The self fulfilling prophecy of Steve Keen

[Bill.L]

Hi all,

Whoops, worked out the wrong one.

The interesting thing is asking ourselves which interest rate is relevant. Looking at the numbers there was a 10 year period when either the median (or average ) interest rate was around 14%. Yet there is another 10 year period when both numbers are between 6.5-7%.

bye

 

[evand]

Brisbane boomed in 07 on a booming, resource driven stockmarket bull run. It would have boomed at even higher rates because of that.

When the stockmarket run music stopped Brisbane died in the a$#se.

Hence my annoyance about blaming recent CG on "low" rates. Brisbane boomed on "high" rates although credit standards are admittedly looser than they have ever been.

 

[evand]

You know, there are lots of other ways to make money, and lots of it. Some you don't have to wait 10-20 years for.

What makes me wonder is, if this guy (Keen) is such a great economist, and can read markets and trends so well; how come he seems to only own one not-so-flash apartment?

 

[troyhunt]

The real question is Where is profeesor Keen going to live once he has sold his house? Rent well then join the very long line

Exactly what I was thinking when I watched the article. Perhaps he feels the premium he'll pay in rent is justified by beating the 40% price drop.

 

[plusnq]

Hi WW

I suppose the question then becomes whether the period from 1978 to 2008 is a typical distribution of interest rates or not ? Given it contains the two largest spikes in interest rates it certainly contains enough of the high end of the distribution curve. The lower end of the distribution curve occurred mainly pre 1970 with rates at <6% from 1959 to 1970.

So we can get some interesting data (all data based on monthly data so there are lots of data points reducing sampling error).

1959- 2008 Total series of variable interest rates
Median 8.05
Average 8.87

1978- 2008 WW
Median 9.5
Average 10.24

1985- 2008 (post securitisation)
Median 9.75
Average 9.97

Typical series (IR's about 6% or greater) 1970- 2008
Median 9.38
Average 9.88

So the results tend to show that in recent typical time of IR's of about 6% or greater (has been the case since 1970) the median is 9.38 and the average is 9.88 which is the point WW was making.

So unless an investor thinks we are returning to economic conditions similar to the 1950's and 1960's we could probably expect higher IR's in the future.

Fixing low and long might be a viable strategy for these times and viewing any excess short term rate as an insurance policy. Personally I do this and use rolling timeframes to try and get the best fixed deals at the time of expiry with my view of macro economic conditions at the time.

A good reminder to all WW, thanks.

Cheers

Shane

 

[skater]

What makes me wonder is, if this guy (Keen) is such a great economist, and can read markets and trends so well; how come he seems to only own one not-so-flash apartment?

And why is he only waiting until now to sell it. Didn't he "predict" this years ago.

If this guy is so great, then why on earth did he buy his appartment in the first place. Surely he could have predicted that he would have to sell it??

 

[BV]

Surely he could have predicted that he would have to sell it??

and to sell it at a discounted price...

 

[BayView]

You know, there are lots of other ways to make money, and lots of it. Some you don't have to wait 10-20 years for.

Quite right.

I wonder what he is into then, other than his wage?

property? seems not to be, and is not good at it if he is.

super? probably, lots of salary sacrifice seems to be his style, and that's taken a decent hit recently.

direct buy-and-hold shares? probably. seems the type, plodding along, regular contributions most likely dollar cost average, diversify etc, and has just been creamed.

options and futures? doesn't seem to be. too conservative.

businesses? doesn't seem to be. not really an economists thing.

ebay trading? maybe; doesn't seem like him though.

white collar crime? don't got there; I'll be deleted.

author? ahhh! getting warmer maybe - lots of recent publicity to further the impending book(s).

politics? is it possible to make real money from this?

What's left?

I reckon he'll just sit in cash for a decent while until the economic models say "go".

 

[evand]

I wouldnt care less how he makes his money. Why would you give a toss?

My post was more of a general sense that there are a lot more ways to make money then property for anyone.

Quite

I wonder what he is into then, other than his wage?

property? seems not to be, and is not good at it if he is.

super? probably, lots of salary sacrifice seems to be his style, and that's taken a decent hit recently.

direct buy-and-hold shares? probably. seems the type, plodding along, regular contributions most likely dollar cost average, diversify etc, and has just been creamed.

options and futures? doesn't seem to be. too conservative.

businesses? doesn't seem to be. not really an economists thing.

ebay trading? maybe; doesn't seem like him though.

white collar crime? don't got there; I'll be deleted.

author? ahhh! getting warmer maybe - lots of recent publicity to further the impending book(s).

politics? is it possible to make real money from this?

What's left?

I reckon he'll just sit in cash for a decent while until the economic models say "go".

 

[joe jo jo]

i agree that his views seem a bit extreme. but i haven't done the research that he has.

as far as if he is dangerous, i think his views are needed to temper a bit of the unreality that pervades australia in relation to housing prices. in a separate thread here i read a post by someone calculating the value of the property based on the assumption that CG will appreciate at 10%/annum for the next 3-5 years. not even a hint of awareness that 10%/year is an exceptional return for property--and completely unsustainable.

elsewhere i read people saying that housing prices are fine except for the affordability factor. minor problem that. if nobody can afford them, it does tend to put a dent in things.

i dont post here just to antagonise people. i have read some really good posts that i have learned a lot from and i am grateful for that. and i do hold back a lot of the time because i know i am not saying anything new--if people dont believe it the first 20 times they hear it, they wont believe it now. but i do hope that people start being a little more proactive in protecting themselves from potential financial disaster. better to earn a little than to lose a lot (yep, nathan, im talking to you! ).

bubbles do happen, and when they do happen they invariably burst. if you think you are safe because everyone else is doing it and not everyone can be wrong, look at the US. according to 60 mins, 1 in 6 people owe more than their house is worth. true, if they can ride this storm out they will be fine in 3-4 years, but man - that will be a really, really scary 3-4 years.

Hi Urchin,

yes bubbles do happen, but the age old question for me is "is this a bubble", I dont think so. We cant compare the USA, because that was a bubble (how do property prices rise with over supply ?? answer = bubble). If you define a bubble by the income to debt ratios, then you need to consider other variable such as availability of stock, population density, differences in discretionary income etc etc. If there is a high density and low supply in an area, then the income spread gets pushed upwards.

The only valid issue for Australia is unemployment, which will naturally reduce prices for a period (depending on the area). If you haven’t prepared for this and can’t accept a little bit of negative equity once in a while, then maybe investing isn’t for you.

Just looking at his property also, I would never go near that type of property class. Why ?? (a) not scarce, (2) not unique (3) high rise (big no no for me). I would think if there was going to be a decline, his property will be the first to feel it.

We do need people like him though, but more during the boom times me thinks (not now). Example, a friend of mine just called, has an LVR of 40% and is almost neutral gearing, has a massive reserve and a large dual income. She is now panicking after watching his appearance (so unnecessary). Maybe her fault for listening, but he is a professor right, he knows everything ??

Lastly, I am happy to hear is predictions if he can go into specifics i.e. what areas and by how much, otherwise it is just general media pushing.

 

[evand]

Why is this guy dangerous?

A lot of people don't need an economics professor from Western Sydney to help them lose their IP's, PPOR's, lots of money and plenty else. They can do (and have done) that stuff on their own.

People need to be responsible for their own actions, good & bad.

This guy is dangerous, '

 

[lizzie]

Quite right.

I wonder what he is into then, other than his wage?

you missed out "payments for appearing on national television."

 

[gman65]

Judge the man by what he is saying, not by where he is living I say.

If he is wrong, he will be believed to be scaremongering fool and we will never hear from him again. If he is right, or somewhat close to being right, then he will be vindicated.

Running such a story on a high-profile "current affairs" (and I use that loosely) program is sure to raise a lot of fear out there, especially considering the story was presented in an utterly one-sided fashion.

Being based in Western Sydney, where some properties *have* fallen by 40% surely gives a fair bit of bias I would have thought to his perspective anyhow. Just because it's happening out there, doesn't mean it will follow through everywhere - each market has their own quite different demographics and level of debt anyhow.

 

[josko]

The agent selling my house told me he lost 2 sales the last time Keen was on TV!

Hope I didn't just lose mine!

Regards JO

 

[Pushka]

Hey Evand, I think that anyone who gets on TV and is promoted as some kind of guru is dangerous because people will listen to him and panic, rather than simply use his input, along with all available data, to make decisions. Unfortunately a lot of what is happening on the share market at the moment is based on fear and rumour, rather than fact. The share market 'hates' the unknown, which is what is happening at the moment. For someone to come out and say 'the property market will fall 40%' entirely based on what has happened in the US is irresponsible.

But of course people are responsible for their own actions, but comments from purported 'gurus' will influence others who may panic unnecessarily.

 

[urchin]

t. For someone to come out and say 'the property market will fall 40%' entirely based on what has happened in the US is irresponsible.

I think you are oversimplifying his position. there is a logic to his position and his conclusions are supported by that logic. you don't have to agree with it, but it is not correct to say that he is just going out there and spouting like a crazy man just to get attention. he has been saying this stuff for some time now, long before the media paid any attention to him.

i would rather have him out there and scaring people into a sense of caution than some of the other people that have been trying to scare people into buying into this very unpredictable market (FHOG will start another boom, get in while you can! etc. etc.). if all he does is scare people into taking a step back and considering their decision--a very, very big decision--a little more carefully in the light of all that is going on these days... i think that is a good thing. understandably its not pleasant if you are trying to sell your property but that really isn't SKs fault.

 

[Pushka]

... i think that is a good thing. understandably its not pleasant if you are trying to sell your property but that really isn't SKs fault.

Well, you see that is my point. He is presented as an expert, he said he is selling his house because of it so he might panic others into selling. This means the market is flooded with properties that would otherwise not be there, and people are scared off buying.

 

[urchin]

Well, you see that is my point. He is presented as an expert, he said he is selling his house because of it so he might panic others into selling. This means the market is flooded with properties that would otherwise not be there, and people are scared off buying.

i doubt very much that SK is the sole or even primary determining factor in these sorts of decisions. if someone is on the fence, sure, this might give them the push they need but he is simply one voice of many and all of them are saying different things.

i notice i always end up defending SK tho I don't really feel all that strongly one way or the other. i do think his position is extreme but i also think he has every right to make it known. after all the years he has been ridiculed, it has to be pretty gratified to discover that people are eager to listen to you. i doubt any of us would be completely immune to that sort of attention.

but the reason i end up defending SK is because i think this sort of panicky atmosphere is a strong sign of overinflated prices. people are very nervous because they think prices could tumble. you call this a self-fulfilling prophecy, but if prices were really justified at this level the people who panic and sell would be outweighed by far by buyers ready to snap up a good deal.

in this case, however, we already have heaps of people trying to sell, only nobody is biting. this time i think it is not a matter of talking down the market, but rather the case that the market is already down and people are simply pointing that fact out.

if you are an investor and if you know what you are doing and if you have been operating according to a valid plan with good risk management, i am sure that everything will be all right. it is the people who got swept along by the excitement and saw property investment as a quick and easy path to riches that will likely bear the brunt of the downturn. it is the same with any other downturn. the good businesses survive and then thrive (due to decreased competition) and the amateurs get swept out to sea and are never seen again.

if you are a professional investor nothing SK says should matter. if you are an amateur who does not have a strong background in the field--yeah, i think now might be a good time to panic as you probably had no business investing in real estate anyway.

if people are nervous about their position they should probably cough up a couple hundred dollars and talk to a good accountant and get professional financial advice. then, and this is the important bit, they should follow that advice even it it means a short term loss.

 

[The Fence]

i would rather have him out there and scaring people into a sense of caution than some of the other people that have been trying to scare people into buying into this very unpredictable market (FHOG will start another boom, get in while you can! etc. etc.).

Better have a talk with Kevin Redd then urchin....get him to call it off....

People will believe in what they believe in no matter how hard you, I or anyone else here for that matter, tries to convince otherwise.....Mr Keen included.....

 

[Debt Junkie]

Hi all.

I've been hearing - repeatedly since the interview - that SK anticipated this crash in the market five to ten years ago ... now, I find that hard to believe, as I doubt the US was going gangbusters on their ninja loans etc, or that the credit crisis was in sight for anyone ... but what I'd like to know, is if any of you, in your research, have come across a list or article indicating this foreknowledge ???

Thanks