic indicator yet ) is that real estate investment, unless it’s a gimme, is no longer on the agenda.
I left a couple of zero’s off the $350,000.00…it should have been $3,500,000.00…sheesh!!!I should get a job selling real estate.
Steve the argument that a reduction in Bank’s LVR’s will reduce property prices automatically is ridiculous. Banks have already reduced their LVR’s to 90% (95% for existing customers), and it has done nothing to house prices. To assume that house prices will fall by 50% because of a 5% reduction in the banks lending practices is just fantasy.
The fact is, people will just stop selling. If somehow, magically, people could only offer me $200,000 instead of $400,000 for a property because they had a $20,000 deposit which would have covered it at $400,000 and 95%, and now is 10% deposit, I’d take an infamous line and ‘Tell em they’re dreamin’ and wait until someone who could afford it came along.
Oh sure, what about those unemployed hordes who are on the way who need to sell? I can assure you it won’t happen. The banks will continue to fund their loans, they will simply reduce their repayments for a period, or capitalise the interest. Banks have no desire to end up on tabloid TV such as Today Tonight for forcing people out of their homes. When the economy recovers it will be in their best interest to have people remaining in their homes so they can repay all that extra amount that has been capitalised.
Besides 9% unemployment is still 91% employment. Figure that.
Japan is a basket case and has been for years. They have an aging population (much moreso than our own) and a declining population too. Australia is growing rapidly. Comparing the Japanese experience to Australia is like comparing apples and oranges.
To be fair I see some softening of house prices coming, in particular in places where the economy has boomed, like WA and mining towns, but the falls you are predicting simply will not happen. Like I said previously, if they did, I’d be more concerned about my health and safety than the value of my home as it would be Lord of the Flies time.
Adam, you make the point about unemployment and then completely ignore it.
It’s unemployment that will be the “king hit” that produces the “forced” sale.
Yes ,the banks love it when the punters are on the ropes. Recapitalization is a very profitable tool for the banks when under the guise of compassion and avoiding the TV Tabloids, but those same banks have got their limits when it comes to asset sheets and profit and loss.
I saw all this in the early 90’s when you were probably still in your dypers…it was n’t the Lord of the Flies then, but hang onto your hat this time.
Diapers Gary. And yes I was young but age and experience are no substitute for intelligence.
Yes Banks do have their limits but we are not going to see forced sales on the scale of the US or UK, we do not have an oversupply of housing like they do (see Detroit or Ohio, Cleveland) we have a chronic undersupply. Our population continues to grow and will do so into the future. We already have vacant housing shortages and this won’t change, where are these people going to go live, in cars? Will we see a return to the nomadic gypsies of the past? I doubt it.
If people are forced to sell they will rent. This will force rents up and see investors return to capitalise on these sales.
I did not ignore the point on employment I made the point that even if the rate rises to 9%, there are still 91% of people employed. These people will be the ones to capitalise on the ‘forced sales’.
There may be bargains to be had in the market, true. There will be softening in some areas yes. But we will not see the collapses doom harbingers such as Steve Keen are discussing.
I will close by reiterating my previous point - it has never been easy to buy a house. Deal with it.
Rory declined to switch to your index Chris, on the grounds that he expected me to be wrong whatever index was used. So it’s still with the ABS series.
(((Diapers Gary. And yes I was young but age and experience are no substitute for intelligence. )))
Ok, so spelling and maths were never my strong point, and I am obviously not as intelligent as you Adam.
(((( We already have vacant housing shortages and this won’t change, where are these people going to go live, in cars? ))))
In Sea Containers Adam. You can have a 20ft or 40ft container, complete with windows and double doors at the front…self locking too. I have heard that these Sea Containers are a “renovators delight” and if you buy down near the Docklands it’s guaranteed to be “Tightly Held.”
…but you don’t have to be a Rhodes Scholar to realize that unemployment will be the catalyst for over-supply in the market. Just take a quick trip out to the Burbs and see for yourself, in some areas the For-Sale signs are 1 in 4.
We don’t need statistics Adam, to tell us what we see with our own eyes, and unemployment in real terms is only just beginning and even the threat of unemployment will be enough to curtail investment.
(((I did not ignore the point on employment I made the point that even if the rate rises to 9%, there are still 91% of people employed. These people will be the ones to capitalise on the ‘forced sales’.))))))
How can they Adam, if they don’t have a job?
Gary, read what I wrote again.
I said 91% of people will still be employed, and they will be the ones to capitalise on the forced sales. Employed meaning in employment, working, having a vocation trade or career which is still continuing and ongoing.
I do agree there will be some areas of softening. Yes, you will see some areas where there will be for sale signs springing up all over the place. These areas are the ones where there will be some price declines, largely because the people in them should never have been lent the money to begin with, but to think nobody will get burnt in the hard times is a bit optimistic.
I think you are over-reacting to things a bit, as is Steve Keen. Yeah I get the Leverage argument, similair to the inverse relationship between price and yield sort of thing, but to argue that a 5% reduction in lender’s LVR’s will result in a 50% reduction in property prices is just silly. Yes there will be some forced sales, but they wont go for 50% less. The bank won’t let them, but if they do I’ll borrow to the absolute hilt and buy as many as I can.
(((Yes there will be some forced sales, but they wont go for 50% less. The bank won’t let them, but if they do I’ll borrow to the absolute hilt and buy as many as I can.)))
That’s very curious Adam, what makes you think the banks won’t let them?
It will be the banks leading the charge. When a mortgagee sale takes place, the banks get what ever they can for it and then lump the outstanding balance straight back on the borrower, unless he or she goes into bankruptcy.
To justify all this, all the banks have to cry out is WE HAVE RESPONSIBILITY TO SHARE HOLDERS. …you all heard that bank-bullshit before.
No Adam, the banks assett and liabilities will take precedence when it comes to push and shove.