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

No one has argued that demand remains unaffected by cost of credit. The argument is between @barnes, who claims:

and me, who claims:

You suggest:

but @barnes claims:

According to @barnes theory, there would be no point in trying to "stimulate the psychology" because "Human psychology has nothing to do with market moves". That would mean that fear and greed would play no part in the rise and fall of markets. Previously you posted:

I agree with you. Greed and fear impact asset prices. I don't agree with @barnes that credit is the only driver of prices.

 

No it doesn't. The graph does not prove that credit is the only driver of prices. All the graph demonstrates is a correlation between house prices and interest rates. It does not prove causation. Without any other supporting data, the graph does not prove that falling interest rates caused house prices to rise, because interest rates are not an independent variable. What role did Irrational exuberance play in house price increases?

"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.”"​

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

I would love to see a detailed argument as to how "Irrational Exuberance" played no part in the Moranbah bubble.

 

It's a trivial exercise to examine the central thesis and prove or disprove it.

If the thesis is true, when interest rates increase, prices should fall. Have to look at
Sydney Annual median house prices from 1980 to 1990 vs the Standard Variable Rate at Jan of each of those years. What is the correlation between median house prices and interest rates?



If the thesis was true, house prices should have fallen as interest rates increased. The opposite occurred. The data does not support the thesis.

Data sources
http://www.econ.mq.edu.au/Econ_docs/research_papers2/2004_research_papers/Abelson_9_04.pdf
HISTORICAL INTEREST RATES AUSTRALIA

 

Why don't you make the same graph for other years the 90s and beyond and see where it takes you.
Every rule can have a small exception, late 80s was this small exception (from 81 til 86 nothing happened).

 

Really, it's not my job to hunt through the data to try to find a series that matches your hypothesis.

Besides, people a lot smarter than me have analysed the data and concluded from a RE viewpoint, it thus appears difficult to account for the observed house price dynamics using changes in real interest rates as a driving force.

For the U.S. economy, however, one cannot find a close simultaneous association between changes in the real mortgage rates and house prices changes. Mortgage rates, for example, stayed approximately constant between the beginning of 2003 until the end of 2005, see figure 2, while house prices increased strongly over these two years. Likewise, real mortgage rates were roughly constant over the years 2006-2008, while house prices decreased considerably over these years. Due to this close association with in-terest rates, house prices under RE do not exhibit the persistence that can be observed for house price fluctuations in the data.

Furthermore, the amplitude of the fluctuations generated by interest rate shocks tends to be small compared to the data. The RE model justifies a 4% appreciation between 2000 and 2005, while the U.S. experienced a tenfold increase over this period. From a RE viewpoint, it thus appears difficult to account for the observed house price dynamics using changes in real interest rates as a driving force.
​

http://cep.lse.ac.uk/pubs/download/dp1064.pdf

To be honest, I don't really care if you want to expand your knowledge or not. I have given you the info. Take it or leave it.

Personally, I would rather ground truth my beliefs and see if they stack up to real world data. I realise that's a personal choice. Taking a final example, out of interest, Perth from 2003 to 2007, because I know there was a boom (I was looking to buy in 2007 but prices were too high). From 2003 the median house price increased from $205,000 to $470,000 (an increase of 129%). At the same time, interest rates increased from 6.05% to 7.55% (an increase of 15%). In this example, when interest rates rise, housing prices rise. What can account for this?



Historical House Prices in Perth

 

Some food for thought. Take it or leave it.

There are a number of implications for investors.​

1. Understand emotions. Investors need to recognise that investment markets are not only driven by fundamentals, but also by the often-irrational and erratic behaviour of an unstable crowd of other investors. Also, not only are investment markets highly unstable, they can also be highly seductive. Be aware of past market booms and busts, so when they arise in the future you doe not overreact – piling into unstable bubbles near the top or selling everything during busts and locking in a loss at the bottom.

Why markets are irrational - ASX

 

I do post serious research papers, data and analysis and commentary from subject area experts to support my view. You post hypotheticals, anecdotes and memes to support yours. Good job!

I posted Sydney in the first example, because it was the data in the first column. I posted Perth in the second example because I know it was a boom. I tried to buy in 2007 but the market was overheated. I was curious as to what happened to interest rates during the boom so I ran the analysis. There's no hidden agenda. I didn't run Sydney in the second example because I can't remember when the boom was so I don't know what years to pick.

As I said, it's up to you to try and understand the market better or not understand the market better. It makes no difference to me. Only you can decide what is important to you.

 

Yeah, because Perth has a dataset available to analyse from 2003 to 2007 and I can't find the equivalent for Sydney. Give me some Sydney data and I will analyse it.

 

Me either.
Unless someone was trying to get one over on you I suppose.

 

@Perthguy posted three quotes about credit and the housing boom.

I think that all three are saying roughly the same thing.

Demand refers to people who have the desire to purchase something, and the ability to do so. For example, I'd like to buy 110 Wolseley Road, Point Piper, but I'm at least $30 million short. So I don't affect the price, because I can't afford it.

If you reduce the cost of credit, then people feel as though they can borrow more, which in turn drives up demand. Given a limited and somewhat inelastic supply of properties, prices are only going to head up in that scenario.

Yes, sentiment is going to play a big part. I suspect that in the aftermath of a Keen's 70% collapse in prices there would be very few buyers.

 

Only to a point. Credit is getting cheaper and cheaper. In response, Sydney and Melbourne property markets have boomed because there is demand there. At the same time, Perth and Moranbah markets have experienced price decreases because there is a lack of demand in those markets. Booms are driven by demand and credit.

The other point is that credit does not need to be cheap for a boom to occur if there are other economic factors at play such as high inflation and strong wage growth. These factors meant that even as the SVR neared 17% in the late 80's, the growth in property prices did not slow down.

 

I wasn't joking when I said you are doing a good job. You have literally made zero effort to prove your case. I have done all the works and you have me on the back foot. You are a brilliant strategist. I am not.

Instead of relying on facts, research and analysis, I need to switch to your tactics: memes, hypotheticals and anecdotes.

If the SVR dropped to 2% tomorrow, would Moranbah boom? Would the Perth market recover? No, because there is insufficient demand in those markets and it takes more than cheap credit to drive up demand.

What if there was cheap credit available but no buyers? Would prices boom? There are no buyers to push up prices. The boom never happens.

 

But if there are no funds, there are no buyers also. In those examples that you have shown the buyers had funds even though the rates were high, it was a so called "delayed" demand. Demand that started to grow on lower rates in the low to mid 80s and than couldn't stop in the late 80s. And when rates were at a very high 17% demand vanished and we had a recession of early 90s.
The same thing is happening now. The prices are too high because the credit is very cheap, so the market is slowing down (Syd and Mel) and falling in Perth. Why, because there is no "delayed" demand fueled by cheap credit like it was in the 80s or in the mid 2000s in Perth. The prices now are too HIGH for DEMAND even with CHEAP credit. People just CAN'T afford to borrow anymore.

 

That is simply not true. You are not in Perth so you don't know what is happening on the ground. I am here and I can see what is happening on the ground. Buyers are cashed up and ready to buy and they have borrowing capacity. They are just waiting for further price drops before they jump in. This has nothing to do with credit, this is 100% the psychology of markets. Why buy today when I can get it cheaper next month or the month after that?

I don't need to support my views on the psychology of markets. I have my brain, strong conceptual and analytical skills and critical thinking ability.

 

Hey guys, how about 'credit availability is one of a number of influences fueling demand' as a compromise? See http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Former_Committees/hsaf/report/c04 for this and other influences. ie. not a direct cause as such, rather an enabler.

 

Did you just win the internet?

 

Good analysis:-

Lower interest rates
4.17 If this mechanism were the only driver of prices, then prices would have fallen back again as interest rates have since risen. However, there may be inertia in the system, or prices may be 'sticky', as vendors are reluctant to accept low bids. This would imply that affordability will only be restored by the gradual rise in incomes rather than a fall in nominal house prices.​

 

If properties fell 70%, they'd still be more expensive than what he sold his house for.