Forget the cap mate; this is a pretty egalitarian (if not libertarian) site!

On house prices, since I expect deflation, I also expect falling house prices in nominal terms–which was the Japanese experience. Inflation may ultimately occur, but it will be some years in the future I expect, as it was in the Great Depression.

The best guide you can have to what’s likely to transpire here is the record of Japan’s economy over the last two decades.

I come to your very much with cap in hand sir. I am certainly not an economist, more of a computer geek who has some familiarity with simple economic theory.

As a new husband and an even more recent father and have not yet entered the housing market but having compiled the sum of $1h for a house deposit, I do have a question if I may be so bold?

Are house prices going to fall or is the value of houses going to fall by the prices staying the same and high inflation taking place which would cause the real value of all assets to fall. I don’t really want to think about the ramifications if this is correct. Are we all going to have to pay for this abuse of credit? Even for those of us who haven’t used it much (we have only one credit card with a modest limit), we currently have no debt and in the face of inflation would suffer a loss in real terms of our earnestly assembled house deposit.

I hope that you receive this message at a time that allows you to give a benefactory response.

Sincerely

Dr. Bob

Firstly, I can also see from your occasional paper to the Centre for Policy Development, “Deeper in Debt”, that you are not afraid of proposing some policy prescriptions radical enough to shake the establishment (in order to save it).

Secondly, there are those who argue that it is only demand that is forcing up house prices. The Age’s property writers have been suckered into this theory which is being popularised by Macquarie Bank. Robertson thinks the reason why house prices have gone up in some places but not others is because some places are “sexy” and others are “dull”. Australia is rather flattered by this perspective because on the Robertson gauge, all our capital cities must be sexy. If there were no restrictions on land for building, it would cost $60,000 for a fully serviced block on the fringe of Melbourne. Yet, according to the Urban Development Institute, the average price is $145,000, having doubled since 2001. In Perth, government restrictions have brought a four-fold increase in land prices. Slow land releases around the country have identified as the cause of higher house prices. Higher house prices in turn push up rents. Labor’s housing spokesperson Tanya Plibersek’s solution is more levies on new houses to cross-subsidise low-income housing.

Thirdly, analysts at Goldman Sachs JB Were have written a remarkably honest confession to their clients about why analysts keep getting profit forecasts wrong in a downturn like this. And it contains the first public admission I have seen from any analysts that it is hard to reduce earnings forecasts because they need to “curry favour” with company management. The confession was contained in last Friday’s daily to clients from GSJBW and was written by Sam Ferraro and Matthew Ross:
They haven’t seen anything like this before — that is, “the paucity of financial crises … in recent history” means they tend to “underestimate the effects of systematic or top-down developments”.The companies haven’t seen anything like this before. A survey of analysts reveals that 25 per cent of companies that used to provide profit guidance no longer do (and guidance is all-important — see the next point, below). CEOs, they say, are chosen for their “left brain skills: optimism, ambition, hard work, focus and decisiveness. Patience and an appreciation of history are not considered virtues for these individuals”.Analysts “seek to curry favour with management in order to preserve their information networks”. Everyone knew this already, but it’s the first time I’ve seen it admitted.Analysts need to manage their “reputational risks”, so they “engage in herding behaviour”. That is, the costs of getting a big call wrong far outweigh the benefits of getting a big one right.

The bottom line, Steve, is that analyst forecasts — such as those of Robertson — are virtually useless.

- RJW

This real estate thing is becoming a bit of a bore, but to clarify the whole thing:

I was asked what I thought would happen to Australian real estate prices about two months ago, I said that I expected them to mimic what happened in Japan–which was roughly a 40% fall over a 10-15 year period.

That set the economic chatterati going like nothing else I’d said beforehand–even though by then my Minsky-inspired predictions about economic performance had been very accurate, and the neoclassically-oriented predictions they had been making had been abject failures.

When I spoke at the Parliamentary seminar, I didn’t even mention house prices–instead I detailed the theory that had led me to anticipate the serious financial crisis we are now in. That included running the simulation program featured in my most recent Debtwatch.

Rory opened his comments by observing that I was obviously a lot smarter than some of my critics had assumed (thanks Rory), but then continued that he thought that most of the audience at the seminar had come expecting me to explain my prediction of a 40% fall in house prices.

I just reiterated that this wasn’t a prediction so much as an expectation that, having had a bigger price bubble than did Japan during its Bubble Economy days, our asset price fall would be of a similar magnitude.

He then suggested the bet–he walks for a 40% or more fall, I walk for a 20% or less. I thought that was fair enough, so I said yes. But my time frame was always of the 10-15 year period. Real estate is a slow moving train wreck compared to shares.

Somehow some of the chatterati got it into their heads that I had said a 40% fall in five years–Joshua Gans apparently believes so. I never said that, and when Rory suggested a 5 year horizon after the seminar, I said in that case I’d drop the range from 40% to 20%.

He instead said let’s go for the 40% as originally, but from peak to trough.

That raises the question of when the peak occurs, as well as how does one determine the trough.

I expect that the March figures may be the peak–an ABS index reading of 131 from memory–but there is a slim chance that the First Home Buyer con may push the index a bit higher, so that the peak might be more than 131 and later than last March. I don’t expect so, but it’s possible.

Also, a trough has to be a clear turning of the market–not just a one quarter blip in the index. The Australian market moves a lot more slowly than the US, which has fallen every month since it turned in 2006. I doubt that the Australian, when it does turn, will be as consistent as the Case-Shiller Index. So I’d refer to see 3 quarters of rising prices before I’d call the trough as having occurred.

So that’s the basic bet: from peak to trough, with 20% and 40% triggers.

But I reiterate that this issue is a trivial one to me alongside the macroeconomic disaster that this crisis is going to become. I’d rather forget the whole wager until such time as it is triggered one way or the other.

Is the article in the newspaper correct? The guy made it seem like you chickened out of your bet about the 40%. The article mentioned that you stated it could take 15 years for it to play out? Made it seem like you were nervous and not confident with your bet. Can you please clarify these views.

Cheers!

Cheers

I don’t think I disagree with you re the Fiscal imbablance. My point was that the “surplus” was created by exacerbating the imbalances in the other sectors (as you describe). However there is the question of what is ’cause” and what is “effect”. I guess that is pretty normal in the world of economics. You argue that the govt surplus is “causing” the increase in private sector debt. My thinking was that Costello (with that idiot Henry’s advice)solved his problem by stimulating the profligacy and distortions in the private sector. I guess i don’t see ’cause and effect’ so much as one gigantic FUBAR.
My greatest amazement is that the whole shenanigans has never been questioned by even one Financial journalist or Economist (with the possible exception of Steve)
Now as to psychopaths…these people are not mentally ill! Psychpaths know full well what they are doing, they just don’t care what harm they cause.
Your position is i understand it is somewhat akin to a version of Occam’s Razor
“Never attribute to malice that which can be adequately explained by stupidity.
I don’t think they are that innocent!

Elect me dictator and i’ll sort it all out!!!!

I was speaking to a property banker from one of the majors on Friday and he told me about one of his clients. No specifics of course.

I don’t know where this was. But I assume somewhere in NSW or South East Queensland.

The development is now finished. Before construction began 16 contracts were exchanged off the plan. I am not sure how many units there were all up. All 16 contracts have now defaulted and their deposits have been forfeited. The contracted sale prices were mostly in the $900K to $1M range.

The units are now on the market for between $500K and $600K and there are no sales as yet.

The property sector will explode next year. If it hasn’t already?

Look for Perth to have a very rough ride after it had such a large boom in a very short period of time.

Fair enough, but originally I was adding to your 6 point plan, looks like you’re not obeying your own point 3 though.

3. I mean physical cash. As much as possible. Do you know how hard it is to get money out of the banks. The RBA has run out of $100 notes. You also need to book in at least a week to get a significant amount of cash out of the banks.

Anyway, good luck man, but sounds like your mattress is going to get awfully lumpy stuffed with all those bank notes man!!