Steve Keen is at it again

[hobo-jo]

Hobo-jo, my comments probably does not apply to you. My apology if it gives that impression. In fact, my thoughts are not too different from yours, except for my disregard of D&G gurus, who rushed out sensational stories of impending doom but failed to incorporate the economic basics of impact from Australian politics.

Do you then also disregard those sources that spruik about house prices rising strongly in the short term given your current outlook?

Personally while I disregard many "experts" conclusions (both bullish/bearish), I often check the background data to see what they are basing their views on.

I agree that many of the D&G crowd failed to predict the impact that the FHOB/cut rates would have, but I would say the same of most bulls.

Hobo, what's going to stop the government and the RBA to repeat the same measures once again if prices started to fall? The banks could also relax foreclosure rules since it's not in their best interest to foreclose if they can avoid it somehow. I am sure there are other measures as well that can be introduced to prevent a freefall in house prices. I am fairly confident the people will slash all but the very basic spending to ensure they hold on to their properties. I know I would be doing that.

I think recent quotes from the RBA & government indicate that they are looking for a sustainable policy for housing going forward (I'm sure they've noticed the effects that low rates and the FHOB had and hope they would not make the same mistake twice):

Recently the topic of home ownership has come up in my own home with two adult daughters and a teenage son, it's a topic I am always happy to encourage! Like many parents, I am concerned by how difficult it is for my daughters to access home ownership. I have lived in the same house for over 30 years and have enjoyed all the benefits that come with home ownership. Like most parents, I want my kids to be able to access the same opportunities that I have had through home ownership.

- Wayne Swan, June 2010

I think it is a mistake to assume that a risk-less, guaranteed way to prosperity is just to be leveraged up into property. It isn't going to be that easy and I think if we think about property prices as parents, and you're a parent, as am I. I've got kids that within not too many more years are going to want somewhere of their own to live and you wonder, how is that going to be afforded?

- Glenn Stevens, March 2010

Although I certainly agree they could reintroduce stimulus, I'm not sure it would have the same effect as we have already pulled forward a lot of buyers with the FHOB. Is it really an investment worth buying today if you are relying on government stimulus for it to make sense/do well?

Do you honestly believe we won't find the next driver for economic growth soon?. It could could be happening now in Healthcare, IT/Telecommunications or Renewable energy sector. Remember, these things are only obvious in hindsight.

The problems that drove us into this mess are far from fixed so what hope would I have of any new "real" growth in the near future? Especially in the US the investment banks are practically insolvent while continuing to trade due to them not having to write down the value of their assets, have a read of this and tell me we will see good news out of the US soon:
http://www.zerohedge.com/article/presenting-wall-worry-50-ugliest-facts-about-us-economy

China has relied a lot on the US constantly consuming their produce, who is going to replace them? If you honestly think that China could self sustain their current economic output by selling internally or to elsewhere then maybe you are right, but I think if you are relying on the US to turnaround and drive growth you could be waiting decades.

I am not of the opinion that the US will see a double dip recession because it is my opinion they have already entered a depression.

Therefore if you are prepared to commence a new thread, outline those points you feel are legitimate I am happy to give you a proper reply without all my usually "snappiness".

I think I've probably done my argument to death on here tcocaro , I'm not sure that "another" bearish vs bullish outlook thread would help. Many of my core views are in recent threads:

http://www.somersoft.com/forums/showthread.php?t=64222
http://www.somersoft.com/forums/showthread.php?t=60573
http://www.somersoft.com/forums/showthread.php?t=62805
http://www.somersoft.com/forums/showthread.php?t=58932

Several pages of good back and forth from here:
http://www.somersoft.com/forums/showthread.php?t=63529&page=4

So feel free to address any of my posts in those threads if you have time!

 

[Bill.L]

Hi all,

oracle, you don't see a little problem with this statement of your do you???

with both the Treasury and economists predicting

How often are their predictions accurate??

bye

 

[oracle]

Hi all,

oracle, you don't see a little problem with this statement of your do you???


How often are their predictions accurate??

bye

I forgot to include even the RBA has similar views on unemployment rate where they are expecting it to fall further in future.

Ofcourse, Bill they don't get it right most of the time. But it's worthwhile to know what they are thinking and where they are expecting the economy heading into the future. They have access to a lot more information than the average Joe and therefore even if they don't get it right 100% atleast you know things are not as bad as it's been published in mainstream media about the economy.

Usually, it's some unknown event that can throw all the forecasts of Treasury out of the window. Which again is impossible to know in advance.

Cheers,
Oracle.

 

[Shadow]

However, you seemed to deliberately choose the fuzzy and anaemic

"approach $1M by 2014-2015 has always been my prediction"

Does this mean any price under $1m is your prediction? That's not much of a prediction......

Anyway, if I couldn't grow my capital quicker otherwise, I'd bet you $10,000 the index doesn't hit $1M by the above date.

Not to worry. We now have a sort of prediction from Shadow, if we leave out the word "approach".

Sorry about the delay, I don't log in here much these days. I use the word approach because I believe $1M will be a bit of a psychological barrier and that prices will get into the mid-high 900s before people balk at the thought of paying $1M for a median house. Of course, the $1M mark will eventually be passed, but I would expect a dip once prices approach $1M during this cycle.

If the construction boom goes ahead as I expect, and an over-supply of property is created, then that dip could be significant. One thing to look out for is the rental vacancy rate. Vacancy rates hit 5% at the peak of the last Sydney boom in 2003, indicating an oversupply. However, those vacancy rates are now sitting down around 1% indicating a severe shortage.

The chart you posted shows Sydney prices growing at about 1% per month currently, although growth has of course been much higher in the past. The reason why your trend line is still pointing slightly down is because Sydney house prices were falling for half a decade until last year. Prices fell 20% in real terms between 2003 and 2008, so of course the long term monthly growth trend is down when you consider that recent 5 year period of negative real growth.

The new growth cycle in Sydney has just begun, after that long correction period, and the current 1% per month growth rate is more than enough to get Sydney prices to $1M by 2015. It actually only requires 8-9% per annum to get there.

Great chart as per usual WW.
It does not surprise me that Shadow is cherry picking how he presents his data.

Yes, it is a good chart. It clearly shows the price correction that occurred in Sydney over half a decade from 2003-2008 before this new growth phase began. It actually tells the same story as my chart, so I'm not sure why you call it cherry picking (unless you didn't understand what the chart was saying?).

 

[WinstonWolfe]

The chart you posted shows Sydney prices growing at about 1% per month currently, although growth has of course been much higher in the past.

Current growth means little in a cyclic system.

The reason why your trend line is still pointing slightly down is because Sydney house prices were falling for half a decade until last year. Prices fell 20% in real terms between 2003 and 2008, so of course the long term monthly growth trend is down when you consider that recent 5 year period of negative real growth.

Shadow, you just can't pretend the fall in nominal values from 03 to 07 was a temporary glitch, a statistical outlier with no rational cause, a one off fat tail event. It was unprecedented in the previous 20 years. It is unwise to discount the fundamentals underlying that......as it is unwise to discount the slowing in the rest of Australia, and the global macro outlook.

The new growth cycle in Sydney has just begun, after that long correction period,

I don't know how you can conclude a new growth cycle has just begun when Sydney has averaged 1.2% per month since May 09. In my view, that growth was tied to the stock market recovery, and the stock market has hit a wall, as did Sydney property last month.

and the current 1% per month growth rate is more than enough to get Sydney prices to $1M by 2015. It actually only requires 8-9% per annum to get there.

Why you would think straight line 8.5%pa growth is realistic for the next 5 years I am unsure.

Yes, it is a good chart. It clearly shows the price correction that occurred in Sydney over half a decade from 2003-2008 before this new growth phase began. It actually tells the same story as my chart, so I'm not sure why you call it cherry picking (unless you didn't understand what the chart was saying?).

Shadow, I'd be interested in which variables you feel will support 8.5%pa growth to 2015.
- cash rate drop
- lower bank margins
- looser bank lending criteria
- mean household disposable income growth > property price growth
- 8.5%+ rent yield growth
- others?

The only one I see as likely is a drop in the cash rate due to deteriorating global credit flows.

 

[Shadow]

Shadow, I'd be interested in which variables you feel will support 8.5%pa growth to 2015.
- cash rate drop
- lower bank margins
- looser bank lending criteria
- mean household disposable income growth > property price growth
- 8.5%+ rent yield growth
- others?

The only one I see as likely is a drop in the cash rate due to deteriorating global credit flows.

Most of the above.

The cash rate looks to be dropping before long...

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

Credit is loosening - see latest announcement from ANZ with 97% LVR coming back.

Disposable income doesn't need to grow faster than house prices, since the additional servicing cost is only around 7% of the house price growth at current interest rates.

Sydney rents will definitely rise due to the critical shortage (vacancy rates around 1%). The Sydney economy is doing pretty well too, and auction clearance rates are steady.

 

[Witzl]

Just getting back to the original topic..... did anyone see Keen on TT on friday last week?? He was at it again, broadcasting how house prices are just so unaffordable, showing a graph displaying how that every time the govt intervenes it "artificially inflates the price", etc etc.

.... yeah it was complete and utter rubbish. Keen was true to form

 

[eXc]

@witzl
Coming in without reading the thread, but my experience was that the FHOG increased house prices a lot. I am not a great economist in the slightest, but my experience...

I was looking in my area in December 2008, and decided after looking at quite a few I would pick up what I was after for $250,000 no worries.

After getting pre approval and coming back to the market in January 2009 (1 month later) those areas jumped to advertising at 280,000 for the same thing, but selling for 300,000 +. It also went from 5 people at each open house to 50+ people at each open house.

So in one month the prices jumped $50,000+ and interest in the properties increased 10 fold.While I guess it could be that they just jumped, my guess would be that it was all the first home buyers...which was pushed up by the government incentives...

now that said, perhaps that doesn't make it artificial if it stays there...

 

[Witzl]

IMo - it is only "artificial" if once the said stimulus/incentive is removed, that prices fall back to where they were before. If prices stay up, then it was just bolstering demand IMO.

... but im just an armchair economist, i really have no qualifications to make this judgement.

But Steven Keen is a douche.

 

[eXc]

Well using your definition, then prices here are not artificially inflated, they just jumped 20% in a month...they haven't really come back down (slightly have) so...

 

[.toe]

IMo - it is only "artificial" if once the said stimulus/incentive is removed, that prices fall back to where they were before. If prices stay up, then it was just bolstering demand IMO.

... but im just an armchair economist, i really have no qualifications to make this judgement.

But Steven Keen is a douche.

I dont think thats how it works. Stimulus may have been all that was driving the market, but just because you stop the stimulus does not mean prices drop. What it does mean is whole lot more pressure in the system, so that if a bubble does burst, the bang will be louder now. All thats happening is the govt is not blowing up the balloon as fast, doesn't mean it's letting any air out.

The FHOB stimulus has been wound back, and first home buyers have stopped buying. The negative gearing stimulus has not been wound back though, and investors have stepped into the breach. But prices are so high compared to rents that new investors have to be increasingly CF-, more pressure.

 

[DeanoC]

IMo - it is only "artificial" if once the said stimulus/incentive is removed, that prices fall back to where they were before. If prices stay up, then it was just bolstering demand IMO.

... but im just an armchair economist, i really have no qualifications to make this judgement.

But Steven Keen is a douche.

Is this because he happens to be of the opinion that property is over priced? Ill agree he has been wrong, but at the same time its difficult to argue against the basic fundamentals that he presents at times.

 

[Deltaberry]

Yea well they present some pretty medicore data. "Australia is expensive relative to long-term trends." Well perhaps the country as a whole is shifting its benchmarks? It'd be good to see the following.

Nominal yields of Australia vs other countries
Relative change in yields of Australia vs other countries
Line chart of historical servicability chart (perhaps average household debt vs interest payments) of Australia vs other countries
Change in average land sizes of Australia vs other countries

 

[BayView]

Yea well they present some pretty medicore data. "Australia is expensive relative to long-term trends." Well perhaps the country as a whole is shifting its benchmarks? It'd be good to see the following.

Nominal yields of Australia vs other countries
Relative change in yields of Australia vs other countries
Line chart of historical servicability chart (perhaps average household debt vs interest payments) of Australia vs other countries
Change in average land sizes of Australia vs other countries

I wonder if other Countries obsess over our values like we seem to do over theirs? Probably not; from my experience most other Countries don't even know where Aus is on the map.

I don't think our properties are overpriced - it's all relative to the economy that the property is in. We should pretty much disregsard what the others are doing and just worry about our own sets of numbers.

Why are properties perceived to be expensive compared to other Countries? I reckon it is due to our (excellent) standard of living and overall economic status compared to other Countries.

As an example; after living in the USA for 3 years, I can tell you that the average Aussie family is better off than the yanks are in terms of ability to spend money on various items. Their middle-class is really actually poor.

In general, I believe the average Aussie can afford more, therefore more has been/will be spent on housing.

Now, if our standard of living degenerates to the level of the USA (and I believe it will due to our ever-increasing obsession with all things American) then you will see a long term softening of house prices.

Pretty simple - without savings, and with banks not lending to marginal borrowers it's very hard to get a decent loan for a house. No loans means no buyers, no buyers means no price increases.

This is not allowing for the "overseas investor" factor, but this element would only represent a small percentage of the overall housing market here.

 

[Intrinsic_Value]

i would be happy to continue to 'speculate' on residential property, but i would be nervous about 'investing' in residential property.
At this point in time.

Read into this what you will.

 

[tcocaro]

That your unable to profit in real estate unless absolutely everything looks rosy, prices are rising and Keen himself guarantees your investment?

Or perhaps your just reducing all those who invest their hard earn money into the market today as gamblers and all those that sit on the side lines doing nothing as wise old sages screaming the end is neigh?

Not sure but I gave it my best two shots at reading into what you said, was I close?

i would be happy to continue to 'speculate' on residential property, but i would be nervous about 'investing' in residential property.
At this point in time.

Read into this what you will.

 

[jrc]

Interesting to see that John Mauldin who has been mentioned on this site occasionally is using Stephen Keen in one of his latest articles

http://investorsinsight.com/blogs/j...0/09/06/what-bernanke-doesn-t-understand.aspx