Bloomberg flashed the news “Macquarie’s Robertson Wins Mountain Bet on Australian Houses” across traders’ screens yesterday evening with raucous cheers heard echoing across Martin Place. It was even reported that interest rate futures had increased the probability of a 25 basis point hike today given that this was further vindication that the pig-hunting and barra-catchin’ man from Far North Queensland, otherwise known as “rate cut Rory”, very rarely gets his big calls wrong.
Bloomberg summarised the situation:
“The concession follows a report published earlier today…shattering Keen’s forecast…Robertson, 43, challenged Keen to hike Mount Kosciuszko if values fell by less than 20 per cent.Now I think we can claim at least some partial credit for Rory’s conviction on this subject. In early 2008 Rory was actually quite pessimistic about the market having seen Paddington property values slide by 10 per cent. He was interrogating us mercilessly on why this trend would not extend to the broader market. We explained that there was very high cross-sectional dispersion or volatility in residential property returns and you could not extrapolate out from one affluent little suburb to the $4 trillion housing stock. The example we kept on coming back to was 1991 recession where the Palm Beaches, Point Pipers and Mornington Peninsulas were getting hammered while overall housing values actually rose by circa 2 per cent per annum between 1990 and 1992.
“Keen could scarcely have been more wrong,” Macquarie’s Robertson said today in Sydney. “I wish Dr. Keen well on his long walk. The Sydney academic will do the walk wearing a tee-shirt saying: 'I was hopelessly wrong on home prices! Ask me how'.”
Rory then asked us to analyse the proportion of property sales that were accounted for by homes worth more than $1 million. And the result was surprisingly small for those us who live in the Eastern and Northern Suburbs (of Sydney): just 4.3 per cent of all transactions. Intuitively this makes more sense when you consider that the national median dwelling price for all areas (metro and non-metro) is only around $400,000.
The RBA requested we extend this analysis by dividing up our index up into cheap areas, the mid-priced market, and expensive suburbs. And the dynamics were clear: while the mass-market had tapered only slightly, those affluent areas were getting slaughtered with circa 10 per cent price falls for the 20 per cent of most expensive suburbs in Australia (interestingly, it is precisely these regions that have now recovered the fastest).
Rory has delivered the community a profoundly valuable public good: he has finally held extreme views to account. Steve Keen’s dire prognostications captured unprecedented media air-play for an academic economist (and note here that I personally think that Steve is a terrific bloke). They were relentlessly recycled in leaders in newspapers and via the current affairs channels, 60 Minutes, the 730 Report, and Lateline. There was never any balance, or contextualisation. We never heard the reporters qualify his claims with the observation that “these views are not shared by any other recognised authority in Australia.” No, it was pure media sensationalism at its best. Steve’s statements were manna from heaven for journalists looking to shock their audience. And shock them he surely did. Consumers were absolutely petrified when told by the media’s nominated expert (with supreme confidence) that their most valuable asset in the world was going to suffer a 40 per cent price fall. And there were no shades of grey here – that was a best case scenario.
Rory’s actions will hopefully give so-called experts in search of a headline much pause for thought in the future. Be warned: there are ballsy fellas out there who will hold you to account. And I have no doubt that there are many senior members of the media sitting at their desks today wondering how they would deal with Steve’s statements if they had their time again.
And this is what the ever diplomatic Rory Robertson had to say in closing out the bet (care of Peter Martin)...
"*I don’t know much about racehorses or the Melbourne Cup, but my winner this week already is home and hosed!
*With the ABS measure of house prices today having punched to a new high (see chart below), high-profile pessimist Dr Steve Keen has lost our year-old bet.
*Dr Keen said repeatedly that Australian house prices would fall by 40% from peak to trough. In our bet, he agreed to use the ABS measure, and agreed that the starting point was 131.0. (For ABS data, see first table in "Downloads")
*On the agreed ABS measure, house prices fell by just 5.5% (to 123.8) and now are at a new high (134.4) in Q3. Dr Keen could scarcely have been more wrong – out by a factor of seven! Thus the bet has been won and lost.
*Indeed, Dr Keen has conceded he’s now due to walk over 200km from Canberra to the top of Mt Kosciuszko wearing a tee-shirt saying “I was hopelessly wrong on house prices! Ask me how”. I wish Dr Keen well on his long walk.
*For fun, if Australian house prices ever fall by 40% from any peak in my lifetime, I will follow in Dr Keen's footsteps. Similarly, if Dr Keen proves the existence of the Loch Ness Monster, I will take the walk.
*For the record, Dr Keen’s big miss on house prices largely reflects a big miss on his "Depression in Australia" forecast: "Best case scenario is a recession more severe than 1990 and lasting one and a half times as long. Worst case is something up to the level of the Great Depression which was 20 per cent unemployment and lasting up to a decade""
