This is the rubbish you have got to stay away from, I couldn't believe it when I read it.
Some guy who professes to be a professor, and a university one at that, claims that housing prices are going to collapse by 40%.
The guy's name is Steven Keen and he's from the University of Western Sydney. Maybe that's go something to do with it.
Things are not good real estate-wise in the west of Sydney, which has been hit hard over the last 5 years. Maybe Mr. Keen owns a house in Western Sydney… and that makes him an expert.
Regardless of whether he's an investor or not (my guess is probably not), he's hit the overide button by being an economist.
Here's where the story gets interesting…
Now Mr. Keen is an economist of course, but when he made that bold statement he was challenged by another economist, Rory Robertson who said Mr. Keen is way off the mark, and if his prediction only half comes true (meaning prices fall by 20%), he'll walk 230 kms from his office in Canberra to Mt. Kosciuszko.
Rory, I think you're pretty safe.
Economists are a funny breed.
They're qualified to talk about money without ever having to make any… a bitlike financial planners.
Now, I have no university degree, in fact I failed year 12 twice… and I'm going to tell you right now why real estate will NEVER drop by 40%.
Here's why…
67% of real estate in Australia is owner-occupied.
That's it. End of argument.
You don't have to be a rhode scholar to figure that out, but you're probably thinking why is the 67% important?
Well, let's take my dad for example. He's 70 years old, he lives in a inner-city suburb in Melbourne called Northcote. He's paid the mortgage off, doesn't owe a cent. He lives a lifestyle within his means on a pension. The value of his home is probably $950,000.
Now if my dad's house went down to $750,000, he'd never sell… because for him the value of the house is irrelevant.
Even if it went down to $500,000 – it wouldn't make any difference. For my dad, the capital growth he's had on the house has all been a bonus. His prime motivation for owning a house was to stop paying rent, have some sort of security and a decent shelter for his family.
There are thousands of people in this exact situation, with houses fully paid off and regardless of the economic climate, they don't have to sell.
For prices to fall 40%, there has to be some form of panic- selling.
We've seen it in the stock market, where the market has crashed by 44% in 12 months.
There are no owner-occupiers in the stock market – everyone is an investor or a speculator.
Here's something else that's pretty important…
The stock market's value is tracked virtually every minute of the day. Whatever stock you may own, you can immediately get a price on its value.
One phone call and you can get out. That's a good thing from a liquidity point of view, but when the panic button is hit, there is no stopping the slide.
The property market is the opposite. I've never seen a price- meter outside of anyone's house. Very unlikely to get any panic-selling.
OK, let's say I'm wrong and he's right.
What if prices do fall 40%?
Well, I'd be in there buying like crazy. Imagine every single property cash flow positive to the tune of 12-15%.
Yep! Even Sydney…
Give me a break Mr. Keen.
This my friends is another example of how stupid some of these guys are, and unfortunately there are people out there who hang on their every word.
One thing for sure, with the easy profits that we've had in the period leading up to November 2007, so many Australians got comfortable and today are paying the price.
Not only has the stock market crashed, exposing those who were complacent and ignorant, but the financial intelligence of every-day investors also crashed and now is at an all-time low.
The solution?
You have to take responsibility for your own financial intelligence and don't be a victim to professors who have no idea.
Signed with Success,
Jon Giaan
Knowledge Source
P.S. Look out for more articles on how to boost your financial intelligence going forward.
Stephen says
Mr Giaan,
Your near-personal attack on Mr Keen are unfounded and have been made with no substance.
I don’t known Mr Keen and cannot predict whether property prices will drop by 40%, but I am certain they are certainly on the way down. You seem to base your optimism solely on the fact that 2/3 of houses in Australia are owner-occupied and the illusion that everyone became self-made millionaires in the last 5 years of economic growth.
Owner-occupied does not mean ownership. A substantial portion of the two-thirds are paying off their mortgage. So what do you think when these families start losing their jobs and struggle to pay for their credit cards?
If you take a look at property values to household income you will realise that it is at a ratio of 6 to 1 in Australia i.e. property values are six times household income. This figure is one of the highest in the world. Sure, in your world Mr Giaan where two-thirds of houses are 100% equity owned, this will not be a problem. But in the real world, it doesn’t take a genius to realise that when more than half of the value of the property is in debt, you run into problems when property values drop, hence the value of your equity drops but debt stays the same.
You rightly spotted the right distinction between valuation of the stock market and property. However, this just means that property, amongst other unlisted asset classes are subject to a valuation lag. If you take the property market in Australia as a whole i.e. including commercial, retail and residential, preliminary property valuations have already dropped to the tune of 15% to December 31.
Better get out the camping gear and draw out the tracks to Mt Kosciuszko.
Sure the current market makes it a buyer’s market, but for those who have the money. Now the last time I checked I thought we were in a global financial crisis, which means the majority of us do not have money.
You should be more responsible in your future comments by backing it up with evidence that can be substantiated. Mr Keen could be wrong, but at least he has sufficient research to back up his comments. You on the other hand, exhibit characteristics of a salesmen that likes attacks with either inaccurate information or outright bull to those that have a contrary opinion.
Allen Schofield says
Ouch !
I think you may have hit a raw nerve here. Actually, I have to agree with you. I have investment properties and I do not see them falling significantly in price. Everybody needs a roof over their head. Property has always been a long term investment but property, in history, doubles in value about (I said about) every ten years.
The share market is now open to opportunities, try cheap gold or oil companies. Gold for security and oil because we all use it every day. Price fluctuations will generally rise, not fall. I do not see a flood of people throwing their cars away! However, being a car salesperson right now is not the best career opportunity.
Interest rates will fall once more as we enter 2009, but this will help property and all industries that hang off property.
I think ‘rhodes’ should have been typed “Rhodes”, but I’m not a Rhodes Scholar, so what would I know?
Best regards
Allen
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John says
Its now 2014. Looks like Stephen was wrong.