Zero Percent Interest Rate - Steve Keen

[tcocaro]

I take it you've never studies statistics at all then?

graph theory and statistics and the university of sydney, what about you?

I would say that if prices were $250k today they would be more likely to rise to $500k in a decade than prices at $420k today are to rise to $840k in a decade. That makes sense to me.

This makes absolutely no sense. You are basing your analysis on "feelings". Your feeling is that 250k is "cheap" and therefore its more likely to rise whereas your feeling that 500k is "expensive" and is more likely to fall or not to rise by as much in percentage terms.

Your comment here is completely wrong and irrelevant.

Before replying, do me a favor don't reply with a post that takes your argument in a new direction because that tactic is why this thread never dies. i.e. you post a half baked response, get a post like mine to refute it and then you reply with something completely different yet again.

Your "feelings" about prices and what they should do have no place in statistical analysis. Read up the definition of a trend. - seriously.

 

[tcocaro]

Shadow glad we picked up on the same point. Seriously to me this last paragraph of MC tells me atleast, this is the time we stop posting.

250k has a higher likelihood of doubling than 500k? because of ???? - this is a laymans understanding of price growth. "ofcourse prices could double 10 years ago the average house price was 250k but now.... 500k is way to much to double yet again" - he was the same bloke 10 years ago arguing 250k was too expensive.

-- its just plain wrong.

Seriously have you seen a rational person screaming at a lunatic? to a 3rd person they both look like lunatics.

I think we are dangerously close to all looking like lunatics to anyone reading this thread.

To me, the nominal base value is irrelevant to whether prices can double. After all, what is this value based on but an arbitrary value assigned to a unit of currency. Is a house valued at 1 Million Zimbabwean dollars more or less likely to double in value than a house valued at 1 Thousand Australian dollars? Stupid question, right? There is no sensible answer. It does not matter what the nominal base value is - this has got nothing to do with whether prices can or can't double.

In your example above, the $420k house could easily double in one year if the government inflates the money supply sufficiently. The base value is irrelevant.

 

[plusnq]

The men in the white coats are coming.

 

[Max Carnage]

graph theory and statistics and the university of sydney, what about you?

Good. Well how about you explain where Shadow is wrong then?

I've been getting paid good money lately modelling growth functions and undertaking risk analysis and NPV optimisation using monte carlo simulation for a very large industry. Peer-reviewed too.

This makes absolutely no sense. You are basing your analysis on "feelings". Your feeling is that 250k is "cheap" and therefore its more likely to rise whereas your feeling that 500k is "expensive" and is more likely to fall or not to rise by as much in percentage terms.

Your comment here is completely wrong and irrelevant.

Are you kidding? I'm talking about averages. If the average home price in 2008 dollars was $250k instead of the current $420k and all other variables were the same, which would be more likely to rise in the future? I think the former, simply because it would be more affordable. Do you disagree?

Before replying, do me a favor don't...

Before lecturing me on my posting style, how about you take a little personal time to reflect on your attempted belittlement of me yesterday?

Your "feelings" about prices and what they should do have no place in statistical analysis. Read up the definition of a trend. - seriously.

As above, it's not my feelings, it's a logical deduction. All else being equal, lower prices are more likely to rise. But extrapolation of a perceived 'trend' from a bubble prior to burst would indicate prices were more likely to rise, and rise further, than if the bubble had never existed!

As to the statistics, TF's point above was entirely correct. The predictive power of a regression should be tested by modelling forward from some point in the past and comparing the result with reality. But you knew that, right, because it's pretty standard practise in stats?

 

[Max Carnage]

Seriously have you seen a rational person screaming at a lunatic? to a 3rd person they both look like lunatics.

I think we are dangerously close to all looking like lunatics to anyone reading this thread.

Again, the belittlement? Why? Does this kind of behaviour further your argument?

 

[Shadow]

If the average home price in 2008 dollars was $250k instead of the current $420k and all other variables were the same, which would be more likely to rise in the future? I think the former, simply because it would be more affordable. Do you disagree?

All other variables are NOT the same. It is those very 'variables' that matter, not the current nominal price. This is getting silly. Hey guess what, if all variables were the same, Hitler is just as likely to invade Poland today as he was in 1939. Wait - is that an air raid siren I can hear? After all, if all variables were the same, I would be just as likely to hear that air raid siren as somebody in Poland. Oh but guess what, all variables are not the same. I am sitting in my house in the Northern Beaches, I can't hear anything from Poland, and Hitler is dead!

The predictive power of a regression should be tested by modelling forward from some point in the past and comparing the result with reality. But you knew that, right, because it's pretty standard practise in stats?

The trend line that I plotted is the current trend based on all available data. If you want to omit some data and plot a different trend line, go for it.

 

[Max Carnage]

All other variables are NOT the same. It is those very 'variables' that matter, not the current nominal price.

How can all other variables not be the same in a hypothetical where all other variables are the same?

Or, for that matter, how can all other variables not be the same in a reality where all other variables are the same and only price is hypothetically changed?

 

[The Fence]

Deep......

 

[Shadow]

How can all other variables not be the same in a hypothetical where all other variables are the same?

Or, for that matter, how can all other variables not be the same in a reality where all other variables are the same and only price is hypothetically changed?

Now you're just trolling!

 

[tcocaro]

ummm sorry to hurt your feelings once again.

if it makes you feel any better let me be the lunatic and you the rational one, better? - in the end of the day we are all looking stupid at this stage.

I am not prepared to continue conversing on this topic, it has shifted from the original post so much we may aswell be talking about floral arrangements.

In my personal view your arguments hold no water and I am not prepared to continue debating given its obvious no one reading this thread could possibly getting anything of value out of it. Beyond a laugh or too are BOTH OUR expense.

Again, the belittlement? Why? Does this kind of behaviour further your argument?

 

[Max Carnage]

Now you're just trolling!

Not at all. Can you simply answer a simple question?

If prices today, in today's environment, were lower than the current average home price of around $420k, would they be more likely or less likely to rise?

And based on this, what would extrapolation of a perceived exponential trend tell you, that they were more likely or less likely to rise?

Trend extrapolation would contradict logic. Therefore, the assumption that such a trend has predictive powers is flawed at its root.

 

[Shadow]

Not at all. Can you simply answer a simple question?

Can you?

If prices today, in today's environment, were lower than the current average home price of around $420k, would they be more likely or less likely to rise?

And based on this, what would extrapolation of a perceived exponential trend tell you, that they were more likely or less likely to rise?

If prices today, in Sydney, were higher than the current average Sydney home price, would they be more likely or less likely to rise?

And based on this, what effect has the previous 5 years of declining Sydney prices had on whether they are more likely or less likely to rise?

 

[Max Carnage]

Can you?

Yes. But it is rude for you not to.

If prices today, in Sydney, were higher than the current average Sydney home price, would they be more likely or less likely to rise?

Less likely.

what effect has the previous 5 years of declining Sydney prices had on whether they are more likely or less likely to rise?

More likely*. But at the same time, the trend would have fallen. Hence it is of no predictive value as it moves opposite to logic. It was predicting higher growth in 2003 than it predicts today. Why? Because it didn't then have and does not today have predictive powers. It said "up, up away" when the reality was down a bit, flat for a bit, up a bit, and this year back down again...

If prices continue to fall further (say, back to levels consistent with a future flow of household income exceeding required credit flows), the trend will have proved useless as it moves in quite the opposite direction to reality.

* More likely != probable. In fact given the highly improbable nature of Sydney home prices reaching 15x earnings or thereabouts I'd say 8%pa average is very highly improbable. The experience of every other market that has gone through a price bubble that pushed prices above 8x earnings has been a marked fall in home prices over the following decade, not a continuation of the trend defined by the bubble. In all these markets the trend was proved to have no predictive ability.

 

[lizzie]

In my personal view your arguments hold no water and I am not prepared to continue debating given its obvious no one reading this thread could possibly getting anything of value out of it. Beyond a laugh or too are BOTH OUR expense.

yep ... the questions you are "demanding" answers to are getting so "out there" hypothetically that they no longer have any base in reality.

about time you guys canned this thread.

what is, is what is ... assumptions on the possibilities if variables were removed or altered is just plain ridiculous.

 

[Max Carnage]

what is, is what is ... assumptions on the possibilities if variables were removed or altered is just plain ridiculous.

The only variable I hypothesised upon was price. This is a very reasonable thing to do, not "out there" at all. The refusal to countenance a hypothetical lower price is effectively discounting the possibility that current prices are in a credit-financed speculative-bubble to zero!

 

[joe jo jo]

I have enjoyed reading this thread, but have wasted much time and consequently now behind in work. Thank You

 

[Shadow]

More likely*. But at the same time, the trend would have fallen. Hence it is of no predictive value as it moves opposite to logic.

The trend is of some, albeit limited, predictive value. One may countenance the idea that the trend of the past 30 years may potentially continue for a little bit longer. On the other hand it may not. I am betting it will, you are betting it will not. Do you remember who won our little bet on interest rates?

I see the trend as just one part of the puzzle. There are many other fundamental reasons why prices in Sydney could experience another surge - for example:

- Current prices are 15% lower than the previous peak
- Lower interest rates
- Increased First Home Owners Grant
- Increasing rents and rental yields
- Strong international immigration
- Lack of supply of suitable available properties in the locations where people actually want to live
- Past domestic exodus from NSW to other states is reversing
- The price gap between Sydney and other cities is now quite small by historical standards
- NSW government needs to revive the property market in order to refill its coffers - they may do something to increase buyer demand. A possibility.

On the other hand, here are some potential reasons why prices may not rise:

- Large increase in the unemployment rate
- Banks restrict credit considerably

There are currently no real signs of significant credit restriction. Our banks are well capitalised. Interest rates are falling. The government is doing everything in its power to boost liquidity and persuade people to buy property. They have the budget surplus and the future fund to spend if needed. The RBA has stated that the worst of the credit crunch is probably past us.

So it really comes down to unemployment. Will unemployment rise enough to create so many forced sellers that property prices crash in Sydney? It's possible, but that is not the most likely scenario in my opinion, so I am basing my investment decisions on a growth outlook for Sydney over the medium term (5-6 years). After that, who knows where we will be.

 

[Max Carnage]

The RBA has stated that the worst of the credit crunch is probably past us.

And yesterday their boss said "the likelihood of a global catastrophe has in fact declined over the past couple of weeks". That's a direct quote.

This tells me that even he believes that not only is "global catastrophe" a possibility, but there is still a chance (>0%) that such an event occur. So "global catastrophe" is at one end of the 'possible spectrum', your chart is at the other. I say this because for it to become reality, the rate of credit growth would not merely have to bounce back to 2007 levels (it's recently declined to about half that), it would have to accelerate to a much higher level and remain there.