The self fulfilling prophecy of Steve Keen
- Thread starter joe jo jo
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I thought bankruptcies, delinquencies and repossessions were historically high right now.
Did wages rise by 177% between 1998 and 2008? The (imputed) value of privately owned residential real estate in Australia did.
A 40% drop in this value would make the 10 year increase 66%. How much did wages rise over that period again? Gross national compensation of employees was up by 84%. The fall in unemployment contributed part of this gain and even the Treasury are forecasting unemployment to rise. Wages of part-timers will likely be reduced too (reports have it that hours are being cut already).
It's the error of discounting the possibility that current prices are in a bubble to zero. Keen clearly believes current prices are where they are because of an enormous speculative bubble. On this point I agree with him.
Realesate is down, but not by 40%!
Had a few really crappy offers on a property, it's been for sale for almost 3 months now, bank valuer put $320k on it back around June. Had a couple of offers around $280 looking just trying to get the offer $300k up a little bit more but even if it doesn't move we will sell. So from this bit of actual data we can state that realestate prices have dropped.
Just thought I would chuck in a bit of factual data.
Cheers
Graeme
Had a few really crappy offers on a property, it's been for sale for almost 3 months now, bank valuer put $320k on it back around June. Had a couple of offers around $280 looking just trying to get the offer $300k up a little bit more but even if it doesn't move we will sell. So from this bit of actual data we can state that realestate prices have dropped.
Just thought I would chuck in a bit of factual data.
Cheers
Graeme
Sorry I don't see the connection.
Serviceability is apparently fine as measured by the low bankruptcy rates (ignoring florists in Western Sydney).
Serviceability will only fall if unemployment increases in a meaningful way or wages fall.
I don't consider it likely that wages will fall (can you imagine a union telling its membership to accept a 20 percent wage cut?) So the only way serviceability can be hit is with a significant rise in unemployment. Given we are currently at or above full employment we have a fair ways to go before that occurs.
Serviceability is apparently fine as measured by the low bankruptcy rates (ignoring florists in Western Sydney).
Serviceability will only fall if unemployment increases in a meaningful way or wages fall.
I don't consider it likely that wages will fall (can you imagine a union telling its membership to accept a 20 percent wage cut?) So the only way serviceability can be hit is with a significant rise in unemployment. Given we are currently at or above full employment we have a fair ways to go before that occurs.
As I have pointed out in a different post
i. Keen believes that companies should fund themselves with 100% debt...
ii. Loans should be non-recourse to the lender...
Now I have no problem with people offering contradictory views and I respect and read those who do:- people like Marc Faber,Nicholas Taleb, George Soros (Reflexivity which is way over my head)... the difference between him and them is that they put their money where their mouth is and have become very wealthy in the process...
Now does it mean that I will only listen to rich people? No - smart people who have accomplishments or are respected in their fields are worth listening to as well...
Now, our friend SK is no more than a media larikin who only has a shallow understanding of finance yet professes these outlandish views in the media... He's only an Associate Professor at UWS - and from what I gather - he's already 50 or 60? If he had accomplished much in his academic career he would definately be made full professor by now...
So he's neither a practitioner nor an academic... what is he then?
Btw, I am neither smart, nor rich, so there is no reason for you to listen to my views as well...
i. Keen believes that companies should fund themselves with 100% debt...
ii. Loans should be non-recourse to the lender...
Now I have no problem with people offering contradictory views and I respect and read those who do:- people like Marc Faber,Nicholas Taleb, George Soros (Reflexivity which is way over my head)... the difference between him and them is that they put their money where their mouth is and have become very wealthy in the process...
Now does it mean that I will only listen to rich people? No - smart people who have accomplishments or are respected in their fields are worth listening to as well...
Now, our friend SK is no more than a media larikin who only has a shallow understanding of finance yet professes these outlandish views in the media... He's only an Associate Professor at UWS - and from what I gather - he's already 50 or 60? If he had accomplished much in his academic career he would definately be made full professor by now...
So he's neither a practitioner nor an academic... what is he then?
Btw, I am neither smart, nor rich, so there is no reason for you to listen to my views as well...
Not sure which post you were reading but I was simply supplying generalised information. If you inferred from the post that it was a pointless attack then I guess I've outdone myself. Didn't think I was smart enough to ridicule an Associate Professor of Economics. At any rate, ad nauseam discussions of economic theory should be best left in the classrooms. Somersoft is the real world where we make real money, theres plenty of tutorials and staff common rooms to have those discussions till the cows come home or funding runs out, whichever comes first.
Interesting report from the IMF
http://www.imf.org/external/pubs/ft/scr/2008/cr08311.pdf
Especially this paragraph from page 30:
"The results indicate that the overvaluation of house prices in Australia is, if
anything, moderate. The preferred regression specification produces an estimate of
overvaluation of about 15 percent for early 2004, which drops to about 5 percent by March
2008.15 Other specifications and estimation periods result in a range of estimates between
2 and 15 percent for March 2008.16 Moreover, extrapolating the results in the future indicates
that, if house prices increase in line with inflation, and real personal incomes and migration
increase as expected, house prices will be in line with their equilibrium value by mid-2009.
To summarize, the results do not produce evidence of a significant overvaluation of house
prices."
http://www.imf.org/external/pubs/ft/scr/2008/cr08311.pdf
Especially this paragraph from page 30:
"The results indicate that the overvaluation of house prices in Australia is, if
anything, moderate. The preferred regression specification produces an estimate of
overvaluation of about 15 percent for early 2004, which drops to about 5 percent by March
2008.15 Other specifications and estimation periods result in a range of estimates between
2 and 15 percent for March 2008.16 Moreover, extrapolating the results in the future indicates
that, if house prices increase in line with inflation, and real personal incomes and migration
increase as expected, house prices will be in line with their equilibrium value by mid-2009.
To summarize, the results do not produce evidence of a significant overvaluation of house
prices."
I also agree - but not a "speculative" bubble. This suggests we are all gamblers trying to spin a double zero. I'm certainly not one of those.
Most people buy properties to hold them for the longer term and either live in them or rent them out. The percentage of flippers and traders - the speculators - would be very small - maybe half of all investors?
Considering that around 70% of all resi property sales are o/o's, and out of the remaining 30% of investors maybe half are flippers,traders and developers, then this means most sales are not speculation sales.
What has happened is people were able to access a higher amount of credit, and pushed up the prices accordingly as demand grew stronger. FHOG for example, coupled with NoDoc and LoDocs etc.
Where I disagree is with the ramifications of the disparity between the supposed over-valuations and the supposed servicability of the debts attached to the over-valued houses.
SK thinks that because the values are so high compared to the wages, there must be a massive drop in order to restore the balance.
I don't think this will happen. Not everyone needs to bail out, so they will just sit and wait and hold on to what they own; maybe even buy more if they are able?
The people who can't afford to buy, or can't afford to get finance will keep on saving, the house prices will stop for a time and the wages will catch up - just like millennia before.
There will a slow and steady progression of both - a little bit of a drop in prices, but more likely a stalling for a coupla years due to lack of qualified buyers and credit scarcity, and the wages will sneak up, sneak up.
Finally, a bit of balance returns for a short time and off we go again. Rising prices return, yields go down the toilet again and everyone cries about how expensive real estate is.
I wonder if the FHOG will jump up another $7k?
Is there any other kind?
A bubble to me is a rapidly inflating market that is over-valued.
This can be from lots of o/o's buying houses because they have access to lots of money - cheaper rates, FHOG, high LVR loans, fear of missing out because the prices are going up and they may not be able to afford their dream home.
They are not speculating; they are saying; "You bewdy! I can afford to buy the house that I couldn't afford to buy last year, so I'm gunna buy it!!", or "hell; the prices are going up; I'd better buy before I can't afford to again".
Speculating is when people are gambling in the hope of a fat return.
In property, that's a good number of investors (who are gambling); but not all, which makes the overall activity of property sales very low as speculative sales.
Shares, however, have only one use - to make money. No-one buys a share to live in - it's a chance to hit the big time, or they are out of the market.
Therefore, most share investors are creating a "speculative" bubble.
Totally different reason; hence the term. But of course; the results are often similar, so most people just dump the two types of bubbles under the same term.
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