Steve Keen is at it again

[Ajax]

http://www.finnewsnetwork.com.au/ar...85b81-FNN_Investor05_08_2010&utm_medium=email

..."When it starts coming down, there will then be some of the feedback effects people are worried about because the real cause of the crisis wasn’t how house prices then falling, it was the debt that drove the house prices up in the first place - stopping rising then going down, causing what is now being widely called the de-leveraging. And when you de-lever, you spend less than you earn because you are using part of your income to pay your debt down, so there’s a drop in aggregate demand – that’s what actually causes the crisis. So the good news of falling house prices unfortunately has a bad news punch that when it starts to happen, there’ll be people who start reducing their debt levels and by doing that there’ll be less demand in the economy, and we’ll start facing the same sort of downturn that we’ve seen in America."

 

[Peter_Tersteeg]

Once again he's completely ignored the core fundamentals of supply and demand. Certainly the barrier to entry is more difficult today than a year ago, but unless there's more houses than there are buyers, there's little reason for property prices to fall across the entire market.

His focus is on getting into the market, but has little to say about affordabilitly for those already in the market.

Government intervention was what stopped his last predictions from eventuating, but wasn't it rising interest rates which heavily influenced those predictions in the first place? Apparently the entire boom of the last 18 months was driven by first home buyers, but that certainly hasn't been my experience. They were a stimulus initially, but lenders quickly compensated the policies to adjust for the increased risk and it's been other market segments who have been borrowing most of the money.

A lot of what Steve says makes sense, but then he accuses others of ignoring certain aspects of the market in their predictions. Nice.

I love his idea of indexing borrowing limits to the rental income. Can you imagine the effect that would have on rental yields?

 

[Propertunity]

Well that was 11 minutes and 38 seconds of my life I will never get back
I think the first Q from the interviewer was most telling.

Now the last time we spoke to you your view was that Australian house prices were likely to fall, yet twelve months on they’ve continued to rise......

Is it possible to get brain damage in the thin air at the top of Mt Kosciusko? How long did he spend up there?

 

[Dazz]

Does he have his name on any title deed yet as a registered proprietor ??

 

[WinstonWolfe]

One scenario is that as mortgage and rent pmts keep following house prices up, people spend less on the goods and services that make up cpi.....thereby putting downwards pressure on interest rates......higher house prices become an inflation control mechanism.....well all inflation except housing inflation.

The only drawback is the economy stagnates for lack of growth in household consumption. But that can be masked by population growth and spending less on infrastructure.....hang on....isn't that happening now?

 

[VYBerlinaV8]

My guess (let's be honest - that's all it is) is that we are overdue for sme market stagnation. I've taken this into account in my planning, and figure that it has to happen sometime.

 

[willair]

At least he a bit of Front i don't give a stuff if he has no name on any property or not very easy too hide property titles, it's always pays to listen just dependS ON who gets into Government a simple Tax on the sale on the ppor would cause more damage ,,then 9% interest rates-high unemployment ,because the real estate markets must have high sales volumes to keep every going,and the numbers are just not there,, it will be a interesting six months..willair..

 

[Sunfish]

I know bagging Keen is a time honoured tradition here but simply quoting supply/demand sounds like a parrot with about the same degree of thought given. I am sure there is latent demand for houses in the US but their price is STILL dropping, way under replacement.

This is a passage from Elliot Wave International and of course they are not talking about the Aus property market but it is about asset pricing:

At any given time, market prices reflect the activity of a relative few buyers and sellers. Bob Prechter explains:

For prices of assets to fall, it takes only one seller and one buyer who agree that the former value of an asset was too high. If no other bids are competing with that buyer’s, then the value of the asset falls, and it falls for everyone who owns it. If a million other people own it, then their net worth goes down even though they did nothing.

Thus the majority of shareholders can lose money by doing nothing -- literally. That is precisely what happens in a bear market.

Perhaps your thoughts already jumped ahead to the next logical question: How much selling went on in 2007-09? Well, this much we know: Stock, bond and cash-equivalent mutual funds total some $12.3 trillion in the U.S. today. That's only .09 percent ($11 billion) less than in October 2007. Equity funds represent about half that total, and they are down only 8.8 percent.

This is what I meant by quantifiable. The major stock indexes lost more than HALF their value, but it's not because "half" of all shareholders tried to dump their stocks. Not even close.

Prices are set at the margin.

 

[Ajax]

I actually think he has some valid points re increasing house prices not adding to productivity in a meaningful way. His idea on banks being restricted to only lending 10 times the gross annual rental on a property is novel.

He says he rents for $500/week (and this would be in Sydney somewhere). I recall he sold his apartment in Surry Hills about 2 years ago.

An apartment in Surry Hills renting for $500/week would probably sell for around $500k.

His idea is that banks should only lend $260,000 (52 weeks x $500 x 10) on such a property and that such a policy would keep rising house/unit prices in check.

His theory is that it is the lending policies of banks that is driving up house prices.

 

[HiEquity]

Well it would certainly work on a few fronts:

- It would reduce the price of existing housing. This may be a problem for the 70% of us who own our own house though!
- It would reduce the future indebtedness of the population.
- It would greatly increase the number of people who could afford to buy an existing house as a result.
- It would therefore greatly reduce the number of renters as many of them go out and buy their own (now much cheaper) house. It wouldn't by itself send rents up or down as these people would effectively be buying the houses they already live in and pay rent for.
- So it would give more of the population certainty over their place of accomodation.
- The only snag is it would send house prices well below their replacement cost. As no new accomodation would therefore get built and assuming the population keeps increasing, there would be ever increasing competition for rental housing, pushing both rents and prices up to a new equilibrium where it is possible to make a case for building the necessary new houses.
- This equilibrium would be at a higher yield than the previous one. House prices would have gone down but at the expense of rents going up. From a social equity point of view, it is generally accepted that keeping rents affordable is the most effective way of helping the most disadvantaged in our society so we may go backwards on that front!
- But more of middle Australia will be able to buy their own house so who cares if it increases the number of homeless people, right?

All this is predicated on an increasing population of course...

Anyway, it's not so bad for investors. The drop in values should be compensated (in the absence of (further) rent controls) by the increase in cashflow, which may well push some of us into retirement!

 

[tom32]

Well it would certainly work on a few fronts:

- It would reduce the price of existing housing. This may be a problem for the 70% of us who own our own house though!
- It would reduce the future indebtedness of the population.
- It would greatly increase the number of people who could afford to buy an existing house as a result.
- It would therefore greatly reduce the number of renters as many of them go out and buy their own (now much cheaper) house. It wouldn't by itself send rents up or down as these people would effectively be buying the houses they already live in and pay rent for.
- So it would give more of the population certainty over their place of accomodation.
- The only snag is it would send house prices well below their replacement cost. As no new accomodation would therefore get built and assuming the population keeps increasing, there would be ever increasing competition for rental housing, pushing both rents and prices up to a new equilibrium where it is possible to make a case for building the necessary new houses.
- This equilibrium would be at a higher yield than the previous one. House prices would have gone down but at the expense of rents going up. From a social equity point of view, it is generally accepted that keeping rents affordable is the most effective way of helping the most disadvantaged in our society so we may go backwards on that front!
- But more of middle Australia will be able to buy their own house so who cares if it increases the number of homeless people, right?

All this is predicated on an increasing population of course...

Anyway, it's not so bad for investors. The drop in values should be compensated (in the absence of (further) rent controls) by the increase in cashflow, which may well push some of us into retirement!

Solid post!

I reckon that is exactly what it would do.

Without prices at a level to bring on new supply no new supply would be built unless the government also moved to remove taxes, restrictions on the new supply of residentially zoned land driving down costs. I really would not hold my hopes up too much in this area however...

Otherwise in our growing nation prices will generally reflect production costs, if prices get too high supply increases, if they get too low supply falls away. If prices fail to meet costs then production will not happen till prices again meet costs!

As a housing "bear" one thing I notice with keen is he does not take production costs into account as much as I believe they should be in essentially an asset market which is a product. Otherwise his thoughts on debt are in my opinion sound. On the flipside can you imagine what would happen to house prices if the government introduced a new 300k levy on new resi blocks. Nothing at first, but none would get built till prices reflected the new costs. We could ultimately turn Australia into a country with costs like Hong Kong or Singapore though are costs would be government rather than natural constraints. That already most of our production costs are government taxes or government induced price premiums for zoned land irks me no end!

 

[skater]

His idea is that banks should only lend $260,000 (52 weeks x $500 x 10) on such a property and that such a policy would keep rising house/unit prices in check.

His theory is that it is the lending policies of banks that is driving up house prices.

OK, help me out a little with this. Property didn't go down 40% like he predicted, so he is trying to artificially MAKE property go down.

 

[cdremy]

I know bagging Keen is a time honoured tradition here but simply quoting supply/demand sounds like a parrot with about the same degree of thought given. I am sure there is latent demand for houses in the US but their price is STILL dropping, way under replacement.

This is a passage from Elliot Wave International and of course they are not talking about the Aus property market but it is about asset pricing:



Prices are set at the margin.

I agree Sunfish, it pays to listen to different sources other than those which are convenient.

On a different note, what do you think of Prechter's prediction of the Dow falling to 1000??

 

[Sunfish]

On a different note, what do you think of Prechter's prediction of the Dow falling to 1000??

I take no individual "prediction" seriously. If I had, I would be busted by now.

 

[Sunfish]

Property didn't go down 40% like he predicted,

Be nice, he was ambushed. He originally gave a much longer period but this fact was lost in the noise.

No one attitude on SS worries me as much as that which says: "It hasn't happened yet so all you Chicken Littles haven't a clue!". I believe correction delayed is correction amplified.

 

[tcocaro]

Sigh!

Everyone knows my view on this guy but ill post them once more. Lets put aside for a moment the fact he has been wrong and continues to be wrong (this is fact). Lets also put aside the fact he did the opposite of what he preached regarding the sale of his own house and lets also put aside the fact he has no experience in "real world" property transactions instead just (I presume) knows some theory.

I will try to put all that aside despite it ringing in my head like a church bells each time he speaks...

The main issue with his comments are not that each point in isolation doesnt sound rational - they do. The problem is that his views will only materialise if he assumes that there are no reactions from government, individuals or business to a drop in price brought about by de-leveraging.

What i mean is that if "de-leveraging" occured to the extent he suggests a few things have to happen. First whatever caused it in the first place must persists in a growing magnitude. It stands to reason that if "affordability" is the initial driver coupled with fear and uncertainty on the economy then as prices drop lets say by 10% then for prices to continue to plummet (to 40%!!) then "affordability" must somehow perversly get worse and/or the economy must deteriorate even further????

Making his views even harder to sustain is that once prices fall they will only rise again due to RE-leveraging unless governments set out laws forcing banks to be tighter on credit. If this isnt done then people will simply take out bigger and bigger loans once there are signs of improvement starting the cycle all over again. This is just fact and the banks will only be too happy to feed such demand and so will the general public UNLESS governments set out laws dictating how much banks can lend which I dont see happening and goes against anyones definition of "free market".

So if he is wrong who is right? There was a post that said that simply raising the concept of "supply & demand" sounds akin to a parrot but unfortunately unlike Mr Keens hocus pocus unproven and WRONG theories, "supply & demmand" on the other hand is fact. It is one of the pillars of economic thinking and is what will inevitably drive the market up OR down.

If Steven Keen is trying to debunk "demand & supply" thats fine he should have an economic discussion regarding the "theory" but for him to come up with an unproved (and wrong to-date) theory and apply it to property and worse come up with predictions based on an unfounded theory is just arrogant to say the least.

Any highschool student studying economics would know if governments somehow started a massive infrastructure drive, introducing greenfield sites by the thousands and boosting stock in NSW in the order of 20-30 thousand will make prices fall! (by increasing supply).

An increase in stock will lead to affordability improving, the economy will gear up, incomes will improve and basically everyone wins. Ofcrouse there will be issues such as input prices will likely rise as they cannot keep up demmand which will prevent prices falling through the floor etc etc i.e. the equilibrium price however the general principal is the D&S will be the main driver and the main reason prices will either rise or fall not some half baked theory that the economy will just somehow get stuck in a phase of blind de-leveraging and price falls.

It doesnt matter whether you think Keen is right or wrong! Given he is suggesting that somehow credit (leverage) plays a more significant role than pure demand & supply in determining prices he should first try and get his views published, endorsed and adopted by mainstream economic thinking. He should not however be so arrogant and apply his crackpot ideas to the real world and claim without a shadow of a doubt that prices will fall by 40%. I dont care if you agree with me or not you must surely agree that if everyone who had an "idea" that went against 100 years of thinking and then started concluding predictions based on those ideas and got them televised like keen then we would be in a mess with theories ranging from prices droping by 100% to prices rises of 100% and everything inbetween.

For those thinking whats the harm in hearing him out? Using the "world is flat" theory for instance there was a point in our history when enough people knew/thought the world was NOT flat and that anyone saying it was simply ignored. We dont hear scientists saying that we should listen to "flat earth" supporters in order to have a balanced discussion. This is my view of Keen, he is the ONLY one claiming 40% drops and I say its high time he join the flat eath thoerists.

I am sorry but Keen "in my view!!!" is an idiot and a media wh*re who simply gets paraded around because his views are so extreme they make great headlines...

I am sick of him.

 

[Propertunity]

I am sorry but Keen "in my view!!!" is an idiot and a media wh*re who simply gets paraded around because his views are so extreme they make great headlines...
I am sick of him.

OK, why don't you stop beating around the bush and tell us what you really think?

 

[tcocaro]

I beleive if you were wrong last year, wrong last month, wrong last week and wrong today you are most likely wrong tommorow.

When my kid asks me "are we there yet" from the point we leave the driveway and I reply "yes just 1 more minute" I will be wrong for most of the trip but eventually I will be right. Doesnt make me right all along when I am finally right at the end though...

I understand your stuck on the notion that "hearing him out" can only be beneficial. The only problem is you will never hear or see a headline that states "Economist claims steady prices" followed by "The world is rocked to hear economists from coast to coast are claiming we will not see much over the coming year.. financial markets are reeling on the news that nothing exciting will occur..."

Much nicer headline starts with "Economists claims prices will drop by 40%...................again"

Be nice, he was ambushed. He originally gave a much longer period but this fact was lost in the noise.

No one attitude on SS worries me as much as that which says: "It hasn't happened yet so all you Chicken Littles haven't a clue!". I believe correction delayed is correction amplified.

 

[WinstonWolfe]

Why is Keen not taking into consideration build/replacement costs?

It's land that lenders have driven up the price of. The LGAs have helped also, by front loading headworks costs and suppressing city growth with inappropriate green town planning in the face of high population growth. And then Labor State govts have been greedy little buggers letting stamp duty inflate well above cpi.

Build cost increases have been a result of the same pressures that have driven everyone's wages.

If lending criteria were the same as 20-30 years ago, 20 somethings wouldn't be buying 250m2 McMansions.

I think there's merit in the spirit of Keen's 10x rent proposal. Lenders limit CIPs to cap rate so why not RIPs? THere's no shortage of CIPs currently.

 

[Sunfish]

I beleive if you were wrong last year, wrong last month, wrong last week and wrong today you are most likely wrong tommorow.

We didn't have a cyclone in Townsville last year, last week and definitely not yesterday. In fact the last "damaging" cyclone was 40 years ago.

Do/would you plan for the possibility that it might happen if you were to join us in the tropics?

Gambling/investing is not about right/wrong, it is about odds. Know and respect them and you will do OK over the years. Fool yourself into believing that your positive attitude will overcome your poor judgement and you have the seeds of disappointment.