Yesterday, Steve Keen and Christopher Joye went head-to-head at the annual Perennial Investment Conference in Melbourne. Was there a points winner, perhaps even a knockout? You be the judge.
Steve Keen says: I don’t know what Chris consumed after our talk at Perennial’s conference yesterday, but if he has any spare I’d like to try it at a party tomorrow night.
As he left the stage, Chris called the outcome “too close to call” and “about even”, which I thought was a pretty reasonable summary of a point score system that went from 4.9 average across the audience before our talks (where 1 was the “total bear on housing” score and 10 was the “total bull on housing”) to 5.2 afterwards.
Now he “monstered” me in the debate and “demolished” my arguments.
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First, let me point out something statistical to Chris. If you have a random set of scores between 1 and 10, then the average will be 5.5 — not 5.0. On that basis, the audience went from being moderately bearish on property before out talk to slightly less bearish afterwards. And this was an audience of 75% financial advisers, where several people commented to me later that they hope I’m wrong because of their own property investments.
Secondly, as is usual in such discussions, Chris and I talked past each other — if he was going to demolish my arguments then he would have to prove that debt deflation didn’t cause the Great Depression, or that we’re over our own experience of it now.
Chris, you’re a good bloke, too, but to tell me that I let my enthusiasm get away with my arguments and yet to make such a song and dance about a such a minor trend in a selective audience where even so the majority remained bearish on property after your talk …
Next time, after a conference, don’t consume anything, just take a cold shower.
Christopher Joye says: So I think I pretty comprehensively monstered Steve Keen at our debate in Melbourne yesterday. That was certainly the feedback from those who attended (there were 500).
The thrust of my argument was as follows. Keen mounts his housing market critique based on crude comparisons of mortgage debt to GDP. This is a pretty meaningless benchmark. If you want to understand the viability of debt levels, you can use two key measures: debt-to-assets ratios (where the asset is residential property) and debt-to-income (where income is disposable household earnings, not GDP). This is exactly what any intelligent investor would do when appraising a listed company’s leverage. Indeed, it is what regulators and markets do every day of the week.
So what does this mean for Australia’s residential property market? The total value of privately-owned residential property is about $3.5 trillion. The total value of outstanding mortgage debt is circa $1 trillion. Australia’s mortgage debt LVR is therefore slightly less than 30% — i.e. incredibly low. But Keen ignores this.
Even when we only analyse home owners with mortgage debt, the average value of that debt relative to the value of their homes is about 50%. Australia’s largest lender, CBA, has actually disclosed that the average LVR across its mortgage book is much lower — about 34% if I recall correctly.
OK, so this tells us that the absolute debt levels are not particularly high.
What then about Australia’s debt servicing ratios (i.e. accounting for the cost of debt and incomes)? Well, we know that total household interest repayments as a share of disposable income are only about 10% today. This is exactly the same as what they were 20 years ago.
Secondly, we know that Australia 90-day mortgage default rate is about 0.66%, or nearly one-tenth and one-quarter of US and UK levels, respectively. This is despite the fact that mortgage interest rates are considerably higher in Australia. And our default rates have always been lower than US and UK levels.
Given there are about five million borrowers out there, this tells that less than 40,000 are in mortgage stress.
Finally, we can reflect on recent RBA analysis that quantified the share of stressed borrowers with mortgage debt greater than 90% of the value of their home, and high debt service ratios. This allows us to move away from averages to look at those households that are most vulnerable.
The proportion of borrowers with an LVR greater than 90% and paying away more than 50% of their disposable income to service a home loan is less than 1%. A tiny number. Even if you reduced the repayment threshold to 30% of disposable income, the share of borrowers is just 3% of the total population.
Unfortunately, the electronic scoring in yesterday’s debate was a bit convoluted: it measured the shift in the audience sentiment from bearish (Steve) to bullish (Chris) before and after the event. On that basis, I won. But I think a simpler Chris versus Steve voting system would have made the difference much more striking.
While I felt I was able to intellectually tear Steve apart limb-by-limb, I will say this: he is a lovely guy. Very diplomatic and humble in defeat.
As I noted in my presentation, Steve has made some valid criticisms of conventional economics, and its neglect of debt capital market imperfections. And he deserves some kudos for anticipating a credit crisis. But whatever strengths he possesses are overwhelmed by his propensity to make silly statements.
My chief criticism, which I relayed to him privately in addition to vocalising during the debate, is that he massively overstates the explanatory power of his models. Steve arguably got some of the deficiencies in mainstream economics right. But he has yet to show us that he has an alternative model of the world that is demonstrably superior to the existing state of the art.
Put bluntly, Steve has got all his other calls horribly wrong. With the utmost confidence he proclaimed we would have a depression, precipitous house price falls, double-digit unemployment, and so on. Of course, nothing like any of these events came to pass. Steve’s house price calls were off by an order-of-magnitude. And he complains about the impact of counter-cyclical government policy. Yet this is precisely what he was advocating during the darkest days of the crisis!
In debating Steve yesterday, his tendency to grossly oversimplify and leap to grand and utterly unsubstantiated assertions was repeatedly reinforced. He seamlessly mixes the technical and objective with the purely speculative and spurious.
For example, at one point he showed that he knew little about the tax treatment of Australia’s housing market, or its international peers. And yet he speaks as if he is an expert on the subject.
He rails against the first-time buyers’ boost, but does not come close to accurately understanding its effects. Earth to Steve: the cheapest suburbs in Australia (read those areas where first-time buyers are most active) registered the lowest price growth in 2009. They were not driving the market. On the contrary, the best performers were the most expensive suburbs where first-time buyers are few and far between.
There is certainly a place for Steve Keen in our community. Yet he would be well advised to tie his tongue and focus on producing research. Sadly, I sense the temptation to excite naïve journalists with meaningless forecasts is all too strong.