Wednesday, September 30, 2009

House prices surge for 8th consecutive month - Steve Keen to walk to Kosciusko!

Below he concedes the point with grace and style:

"2010 should be an interesting year for property. I will probably have to walk to Kosciouscko at its beginning; Rory may have to consider a fitness regime at its end."

Here's today's house price graph:


Here's Rory's account of the bet he and Steve struck with in November:

If capital-city home prices do indeed fall by 40% within the next five years - starting from Q2 2008, and as measured by the ABS - Rory Robertson will walk from Canberra to the top of Mt Kosciusko (that's maybe 200km followed by a 2228-metre incline).

If Dr Keen turns out to be less than half right, and home prices drop by less than 20%, he will take that long walk.

Moreover, the loser must wear a tee-shirt saying: "I was hopelessly wrong on home prices! Ask me how."

Rory later clarified:

For the record, Steve Keen is keen to clarify that our bet is "peak to trough", as agreed, with no five-year limit. Obviously, I expect this distinction will not make a difference, with the ABS house price index likely to surpass its Q2 2008 level well within 5 years.


Steve begins his concession post with some kind words about a Reserve Bank analysis of housing, presented yesterday by the head of its research department, Tony Richards.


KEENSIAN ECONOMICS
by Steven Keen

"Richard's speech was a welcome acknowledgement of the down-side of rising house prices – something I haven't seen in previous RBA statements. However, there is also a sense of futility about the position the RBA is in, because the paper also acknowledges the down side of falling house prices. One reason why Australia hasn't yet experienced a serious financial crisis is that our house price bubble is the only one that hasn't yet deflated. But if it does, Roberts acknowledges that we could experience the same runaway collapse in credit and the economy we've seen elsewhere.

So the RBA now has to play Goldilocks – it must keep house prices from rising (Mummy Bear) and stop them from falling too (Daddy Bear), thus keeping everyone comfy (Baby Bear). A fine tuning act of exquisite delicacy. After the last four years, I doubt that anyone has any confidence in the ability of economists to fine tune anything.

So the odds are that (a) the government's First Home Vendors Boost (let's call it what it was – not a handout to help first home buyers in but an encouragement to them to borrow up big and give it to vendors to sustain prices) will indeed cause a new bubble to inflate, which the RBA will prick with a rise in interest rates and (b) the tiny rise in rates will cause a huge increase in debt servicing costs for over-leveraged first home buyers, causing a collapse in house prices.

Of course, the removal of the boost at the same time means that the volatility of prices will be amplified by the two wings of government acting against each other, but changing strategies at almost the same time in a way that will drive house prices down.

2010 should be an interesting year for property. I will probably have to walk to Kosciouscko at its beginning; Rory may have to consider a fitness regime at its end."

7 comments:

Anonymous said...

Circus: RBA and Treasury in the same boat but rowing in opposite directions.

RBA tries to contain property prices and maintain control of monetary policy using interest rates and Treasury tries to ramp RE prices with its tried and tested debt instruments. All hail negative gearing on second hand properties, CGT discount for unearned income due to inflation and Interest only loans – the IED of housing affordability.

As long as Treasury continues to rubber stamp distortions in the tax system, housing will remain unaffordable by any reasonable measure. Not good for long term social economy surely.

rog said...

Grace and style? This is what he said to Business Spectator
"After the last four years, I doubt that anyone has any confidence in the ability of economists to fine tune anything."

derrida derider said...

On house prices, there's some fascinating inernational perspectives inthis Gapminder-style interactive chart in the Economist:

http://www.economist.com/businessfinance/displayStory.cfm?story_id=14438245

carbonsink said...

Proof that house prices never fall, but only in Australia.

Anonymous said...

It will be interesting to see how the government addresses the elephant in the room; the hugely distorting effect the FHOG has had on bringing forward demand among FHBs. With everyone able to scrape together a deposit having already jumped in, those left are the die-hards who have clearly based their purchase decision on a belief in an impending crash. Can't see them jumping on the bandwagon for anything less than a 30% adjustment. So where does the fresh demand come from - the homeless?

Anonymous said...

I don't know where you got the 5 years from Peter--though I'd hazard a guess perhaps from Chris Joye? It was always 10-15 years.

Cheers, Steve Keen

Peter Martin said...

Hi Steve - the "five years" quote is from Rory in an email to clients immediately after the event at the Parliamentary Library.

He emailed later:

For the record, Steve Keen is keen to clarify that our bet is "peak to trough", as agreed, with no five-year limit (see attached). Obviously, I expect this distinction will not make a difference, with the ABS house price index likely to surpass its Q2 2008 level well within 5 years.

I'll paste this into the post.

Kind regards,

Peter

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