Steve keen latest update. 2017 recession, 20-70% drop in house prices

Lol, did we have a similar discussion about this some time back?

 

Yes. And since then, the Perth market has continued to decline... even though interest rates have been cut several times since then. This just reinforces my view that cheap credit is the effect of a boom, not a cause.

 

Rising credit is causing a boom. If it wasn't for cheap credit Perth prices would have fallen a lot quicker a d miles lower than they are now. We will see what happens when RBA will lower it's rates to 0,5 and there will be no more LOWER credit. ONLY cheap credit drives property prices up and nothing more.
If the rates were at 8-9% now, prices in Sydney would be slashed in half, the same as in other major cities.

 

It is the ONLY cause. When the rates start climbing again everyone will forget about all other causes (strong population growth, mining boom or bust, location) all this will be nothing compared to the ability of borrowing.
If there is NO cheap credit - who would buy this overpriced housing? I know, I wouldn't.

 

I would guess that Perth was also supply and demand.
Not as many people earning money, less people buying houses.

 

Rising credit is correlated with a boom. But correlation doesn't prove causation. What that means is that rising credit doesn't cause the boom. People buying houses and paying higher prices for those houses is what causes the boom. Supply/demand. You can have all the credit in the world but that won't push up prices if there is no demand. Look at Perth. Demand dries up and prices fall (cause). As a result, the amount of credit decreases (effect).

Late 1980's Australia. "Through the 1980s, both the global and Australian economies grew quickly, and by the late 1980s inflation had grown to around 9%. By 1988, the Reserve Bank of Australia began tightening monetary policy, and household interest rates peaked at 18%."

There was a housing boom. To slow the economy and put a brake on house price increases, interest rates were increased and increased and increased. This did not stop the boom.

Nope. Interest rates have been low for so long that people have forgotten the reason why interest rates his 18%. Markets are driven by greed and fear, not interest rates and cheap credit. If cheap credit was the ONLY cause of a boom, prices would not have boomed in Australia in the 80's when interest rates went over 7%, then over 10% then over 15%. It's wrong to assert that cheap credit causes a boom.

You are conflating two unrelated issues:- overpriced housing and cheap credit. In a boom, cheap credit is abundant then why do people stop buying? Prices peak. I was on the ground in Perth when prices in my area peaked in December 2015. In November, sales were strong. In December, sales dried up. What changed? Cheap credit? No. Market sentiment changed. Prices got so high that people en mass decided that enough was enough and there was no longer any fat in the deals (these were development sites). When demand for properties at those prices collapsed, so did prices. Since then, there have been drops of 30% in these areas. The thing is that credit is cheaper now than then. It wasn't the credit that dried up. It was demand.

This example from Canada, not Australia but the same principles apply:-

"So, even in cases where rates rose dramatically, the odds were still better than 50% that they coincided with rising house prices. While I will concede that this ‘back-of-the-envelope’ analysis is a tad simplistic, I think a trend established using thirty years of data is compelling. ​

So how do we explain this counter-intuitive result? Well for starters, interest rates and house prices do not exist in a vacuum and both are influenced by the overall strength or weakness of our broader economy. Rising interest rates generally occur in a healthy economic environment where future price inflation is expected, making them a by-product of positive economic momentum. While it certainly is true that higher rates increase borrowing costs, this generally happens in periods with rising incomes, higher levels of employment and increasing consumer confidence."
​

https://www.integratedmortgageplann...gher-interest-rates-cause-lower-house-prices/

Pop quiz. Interest rates have just dropped, meaning cheaper credit. Will this drive prices up or down?

Prices are driven by a combination of supply and demand, market sentiment and greed and fear. Claiming that increasing credit causes the boom is like saying the boom is caused by increasing house prices. Both of these are effects, not causes of a boom.

 

Yes. As jobs dried up, many people headed back east. The booms in Sydney and Melbourne coincided with the exodus from Perth. Perth prices dropped, Sydney and Melbourne prices continued to increase.

 

to Perthguy.
You are wrong. If there is NO cheap credit around NO demand will ever come close to purchasing. Because to purchase demand MUST HAVE FUNDS. No funds - no purchase. Everything else is irrelevant.
If tomorrow interest rates will be 10% - what will happen to prices?

 

"This just reinforces my view that cheap credit is the effect of a boom, not a cause."

Claiming cheap credit is the only cause of a boom ignores market psychology. Analysis of the housing boom in the USA

"Interest rates do influence house prices, but they cannot provide anything close to a complete explanation of the great housing market gyrations between 1996 and 2010. Over the long 1996-2006 boom, they cannot account for more than one-fifth of the rise in house prices.
...
The work of Case and Shiller (2003) suggests that home buyers had wildly unrealistic expectations about future price appreciation during the boom. They report that 83 to 95 percent of purchasers in 2003 thought that prices would rise by an average of around 9 percent per year over the next decade. It is easy to imagine that such exuberance played a significant role in fueling the boom."​

http://scholar.harvard.edu/files/glaeser/files/can_cheap_credit_explain_the_housing_boom.pdf

To me, the Sydney market was cooked 12 months ago. And yet, prices have continued to increase in the last 12 months as more and more people pile in. Do you think those buyers have wildly unrealistic expectations about future price appreciation in Sydney? I am certain that many do. The behaviour of buyers in the Sydney market is irrational and can't simply be explained away by "cheap credit".

 

You are wrong. 18% interest rates happened and there was still a housing boom. That is not cheap credit. 18% interest rates did not stop people buying. If your theory is true, how was there still rising prices at 18% interest rates?

What you are missing is that interest rates increase when the economy is doing well. There is real wage growth and so people have the capacity to pay more. What you are claiming is that people can only get a loan when credit is cheap. This is patently untrue and the historical data proves you wrong. In 2010, I was paying 9% interest on my Melbourne property. Prices peaked in 2010. Between 2010 and 2012, prices decreased in the area, along with interest rates. Interest rates went down and prices dropped at the same time. This is the opposite of what should happen if your theory is correct.

 

As I have said before. If rates were 10% now the price rise in Sydney wouldn't even happen, because demand wouldn't be allowed to buy. It only happened due to falling rates of the last few years.
The same happened in the States. When Greenspan drove the fund rates to almost 6% it all collapsed. Demand couldn't afford to purchase anymore.

 

And yet in Australia, when interest rates were over 10%, people were allowed to get loans and a boom still happened.

And yet an extensive research paper into the boom concludes that interest rates are not a major driver of booms, account for not more than one-fifth of the rise in house prices.

 

To Perthguy.
Just answer this. What happens to prices if interest rates are 10% as of tomorrow?

 

Why are interest rates increased to 10%?

Interest rates are increased when the economy is booming:- high inflation, high wage growth, high consumer confidence.

Interest rates are 10% as of tomorrow, accompanied by high inflation, high wage growth and high consumer confidence... result? House prices boom.

To barnes:- Just answer this:- what actually happened in Australia last time interest rates were over 10%?

 

@barnes, if you had the cash would you buy in Sydney right now? If no, why not? If yes, why?

I would not touch Sydney right now, even if I had cash to buy because it is overpriced IMO. Nothing to do with credit.

What role do greed and fear play in booms and busts? To claim credit is the only driver of a boom is to deny that people are irrational. Of course they are and there are always buyers driven by greed and fear.

If wages are expected to grow at, say, 4% per annum, why on earth do people dive into property investment after a market has jumped by 5% in a few months?

In fact, they seem more likely to buy when prices have gone up than when they have become cheaper which makes no rational sense at all.

It is indeed related to fear and greed – and fairly often it is both. Yes it’s partly related to greed and making profits…but it’s also related to the fear of missing out.​

Property Update –The roles of fear and greed in our property investment markets - Property Update -

How else do you explain Sydney in the last 12 months?

 

"Irrational exuberance. Irrational exuberance played a key role in the housing bubble, as with all bubbles, when all parties involved in creating the housing bubble became convinced that home prices would continue to rise. What does “irrational exuberance” mean? Robert Shiller (2005), who wrote a book titled “Irrational Exuberance,” defines the term as “a heightened state of speculative fervor.” The term became famous when, in a speech given on December 5, 1996, Alan Greenspan hinted that stock prices might be unduly escalated due to irrational exuberance. The Dow Jones Industrial Average fell 2 percent at the opening of trading the next day."

https://www.uvu.edu/woodbury/docs/summaryoftheprimarycauseofthehousingbubble.pdf

The counter argument to this is that if there is cheap credit but no demand, there will be no purchase. Cheap credit does not cause demand (Perth for example). No demand - no purchase. Everything else is irrelevant.

 

Compared to what we see now - nothing, or more a recession of 90-93. Do you remember that. I do.

 

If I had the cash I wouldn't buy in Sydney. Why should I compete with someone who uses cheap credit to buy. I have better places to put my cash.
It seems to me you don't understand.
If there are NO funds the fear of missing out or the greed for profit just doesn't exist. There are NO FUNDS. You CANNOT BUY, period. You have to wait with all your feelings until you HAVE funds or until prices DROP so low, that you HAVE funds to purchase.

 

to Perthguy
I will rephrase my question, because you don't want to answer.
If you have NO FUNDS available - can you purchase?

 

No. The recession didn't happen until after interest rates hit 18%. Do you remember what happened between interest rates hitting 10% and interest rates hitting 18%? I do.

And so you prove that cheap credit is not the only factor that people consider when they buy. "I have better places to put my cash" defeats your argument. I wouldn't buy in Sydney either. Sydney is overpriced. If I bought now it could be a decade before I see any real growth in prices.

I have no words. You seem to be implying that when interest rates rise, credit dries up. This is simply not true. Last time there was a credit crunch was during the GFC, when funds dried up. I was trying to get into the Perth market at the time. Prices didn't drop. To claim that credit dries up when interest rates increase is just silly.