Larvatus Prodeo

With the complete collapse in the US property market due to the subprime mess, there’s been a lot of debate in Australia as to whether the same could or would happen here; Steve Keen has gained attention recently for his fairly apocalyptic predictions of a 40% drop in property prices from their peak. As Peter Martin notes, there are rather contrary views: Macquarie Bank’s Rory Robertson has taken a bet with Steve Keen. In short, Robertson will walk from Canberra to the top of Mount Kosciusko if that occurs. His reasons why it won’t?

We now have a bet, and I expect to record an easy win within two years. That’s because falls in Australia-wide home prices will be limited by our lack of overbuilding, our much more disciplined mortgage market, and – especially – by the RBA’s ability to drive mortgage rates lower (something the Fed until this week had been unable to do; see latter part of chartset, attached).

Critically, the RBA knows that it was 15-20%-plus drops in home prices that poisoned the US and UK banking systems and economies. And so that must not happen here; accordingly, limiting the drop in average home prices is an unstated but obvious objective of increasingly easy RBA policy.

Continue reading ‘What will happen to Australian house prices?’