“Heee’s back!” Yep, the Freddy Krueger of economics — Professor Steve Keen — is back telling us that Australian house prices will fall by 40%! Despite our history of public disagreement on house prices falls and when recessions will show up, Steve is a mate of mine. After the GFC, he was tipping a similar housing disaster story.
He even made a bet on a house price plunge with then-Macquarie economist, Rory Robertson. He lost that bet and ended up walking from Canberra to Mt. Kosciuszko with a T-shirt that read: “I was hopelessly wrong on house prices, ask me why.”
After that, on my TV programme, he argued he didn’t allow enough time and what governments did to prop up house prices got in the way of his predictions. He warned the growth of credit would one day prove him right. He says that day nears, as house prices in Sydney are down 14.5% from their July 2017 high, which is their worst fall since the early 1980s recession. Meanwhile, Melbourne prices are down 10.9% from their November 2017 highs, which also is their worst fall in the period since 1980.
Earlier this week I interviewed Steve by Skype. He now resides in Amsterdam, after teaching at the University of Kingston in London until recently. He maintains that house prices are bound to fall 40% and it’s becoming harder for a local government to do much about it. And he blames the Reserve Bank, claiming it’s the most “brain dead central bank on the planet!”
I came to our joust as a non-believer but I do think Steve raises some issues that can’t be ignored easily. He underlines how APRA and the consequences of the Royal Commission, with the impact on restrictive bank lending, is sowing the seeds for another big leg down for house prices.
And it’s not just a 40% fall fate for Sydney and Melbourne. He says it will be nightmare for house prices on nationally!
That’s a huge call and this chart based on the Bank of International Settlements shows why Steve is doing a Freddy Krueger.
His central argument is that credit is out of control. This means our household debt compared to our total production of goods and services (or Gross Domestic Product - GDP) is the second highest in the world, only behind Switzerland. This makes me feel personally vulnerable given my surname!
Household debt compared to GDP at 200% is the highest ever for Australia. And Steve says it’s the second highest ever. Making all this scarier is his contention that: “The RBA and mainstream economists don’t understand the role of credit.”
He compares us to the USA which, as a consequence of the GFC of 2008, which created what the Yanks called The Great Recession, where credit growth got out of control and resulted in a 39.8% fall in house prices
This chart from Steve shows that the USA, Spain and Ireland suffered a similar fate but our red line continues to defy gravity! But can it last? That’s a question someone like me, who tries to assist investors to navigate, can’t ignore because I don’t want it to happen.
That’s why I will be interviewing and filming a well-known economist this week after he or she reviews Steve’s argument. He maintains that establishment economists are over-influenced by the faulty thinking of what is called Neo-Classical Economics. He says our Reserve Bank is a classic captive and therefore is not taking the looming threat seriously.
Asked how long before this nightmare on Australian streets happens, with house prices falling 40%, Steve says, wait for it, five years.
In conclusion, Steve did warn about the debt threat before the GFC. I wrote about in my old column that I had for years in The Australian. As a consequence, he won a US award — the Revere Award — for accurate forecasting. But he did get local house prices wrong after the GFC, which I predicted. He has also bet me a recession was due in 2018 and he still owes me a dinner in that great Chinese restaurant in London called Hakkasan!
That said, his analysis deserves to be treated seriously. That’s what I intend to do in coming weeks. Why? Well, I advise clients and do education for thousands of investors, who read Switzer Daily and subscribe to our investment newsletter The Switzer Report.
And I have always lived by the motto that if anything is worth doing, it’s worth doing for money!
The full interview can be found below: