A Litany of Failed Doom Mongering
The FT has a very amusing round-up of failed predictions in relation to UK house prices, demonstrating once again the perverse demand for predictions of housing-related economic ruin. The author really nails it when he notes the inability of the commentariat to get their head around the concept of capitalist acts between consenting adults:
And yet house prices continued to defy the reasoning of such commentators. Unlike many other assets, such as gilts or equities - which usually are influenced mainly by professional decisions - housing is an incredibly democratic market. The average price of a home is entirely a function of decisions, sensible or otherwise, by millions of ordinary people buying or selling homes. Should they decide that it is rational to borrow six times their salaries, when renting might be much cheaper, there is little the intelligentsia can do about it.
The author also quotes this very sound advice from the Bank of England’s Mervyn King, which the RBA would do well to heed:
The best way to destroy the credibility of the monetary policy committee is to lecture people about house prices.
posted on 17 September 2005 by skirchner
in Economics
(11) Comments | Permalink | Main
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Comments
Indeed! All those people who said Tokyo house prices were impossibly high in the 1980s are looking pretty silly now :-)
Posted by quiggin on 09/19 at 09:20 AM
how much did you make short selling tokyo property in the 80s?
Posted by .(JavaScript must be enabled to view this email address) on 09/19 at 11:22 AM
I’ve responded to the short-selling point many times previously c8to. As Keynes apparently didn’t say “the market can stay irrational longer than you can stay solvent”.
Posted by quiggin on 09/19 at 11:45 AM
it was probably difficult in the 80s to short sell tokyo property for small amounts, but with the rise of internet trading im sure this would be possible now.
on other fronts, im happy to wager you that the CDU/CSU will be part of a german government.
Posted by .(JavaScript must be enabled to view this email address) on 09/19 at 11:55 AM
John, the lending by Japanese financial institutions that underpinned its bubble economy was all subject to administrative guidance by the MoF and BoJ. It was a bubble that was actively sponsored by the state, with market mechanisms almost completely marginalised. The institutitional framework was entirely different from that in the Anglo-American economies today.
On the solvency argument, there are now plenty of instruments on the various prediction markets that allow you to take modest positions without threatening your solvency. And of course, one could always paper trade by announcing that you have taken a hypothetical position on a given day and letting people track the hypothetical performance of your prediction.
Posted by skirchner on 09/19 at 01:31 PM
The proponents of the new economy, the new paradigm and Dow 36,000 were right for a very long time in the late 90s. Stephen may very well be right about house prices for few more years yet, but I don’t the house price story will be over (in Australia at least) until the commodities boom story is over.
There are signs that its coming to an end:
Wheels to fall off the super cycle
http://www.theaustralian.news.com.au/common/story_page/0,5744,16657138%255E643,00.html
Miners warned on demand as boom nears its peak
http://www.theaustralian.news.com.au/common/story_page/0,5744,16659251%255E2702,00.html
Posted by .(JavaScript must be enabled to view this email address) on 09/20 at 02:08 PM
There was a severe global commodity price slump in 1998-99, during which Australia recorded real growth as high as 6% y/y.
This is not to say that there are not plenty of risks out there, but the Australian economy is a lot more resilient than people give it credit for.
Posted by skirchner on 09/20 at 02:22 PM
Perhaps, but you have to admit the spike in commodities prices did come at a very convenient time, just as the housing market was coming off the boil and the CAD was entering uncharted territory.
I doubt the economic picture would be looking so rosy now if not for the resources boom.
Posted by .(JavaScript must be enabled to view this email address) on 09/20 at 02:32 PM
Interesting comment here:
http://www.henrythornton.com/article.asp?article_id=3575
“The Demon of Compound Growth – nothing grows forever
Another issue, and one of enormous importance to providers of raw materials and speculators is the demon of compound growth. Let’s take China’s imports of copper as an example. From January 1994 to December 2004, the geometric mean of the month on month increases is 2.73%. In 2004 China’s average monthly imports of copper stood at 115,086 tonnes. The comparable figure for 1994 was only 10,112 tonnes or 1/12th the figure for 2004. Can imports keep growing at that rate? The answer is of course not – increasing imports of copper units compounding monthly at 2.73% would increase monthly imports to 300,000 tonnes at the end of 2007, rising to around 600,000 tonnes in early 2010 and to an impossible 3.9M tonnes at the end of 2015. At some point in time the rate of growth in China’s imports of copper and other commodities will need to collapse closer to western world averages. There are some big bets in the market as to when this might happen and when it does how miners will respond with corporate strategies that seem largely based on the last few years that were extraordinary to say the least.”
Posted by .(JavaScript must be enabled to view this email address) on 09/20 at 02:55 PM
Just an empirical point, as this is looking like one of those fact free arguments. Does anyone have any idea on the annual turn-over rate in the housing market in metropolitan parts of Eastern seaboard Australia?
Just how many people have bought into, traded-up or added investment housing to their portfoloio over the past decade? In short, has overall volume been much higher than in past decades? Or is this a case of relatively stable volumes of stock being asset inflated by much looser and cheaper credit policies?
Posted by Jack Strocchi on 09/21 at 10:53 AM
There is volume data available from a variety of sources (REIA, ABS). Certainly stable as a share of GDP, albeit with the usual cyclical variation. One reason for not taking the more outlandish house price bust scenarios seriously is that these adjustments are seen on volumes as well as prices. Just look at ownership transfer costs in the national accounts over the last year or so, which is a good proxy for volumes and was subtracting from GDP growth up until Q2.
Posted by skirchner on 09/21 at 12:19 PM