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

Your question makes no sense and is irrelevant. If I can't buy, what impact does that have on the market? None.

I will rephrase my question, because you don't want to answer. What happened in Australia between the time interest rates hit 10% and the time interest rates hit 18%?

According to your theory, house prices should have dropped. Did they?

 

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.[/QUOTE]
You don't understand. When rates go up, the banks ask for a bigger deposit or a bigger wage before letting the funds to the purchaser. Cheaper credit means easier ability to borrow, so more people can do it. Rates go up - credit dries up.

 

So you say but this claim is not backed up by the data.

In Jul-1980, the Standard Variable Home Loan Interest Rate was 10.25%. By Jan-1990, the SVR had increased to 17%. During this time house prices boomed. This is a fact. At 17%, credit had not dried up. Your claim is wrong.

Look at Perth between 2007 (SVR of 7.55%) and 2016 (SVR of 5.10%). Prices in many areas of Perth have dropped between 2007 and 2016.

According to your theory, prices in Australia should have dropped between 1980 and 1990 because interest rates increased from 10.15% to 17%. But the opposite happened.

According to your theory, prices in Perth should have increased between 2007 and 2016 because interest rates dropped from 7.55% to 5.10%. But the opposed happened in many (not all) areas.

HISTORICAL INTEREST RATES AUSTRALIA

What I don't understand is why you think human psychology doesn't drive markets.

 

Since apr. 86 standart variable rate for mortgages got up less than 10% to from 15,5 to 17 and started dropping from apr. of 90. So rates were not going up they were stable.
Rates dropped since dec. 11 (7,79%) to last month of a whopping 35% (5,10%). Do you see the difference between the two?

 

What I don't understand is why you think human psychology doesn't drive markets.[/QUOTE]
Human psychology has nothing to do with market moves. Do you buy, because you are afraid to miss out?

 

So were house prices stable then? No.

interest rates started dropping from apr of 90. What happened to house prices, increase or decrease?

And what happened to house prices in Perth? Hint: they went down. Why?

Sure do. When interest rates were increasing (stable according to you), priced boomed. When interest rates dropped 35%, so did house prices in Perth.

I am not the market. I sell when people are greedy and buy when people are fearful. I make my money by going against the herd. How many of the people who bought in Sydney in the past 12 months had fear of missing out?

Shane Oliver sees bubble FOMO - fear of missing out - signs in irrational overpaying

The markets were overvalued despite higher property prices being driven by "fundamentals."

"Interest rates are at record lows and [are] lower than the 1950s - before Marcia Brady was born. The market has gone too far, is overvalued and there is a high degree of euphoric buying," he said.

Sydney property prices have risen close to 20% in the past 12 months and Melbourne, 12%.

Dr Oliver said the bubble characteristic of 'fear of missing out' had set in and buyers, particularly in Sydney, had become irrational," he said.
​

Shane Oliver sees bubble FOMO - fear of missing out - signs in irrational overpaying

Shane Oliver is AMP Capital Investors' chief economist.

 

Some people sure do.

 

Maybe, but I haven't met them.

 

I've seen plenty of people buying at the peak of market because prices could keep going up.

 

Many of the people who bought in Sydney in the last 12 months?

 

I sold my Melbourne property when prices peaked in the area. It made me wonder who would buy at the peak of a market. In my case, we sold to a builder who wanted to build a main residence for his family and for his close relative's family (maybe his brother?). He bought the property because it overlooks a park and he wanted his family home to overlook a park. Some purchasers make emotional decisions.

 

Do you have any idea how much it might have gone down since?

 

I don't know anybody from Sydney.

 

I can run a comparison and let you know tomorrow. It's not a drastic drop yet.

 

Me either. I don't know anyone who bought in regional towns during the mining boom either but I have read their stories on this forum and other places. If you want an example of a market driven by irrational exuberance, that would be one. After a point, there was nothing rational about people piling into the market with ever increasing prices. The interesting thing is that when it all ended, it was a drop in demand that caused prices to crash. Credit did not dry up, interest rates did not increase, they dropped, and yet property prices crashed. Think about it.

 

That's right. Prices crashed because even with cheap credit people couldn't afford to borrow more. They did borrow over their heads because credit was cheap. If credit was 10% or more they wouldn't be able to inflate that bubble in the first place. Credit did dry up. It's not irrational exuberance it's a question of affordability for them.

 

Well, credit is still cheap and prices are cheap. So according to your theory, the combination of low prices and cheap credit should cause a buying frenzy that creates a bubble. You can't argue that prices there are not affordable now. Prices are affordable and credit is cheap and easy. Where are the buyers? Where is the boom?

Edit: prices down 65%. Economics 101- supply and demand.

Prices will go back but they will never go back to the levels achieved during the boom when there was a shortage of supply. Now there is too much supply but prices will probably only go to half a million dollars," she said​

Read more: Property investors in Queensland suffer as prices plummet 65pc in three years

 

If demand remains unaffected by cost of credit, why are central banks all over the world reducing the interest rates ?
Maybe trying to stimulate the psychology. Tickling Psychology in Sydney is much easier as compared to Moranbah, so central banks must be wrong....all over the world....because on ground property prices observed in xyz determine laws and complexities of economics and monetary policies, especially the uni-variate causality and correlation between credit and demand.

Edit: Note the differing impact on US house prices at low and high interest rates which substantiates the point @barnes is making

 

Nah, it's all good, if you know that's enough.
I suppose there's a certian amount of shadenfreude in that sort of thing.

 

The easy way to explain it is that last year, old houses on big blocks on Porter Road were selling for close to $1,000/sqm or more:

Sold Price for 67 Porter Road Heidelberg Heights Vic 3081 ($1,069//sqm)

Sold Price for 70 Porter Road Heidelberg Heights Vic 3081 ($992/sqm)

Sold Price for 82 Porter Road Heidelberg Heights Vic 3081 ($990/sqm)

In June, a property sold in Porter Road for around $979/sqm. Not a huge drop, so prices have held up fairly well. They are just not getting that price premium they were getting for these properties at the peak.

Sold Price for 146 Porter Road Heidelberg Heights Vic 3081

No schadenfreude. I don't derive pleasure from another person's misfortune. I judge myself. In 2007, I compared Perth and Melbourne and bought in Melbourne. Did I make the right decision for myself? I also chose (with my investment partner) to sell at the time we did. Did we sell at the right time? Those are the questions I ask myself.