Would you buy a prediction from this man?

Some people might remember Steve Keen’s bold prediction about the collapse of the housing market. Now he is in a right pickle.   The Charles Sturt (property) newsletter reports.

Sixteen months ago Mr Keen made a bet with Macquarie Group interest rate strategist Rory Robertson after claiming that house prices would dive by 40% when the GFC was at its worst.
Fortunately his predictions didn’t eventuate, and now Mr Keen will deliver on his promise to walk 224km from Canberra to the top of Australia’s highest mountain, Mt Kosciuszko. It remains to be seen whether he will wear a t-shirt saying “I was hopelessly wrong on home prices! Ask me how.”
Dr Keen was way off the mark. Australian home prices bottomed out by 5.5% from their peak in late 2008.

Dr Keen also predicted Australia would have double digit unemployment for the next decade. Well, according to official data, the jobless rate fell in January to 5.3%. Dr Keen said recently the jobless rate was now likely to stay in a single-digit figures as the Government went into more debt to stimulate the economy.

 Not only that, Dr Keen forecast zero interest rates. And as we saw, the Reserve Bank raised the cash rate three times in late 2009.  Over at Macquarie Bank, Rory Robertson said the large interest rate cuts in late 2008 and early 2009, combined with the Federal Government bank guarantees, helped prevent a huge drop in house prices.

But we haven’t heard the end of it. Dr Keen says the bet is only lost for now, because a temporary doubling of the first home buyer grant stabilised home prices. He says his forecast could still come true by 2025.

For now, the 57-year-old academic and tri-athlete will walk the 224km from Parliament House in Canberra to the summit of Mt Kosciuszko. Dr Keen has been a runner since he was 12, and he’s been preparing for the trek by running and lifting weights. He plans to cover 30km a day, between April 15 and April 23, and donate the proceeds to charity Swags for Homeless.

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30 Responses to Would you buy a prediction from this man?

  1. JC

    Look, I admire steve for putting up his house and taking Rory’s bet. The guy really showed he had the guts to follow his convictions publicly which is more than we can say about other dudes that tell us they forecast the crisis 10 times over.

    I hope steve is wrong though although I suspect he may not be over this period.

    And Steve, if you’re reading this, some humble advice from a trader. Never bet the house on on thing. In this case pun intended.

  2. Peter Patton

    Perhaps Macquarie Bank should create a new security called the Keen Call?

    Whenever Dr. Keen made some public pronouncement about an asset class, investors would buy at that day’s price for the length of time of Dr. Keen’s doomsday prediction.

  3. Peter Patton

    jc

    I think a very amusing book could be written collecting all those excited claims that Australia/US/UK were now “socialist” due to all the “nationalizations” post GFC. ;)

  4. The US mortgage market is socialist. We’re markedly more capitalist in that regard.

  5. Peter Patton

    SRL

    I shall take your sensitive sweep of the history of the last 150 years – with particular emphasis on the more recent – under advisement. ;)

  6. Infidel Tiger

    Poor old Keen. He not only cost himself his reputation and 100′s of thousands of $$$, but now he he has to do the walk of shame. He really should be made to push a boulder.

  7. ken n

    Keen has been on about how toxic debt is for quite a while. Does he belong to a particular school of economics or has he worked it all out by himself?

  8. JC

    You never ever go full on retarded in any bet unless you have 99.99999% probability and then leave some money over for food and drink.

    This ought to be lesson to anyone. Never go full on retarded.

    http://www.youtube.com/watch?v=vxr0hYefytg

  9. PP,

    Convince me with some comparisons, not emoticons.

  10. JC

    Ken
    I think he’s worried bout the high level of consumer debt which is something to worry about to be honest especially with this government re-regulating the labor market and reducing potential flexibility during periods of economic shocks.

    Unfortunately Keen believes in Keynesian mumbo jumbo from what i can gather so he wouldn’t be too far from sharing the same beliefs as the current crop of imbeciles running Australian macro-economic policy who in a way have also gone full on retarded.

    We’re too freaking highly leveraged at the consumer level to be gluing up various parts of the economy.

  11. Peter Patton

    JC

    Before having children, for most of my adult life I pretty much lived hand-to-mouth. I was earning above AWE first day out of uni, but like many/most, just presumed it would always increase exponentially, so any money saved today was irrational. But once you have responsibility for people who can in no way feed and clothe themselves, even the old toaster starts to look like a wise investment move.

  12. daddy dave

    He’s right on fundamentals. The housing market is way over-valued. But if something is mispriced, it’s hard to predict when it will correct. There are several factors inflating Australian property values beyond their ‘natural’ state.

  13. Rafe

    A friend in Hobart insisted many years ago that prices in Sydney were about 30% too high. At the time I thought he was mad but when you consider that the housing market in Sydney has been practically flat since 2002 and you discount 3 or 4% pa for inflation that amounts to something like 20 or 30% up to date. I know some suburbs have done better and some have done worse.

  14. I’ve got a lot of respect for Keen. A lot of what he says is correct, even if I think his theory is errant. He should be commended for not only putting his money where his mouth is but also trying to formalise his models and synthesise different approaches.

  15. John H.

    Interestingly on the 7.30 report tonight they interviewed Schilling(?) who stated that most thought there was no housing bubble in the USA and stated that Australia may be falling for the same trap. He had also recently spent sometime in China and spoke to many people there. He was left with the impression that China showed signs of a bubble. Thinking back to what happened to Japanese land values and how much was at stake because of those valuations … .

  16. JC

    John H
    3 years ago no one spoke about bubbles and now everything is a bubble.

    Shiller made himself famous by alerting everyone about mean reversion something that any 1/2 baked trader knows. Whoopee do.

    Shiller was amazingly quiet in speaking up about the level of interventionism in the US real estate markets and now he’s an expert on real estate bubbles here and China. Give me a break.

    I saw him give a speech here about 4 years ago and all he could do was rattle on against the GOP which deserved my question, which was why does the Ivy league academy hate the GOP, to which i received a non answer.

    Shiller is simply famous because he raised the issue of markets usually making there way back to trend line.

    The Australian market is high:

    http://2.bp.blogspot.com/_eKH-tiSXFbc/S4zVLoA5iyI/AAAAAAAAGSw/DYTgKK4v5LI/s1600-h/demographia.bmp

    However people like Steve Keen would be also be supporting labor market re-regulation.

  17. THR

    I think Keen is a fan of Minsky, a kind of post-Keynesian fellow. Whilst his specific predictions turned out to be completely incorrect, his failures are nonetheless instructive. Firstly, he claims (correctly, I believe) to have ‘called’ the GFC. Secondly, his predictions were pretty reasonable compared to what happened in other countries, where housing markets did crash. Thirdly, some of Keen’s errors probably come down to him being an economist rather than a real estate agent. Fourth, the trigger for a housing crash in Australia (i.e. a recession in the face of massive leveraging) didn’t really occur, thanks largely to a resources boom. Had unemployment shot through the roof, it’s hard to believe there wouldn’t have ben a massive crash in the housing market.

    In short, Keen is more right than he is wrong, IMO. The fact that demand for housing is outstripping supply does not point to a shortage per se. It’s fanciful to believe that asset prices can increase 10-15% per year with no risk to anybody whatsoever. A round of job losses or deleveraging could recalibrate things quite dramatically.

  18. daddy dave

    The fact that demand for housing is outstripping supply does not point to a shortage per se.
    .
    I believe that census data shows an average 7 percent vacancy rate for all dwellings. Not exactly a shortage.
    .
    It’s fanciful to believe that asset prices can increase 10-15% per year with no risk to anybody whatsoever.
    .
    That’s how I see it. It makes no sense at all. But it’s this kind of “gut” analysis that also leads me to climate scepticism… ;)

  19. THR

    I believe that census data shows an average 7 percent vacancy rate for all dwellings. Not exactly a shortage.

    Yeah, it’s not as if there are shanty towns on the outskirts of Melbourne and Sydney. Occupancy rates are something like 2.6 people per house, and the majority of homes in Australia have a spare bedroom.

    That’s how I see it. It makes no sense at all.

    There’s a whole industry devoted to providing spin on this issue. When I read the Age, for instance, it’s not uncommon for the front pages to say one thing on housing (with dial-a-quotes from the usual suspects) and the business pages to be saying something different. Then you’ve gt government trying in various ways to prop up prices, and developers dripfeeding the release of land. Then there’s the lending practices of the banks. So there are lots of factors contributing to an increase in prices and the sense of ‘shortage’. However, there’s absolutely no law in nature that says that asset prices should only ever move in one direction.

  20. ken n

    Thanks THR, for your answer at 11:17
    And I agree with much of your 11:29 comment tho “developers dripfeeding the release of land” should at least in NSW read “government…”

  21. THR,

    Minsky is part of his error. It is descriptive but not theoretical or instructive enough.

    So wait THR – you’re saying that banks lending money to people causes shortages? You’re not pushing the idea that banks cause inflation, like our hapless flightless friend are you?

  22. THR

    SLR,

    The banks are partly to blame for rising house prices. If banks suddenly started demanding 20% deposits, this would have a fairly swift and drastic impact on housing prices, no?
    And, as I said above, I don’t think there’s a shortage of housing per se. ‘Shortages’ in parts of the US, UK, Spain and elsewhere turned out to actually be an oversupply.

    More generally, SLR, do you accept the notion that something like a ‘bubble’ can exist, and, if so, would you think it applies to Australia’s current situation with housing?

  23. “The banks are partly to blame for rising house prices. If banks suddenly started demanding 20% deposits, this would have a fairly swift and drastic impact on housing prices, no?”

    Deposits went up in Australia as part of recapitalisations. The long run effect was mean reversion.

    Of course I think bubbles can exist (having strong Neo Austrian tendencies). I think Australia 2001-2007 was a prime example of an asset class bubble.

    I’m worried about the stock market. The RBA dropped rates by 57% and accordingly the stock market rises by 63%. I hope all of our public equity doesn’t share the B&B business model.

  24. I think I should clarify.

    Not only are the “objections” you have THR all part and parcel of the Austrian theory (please read Shand’s primer), but the Australian property market is perpetually screwed by artificial constraints on demand and supply. If both are restricted, the result is little movement on quantity and significant upward push in prices.

  25. Capitalist Piggy

    On 24 February, Prof Steve Keen engaged in a debate with Christopher Joye and according to Mr Joye:

    What I do not say in the slides, but will communicate in the presentation, is this: Keen mounts his housing market critique based on crude comparisons of mortgage debt to GDP, amongst a few other things. This is a pretty meaningless benchmark. If you want to understand the viability of debt levels, you can use two key measures: debt-to-assets ratios and debt-to-income. This is exactly what any intelligent investor would do when appraising a company’s leverage.

    http://christopherjoye.blogspot.com/2010/02/deconstructing-steve-keen.html

    and…

    I won my debate today with Steve Keen in front of 500 investors at the Park Hyatt in Melbourne. The audience was asked to electronically score the result, and I came up trumps 5.2 to 4.9. Steve and I are locking horns again in Sydney on Friday.

    http://christopherjoye.blogspot.com/2010/02/i-won.html

    Here, Christopher Joye presents a more detailed critique of Steve Keen’s arguments:

    http://christopherjoye.blogspot.com/2010/02/stevie-keen-on-tv.html

  26. THR

    I won my debate today with Steve Keen in front of 500 investors at the Park Hyatt in Melbourne. The audience was asked to electronically score the result, and I came up trumps 5.2 to 4.9. Steve and I are locking horns again in Sydney on Friday.

    Joye was actually lying on this point:

    http://www.debtdeflation.com/blogs/2010/03/01/debtwatch-no-43-declaring-victory-at-half-time/

    More generally, why do you believe that the bubble know longer applies to the housing market? And do you agree with Keen’s overarching point, namely, that the vast growth in debt levels spells potential disaster for Australia?

  27. ken n

    The long interview with Keen linked in Joye’s post is worth watching
    http://www.businesschannel.com.au/programs/ontherecord/watch.aspx?id=18314&articleID=549812
    (Sorry, I must learn how to embed)
    I found K fairly superficial: one idea flogged to the end.
    Interesting though that he says that he sold his house because he was sick of having a big mortgage and hints at family reasons. The press story at the time was that he was doing it because he was sure real estate would collapse and was putting his money where his mouth is.
    Worth a look though – goes well beyond the usual sound bites.

  28. Capitalist Piggy

    THR,

    More generally, why do you believe that the bubble know longer applies to the housing market?

    Actually, I think it does. However I also think Joye has made a valid point in dismissing Keen’s debt/GDP ratio. From the individual borrower’s perspective, repayments/income makes more sense. But I believe this is how housing affordability is measured, and I understand that housing affordability is near historical lows. I don’t know if Joye addresses this.

    And do you agree with Keen’s overarching point, namely, that the vast growth in debt levels spells potential disaster for Australia?

    I do. And of course the govt has made matters worse with (a) unsustainably low interest rates (b) FHOB and (c) injecting $16bn into the RMBS market. Points (a) and (b) have already been clawed back, and (c) will be next. What happens then? If Joye is right, presumably the answer is: nothing.

    BTW, did you see his bio? Interesting.

    Chris is the Managing Director of Rismark International, having established the business on the basis of a report he produced for the Australian Prime Minister’s Home Ownership Task Force.
    He previously worked for Goldman Sachs and the Reserve Bank of Australia. In 2008-09, the Australian Government invested $16 billion in a radical policy proposal developed by Chris and Professor Joshua Gans to provide liquidity to Australia’s securitisation market.
    In February 2009, Chris was invited by the Rockefeller and MacArthur Foundations to present innovative policy solutions at the private Transforming America’s Housing Policy summit for Obama Administration officials.

  29. Mikey

    Right now it looks like the air is finally coming out of the housing bubble. It will be interesting to see how Joye explains the coming big drop in house prices given his theory that there is a vast under-supply of housing. Perhaps he will consult his mentor Henry K. Read this very strange interview with C.Joye. [ http://www.smh.com.au/articles/2003/07/02/1056825453672.html ]

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