Saturday, February 15, 2014

I predict that Steve Keen will eventually look

. . . without actually being correct.
For years I’ve pointed out that whereas the huge house price run-up in the US was reversed after 2006, house prices in Britain, Canada, Australia, and New Zealand remained at lofty levels, after a similar rise in prices.  Indeed Australian house prices moved still higher.
Commenters kept insisting “you just wait, the Australian housing bubble will burst one of these days.”  Australian economist Steve Keen was so sure the bubble would burst that he bet his reputation on it:
Mr Keen is a long time bear on Australian house prices, who famously lost a bet with an economist at Macquarie Bank in 2008 over his claim that prices would soon reverse sharply. Two years later he walked 225km from parliament house to Mount Kosciuszko wearing a T-shirt saying “I was hopelessly wrong on house prices – ask me how” to honour the wager.
That’s why I like Aussies, they have an honesty that is increasingly rare in our world.  Now Australian housing prices are soaring higher again.  Is it a bubble on top of a bubble?
And in Australia too, foreign buyers, together with cheap money and supply constraints, have helped push up house prices, prompting some commentators to warn of an emerging housing bubble in some of the country’s bigger cities.
Prices in Sydney jumped 15.1 percent last year, pushing the median house price to A$763,169. In Melbourne and Perth, property prices increased 8 percent, according to Australian Property Monitors, an information provider to the banking and property industries.
“I think we are seeing the creation of a spectacular bubble on top of a spectacular property bubble,” says Steve Keen, a professor of economics and author of a blog called Debtwatch.
Keep in mind that although Australia has 23 million people (same as Shanghai) squeezed into an area the size of the continental US, almost all of them live in “the country’s bigger cities,” which feature California-style restrictive zoning.  So prices may or may not stay high.
Since I’ve been proved right on the fact that the earlier run-up in prices was not a bubble, I’ll take my chips from the table and go home.  No further predictions; I’ve proved my point that “bubbles” are not a useful concept for Australia.  OK, just one more prediction.  I predict that if Steve Keen continues to predict bubbles in Australia there will come a time when it will look like he is correct, and he’ll be feted as the greatest seer since Nouriel Roubini.
Of course he won’t have been correct about there being a bubble, as bubbles don’t exist.  Asset markets move up and down unpredictably.  That’s the whole point of the EMH.  Ex ante there was no way of knowing in 2006 that Australian prices would keep going up while US prices would reverse and fall.  It could have been the other way around.
BTW.  Australia’s been running big current account deficits for decades, and they can continue doing so for many centuries to come.  (When I lived there in 1991 one pundit told me that Australia had a bleak future because of its CA deficits.) Australia gets some cars and TVs built with Chinese labor, and China gets some retirement condos on the Gold Coast built with Australian labor. Believe it or not economists call that sort of mutually beneficial business deal a “deficit.”  I’m not kidding. Don’t be fooled by words, focus on reality.

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