I clearly defeated Steve Keen in our debate in Melbourne, according to both electronic scoring and journalists who attended. So much so that Steve changed his approach in Sydney and started his presentation with the upfront caveats — “I am not a property expert” and “housing is a sideline for me”.
The debates were hosted by an Australian equities and fixed income retail fund manager, Perennial, that is commercially motivated to convince punters to get out of housing and into shares and fixed income. The audience was almost exclusively ‘financial planners’. Anyone who knows anything about financial planners will tell you that they make zero money out of housing and spend their lives trying to convince clients to invest in shares, fixed income, hedge funds, private equity, etc (that is, products they can earn commissions on). Financial planners are, therefore, almost always trying to tell folks why housing is a terrible investment.
Given these factors, I was delighted by the outcome in Melbourne.
In Sydney there were a few changes. First, given the comprehensive victory in Melbourne, the moderator, who runs Perennial’s funds management business, took a somewhat harsher line against me, pushing back more on what I was saying while offering Steve no resistance that I can recall. For mine, the swing factor in Sydney was the questions following the presentations. Every single one of the, say 12 questions fielded from the financial planners, were outright attacks on housing (and almost all of them were myths). I felt like I was battling 500 Steve Keens! The end result was that Steve prevailed according to the audience scoring.
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Steve is a genuinely very nice guy. I suspect he is also pretty damn smart. But much of what he says is plain wrong.
So he successfully called a credit crisis. Yet he also publicly predicted that an Australian depression was “almost a certainty”, a recession much more severe than 1991 and 1.5 times as long a ‘best case scenario’, and assured consumers that we were facing double digit unemployment and 40% house price falls. Indeed, ask Steve for a forecast on any subject and he is likely to give you one, which of course makes for wonderful media fodder. But the hard facts are that he has been relentlessly wrong about everything except the credit crisis.
Long story short, Steve makes one objective contribution to the public debate: he has been correct in his critique of neo-classical economics’ oversight of the role of debt and debt capital market imperfections, which had been made by others before him.
But he has no alternative model of the world. And his analysis is often crudely simplistic and applied to areas that he knows nothing about. Housing is a classic example. His entire analysis of the housing market is based on a relationship between two variables that have no real relationship: the stock of outstanding mortgage debt and the annual flow of public and private economic expenditure (ie, GDP). Think about it.
It beggars belief, but Keen never discusses the much more critical relationships between changes in debt levels, the varying cost of that debt (ie, interest rates), and the incomes of the people servicing the debt (ie, households).
In his debate with me, Keen never once referred to the cost of debt or standard debt serviceability measures. He never once looked at how the value of mortgage debt compares to the value of the assets against which it is secured (ie, residential property) — using either the average levels, or the distribution of those loan-to-value ratios.
If he did, he would have discovered that gearing levels in Australia are incredibly low — less than 30%. He never once analysed the default rates associated with debt. If he did, he would have found that they are a fraction of most of our international peers notwithstanding the much higher interest rates Australian borrowers face. He never once examined debt serviceability ratios. Had he done so, he would have seen that they remain on par with the long-term average over the last 20-30 years (ie, around 33% of disposable income).
Keen can therefore provide no explanation of the link between mortgage debt levels, serviceability ratios, default rates, distressed sales and house prices. Steve’s claims are literally as crude as this: we have had a big increase in mortgage debt relative to GDP (ignoring the cost of that debt has plummeted while long-term serviceability has remained constant), hence debt levels must fall (forgetting our incredibly low default rates or that unemployment has now fallen to 5.3%), and thus house prices must also decline (ignoring that one-third of all homes have zero mortgage debt held against them).
Put differently, Keen provides no credible explanation of the relationship between mortgage debt and house prices. The media needs to understand that he is simply not qualified to talk about either of these variables until such a time as he does outline a model that deals with them.
Steve is also fond of claiming Australia is going to be just like Japan. Yet as I have explained many times before, this is a ridiculous comparison. Japan’s population growth has been falling since the 1970s, turned negative in the 2000s, and the government is forecasting that the overall population levels will contract by around 30% by 2050. This is the main reason why Japan’s real GDP has been growing at anaemic rates over the last 20 years.
It also means that housing demand in Japan has been in secular decline. So, of course, one would expect house prices to stagnate or fall if your population is shrinking. At the same time, you could not find a more extreme contrast than Australia. We have the strongest population growth in the developed world with the government conservatively projecting that our population levels will increase 62% to 36 million people by 2050 (the true estimate is likely around 40 million or more). But Keen never acknowledges these differences, or the fact that population growth is the single most important determinant of economic growth alongside productivity, because they do not suit his argument.
As a final comment, Steve engages in a great deal of ‘revisionism’ about his statements. He was quoted in the media many times during the GFC predicting house prices would fall by 40% or more ‘in the next few years’. Take this example:
“It breaks my heart. But I don’t want to live my old age in poverty and there’s no point in paying a mortgage on an asset that is going to fall by 40 per cent or so in the next few years.”
But since he has been proven wrong by an order of magnitude (the peak-to-trough fall was less than 4%), Steve now argues his call was over 10-15 years. He says it is time for him to withdraw from the media and start doing some technical research. I could not agree more.