20 May 2010

House prices will fall in spring says rebel economist

He has been dubbed a prophet of doom and “the merchant of gloom” but University of Western Sydney associate professor of economics and finance, Steve Keen’s credibility stands up to scrutiny because he was the first Australian economist to call the Global Financial Crisis.

Keen acquired his prophet of doom tag by stating mid-2008 that house prices would crash within a couple of years.

A critic of conventional economic theory Keen made a now famous high-profile bet with Macquarie Group interest rate strategist Rory Robertson that house prices would be the same or lower as they were in September 2008 (when the GFC hit its most critical stage) by the end of 2009.

He even sold his own home in support of his prediction.

The loser of the bet agreed to make a 225km trek from Canberra to the top of Mount Kosciuszko wearing a T-shirt across which was emblazoned the words, “I was hopelessly wrong on house prices! Ask me how.”

Keen, the loser, embarked on the long hike on 15 April.

But although he willingly honoured the requirement of the wager there were no signs of contrition. In fact he is adamant that house prices will begin falling by September this year and that the second half of the bet (within 15 years house prices will have tanked 40 per cent) will come to pass.

Keen claimed that, just as Japanese house prices had fallen 40 per cent since its Bubble Economy burst in 1990, so too would Australian house prices. Keen is turning his trek to the top of Mount Kosciuszko into a protest at government policy that has deliberately pushed house prices higher.

“This latest house price bubble began when the government doubled and even tripled the First Home Owners Grant,” said Keen.

“Along with the decision to allow open slather purchases of Australian properties by overseas buyers, the Rudd Government lit a fuse under house prices.

“These policies reversed the GFC inspired trend for Australian households to reduce mortgage debt, and played a major role in reducing the GFC’s impact on Australia. But they did so by reproducing the conditions that led to the GFC in the first place.

“Australia has taken the “hair of the dog” approach to curing a debt hangover, by borrowing yet more money,” he declared.

Keen, who argues that GFC was the result of too much debt, notes that Australia is the only country in the world with a rising level of debt to GDP.

Keen’s warnings of a property bubble were supported this week by the International Monetary Fund (IMF) in a report that expressed concerns that the Asia-Pacific region, including Australia, is at risk of a property bubble.

Although the IMF found ‘”no evidence of systematic bubbles” in the short-term, it stated that Australian house prices were at elevated levels compared to incomes and rents and that booming property markets across the country represent a threat to financial stability.

The IMF says Australian house prices are overvalued by up to 20 per cent and that the size of the average mortgage has reached an unprecedented high.

The report predicts that low rates, government subsidies and strong immigration will continue to push house prices higher and that a sharp fall in property prices is the inevitable risk.

“As typically happens in housing bubbles, many purchasers may have been buying in the expectation of price appreciation, rather than simply for dwelling purposes,” the report said.

IMF data places Australia’s house price-to-income ratio at one of the highest in the region, second only to India.

Is Keen, the doomsayer, about to be vindicated?

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