Opinion & Commentary
Doomsayer does his dough
University of Western Sydney academic Steve Keen made a name for himself with forecasts of economic doom, predicting a 40% decline in Australian house prices.
Keen put his money where his mouth is, selling his unit in Surry Hills in Sydney in October last year for $526,000.
In November last year, Macquarie Bank’s Rory Robertson raised the stakes, proposing the following wager: ‘On the maybe 1% chance that he is right, and capital city home prices do indeed fall by 40% within the next five years starting from (the second quarter of ) 2008, and as measured by the ABS, I will walk from Canberra to the top of Mt Kosciuszko. If Dr Keen turns out to be less than half right, as I expect, and home prices drop by (much) less than 20%, he will take that long walk. Moreover, the loser must wear a T-shirt saying: ‘I was hopelessly wrong on home prices! Ask me how.’
Following the recent release of Australian Bureau of Statistics data showing capital city house prices up 6.2% for the year ended in September, Keen conceded defeat and will be donning hiking boots and T-shirt.
What does Keen say? ‘I didn’t know the government was going to be stupid enough to bring in the first-home buyer’s boost.’ The increased grant has certainly inflated house prices,, but it would be a gross exaggeration to say this prevented a decline in house prices of 40%.
So where did Keen go wrong? For a start, he neglected the supply side of the market and the growing shortage of dwelling units putting upward pressure on prices. More seriously, Keen made the mistake of assuming he knew something everyone else didn’t. The efficient market hypothesis tells us this is unlikely.
Keen inadvertently demonstrated the veracity of the idea that asset prices are informationally efficient. Robertson made the more reasonable assumption that house prices reflect fundamentals and was vindicated.
According to RP Data-Rismark, the median Sydney unit price rose 8.3% in the year ended September. Keen’s bet against the market has cost him nearly $44,000 in forgone capital gains on his former unit.
Dr Stephen Kirchner is a Research Fellow with the economics program at The Centre for Independent Studies.
