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%.
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.
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,
P.S. Look out for more articles on how to boost your financial intelligence going forward.