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Australian Economist who lost bet will walk from Parliament to Mount Kosciousko (keenwalk.com.au)
38 points by samh 2774 days ago | hide | past | web | 31 comments | favorite

I thought house prices in Australia would fall... of course politicians would try to try to prop them up, because falling prices would be fatally unpopular for them. But you can't keep funding housing prices forever...

...unless you have a source of money. Australia aka 'the lucky country' has tremendous mining resources. Now these, being commodities (e.g. copper is the same wherever you buy it), are typically cyclical in price, over a decade or so. But a strange thing has happened: Australia is currently one of the few sources of many metals in the volumes needed (by China, predominately): Australia has a 'monopoly' on these 'commodities'.

Thus, the sustained metal prices are propping up the housing market.

I don't know how sustainable this 'monopoly' is - whether e.g. higher prices will justify other countries opening up mines, or accessible reserves will be discovered elsewhere etc. I doubt it can continue indefinitely.

disclaimer: this is based on information gathered over years, and might be out of date in some respects.

I think we also have to much demand for housing in Australia to have a really bursting of the bubble. IN recent year immigration has kept demand up. There is also the artificial raising of the value of new estates by only allowing small new allotments at a time to be sub divided to become new suburban areas.

Even though Australia has the windfall mining receipts, it still runs a current account deficit and has basically forever. And although the mining take is large, it's dwarfed by the larger economy. I don't think it is that which is inflating house prices, with the possible exception of some mining towns, where increased wages chase finite supply. But that's not the case on the east coast, for example.

I didn't mean that mining is causing it, but facilitating it. The mining income feeds the rest of the economy - without it, the larger economy would shrink: when rents increase, people are willing to pay it because they are employed.

I think economics needs a lot more of this. Economists are rational people, by and large, but a lot of them have very perverse incentives. I think we could see a minor revolution in economic forecasting if we gave stronger incentives for accuracy and vice versa.

Absolutely. Every time I see the senior economist from the Westpac bank being interviewed on the television I think :

1 - Why do they keep interviewing him about the future but never talk about how accurate he was in the past.

2 - He is deliberately couching everything he says in 'weasel words' so as to never risk being wrong.

But he wears a suit, has a position of authority and looks like he should know what he is talking about, that seems to be all they want.

Much of the world is a confidence trick.

2 - He is deliberately couching everything he says in 'weasel words' so as to never risk being wrong.

This is often because he has to grossly simplify what his actual research has said in order for it to be consumable by a mass audience.

The papers may spell out certain prerequisites and gotchas quite explicitly, but in a TV interview, that turns into a vague-sounding "it depends".

1 - Why do they keep interviewing him about the future but never talk about how accurate he was in the past.

I've often wished that people who made predictions for a living were forced to assign probabilities to their statements, and give some clear definition, so we could keep score.

One thing we could do would be to create prediction markets, which are just a more systematic way of allowing people to make bets on policy outcomes.

This way, if an economist doesn't (literally) put his money where his mouth is, you know not to trust him.

Of course, in the US, this would require legalizing gambling. Unfortunately, our backwards approach to securities markets even discourage speculation except as a way to provide liquidity for hedging.

[disclaimer: I'm currently working at a prediction market startup.]

Check out his Economics blog at : http://www.debtdeflation.com/blogs/

The most interesting thing is that he diagnoses the problems in a very similar way to Peter Schiff, but comes up with almost opposite conclusions.

He's using the walk as an opportunity to raise money for Swags for the Homeless, a bit of very cool bed/backpack engineering. http://www.keenwalk.com.au/homelessness/

224.7 KM http://www.bing.com/maps/default.aspx?q=parliament+house+aus...

That's a long walk for losing a bet.

He _is_ taking 8 days to do it, so he's only got to walk ~30km (just under 20 miles) a day.

And although it's up Australia's highest mountain, we don't have "mountains" as most people understand them, Mt Kosciousko is just a medium sized hill piled on top of a medium sized plain. There's barely 1600m (~5000' or ~1 mile) of vertical distance - Canberra's at 606m, Mt Kosciousko is only 2228m tall.


"... He _is_ taking 8 days to do it, so he's only got to walk ~30km (just under 20 miles) a day. ..."

Hmm 20 miles a day for 8 days in hilly terrain in April is not to be underestimated. Altitude is one problem. The inland 606m is cold, 2228 is Alpine. The upper Kosciouscko areas is well known for snow to fall, melt then re-melt. I remember going to Kosciouscko as a kid in shorts :) First time I'd been to the snow ~ http://climbing.about.com/od/mountainclimbing/a/KosciuszkoFa...

And one other thing... "... in a nutshell I will be running about 15km every morning, and walking about the same distance every afternoon starting at about 2pm ..." ~ http://www.debtdeflation.com/blogs/2010/02/15/launching-www-...

There's probably a good chance that house prices will continue to increase, simply because whoever is in government can't afford the the economy to tank in the short term.

I imagine these subsidies and handouts will continue until the government lacks the ability to positively influence house prices any further, at which point we'll have a much bigger crash.

In the UK's last recession in the early nineties house prices crashed two years after the stock markets crashed. When the stock market crashed the government used low interest rate to boost the economy. This had the effect of keeping mortgages avoidable. However when the economy recovered interest rates had to be put up because of inflation. The resultant increase in the cost of mortgage repayments along with high unemployment, a lagging indicator, resulted in high repossession rates and the property crash.

This is Peter Schiff's prediction.

The financial crisis becomes a currency crisis when the politicians keep trying to pump up a false boom by printing money until the rest of the world wakes up to the loss of value in the US dollar leading to massive inflation.

I'd say the differences between the two are quite slender, Peter Schiff is merely less optimistic[1] about what will happen politically.

[1] Being less optimistic about what will happen politically is probably a very smart thing. Politicians are not incented on the long term performance of their countries.

So if someone who was considering buying a house in Sydney (well, an apartment) in the next year or so - because it seems prices just go up and up and up and up and they feel like it will just be completely unaffordable if they don't lock something in soon - what's the bottom line? Should they not buy until after this correction? Any informed HNers want to tell this hypothetical person what to do, since they're only just beginning to seriously start looking into it? ;)

As a general rule, buying something because prices just go up and up and up is a good way to get thoroughly shafted.

At the very least consider the following:

a) What is your rent currently compared to your mortgage repayments? If you're going to be paying more, just rent and invest the difference in something else.

b) Do you have ambitions of quitting your job and starting a company? If so, having a large mortgage is only going to hinder that goal (it's far easier to make the plunge when you don't have to worry about servicing a large debt, and it's much less painful to downsize between apartments when you're leasing.)

c) Consider whether you're going to want to do the place up, which can be a huge black hole as far as money is concerned.

d) Finally, if you're living with a partner, consider whether you're willing to have the added financial entanglements that owning a house together will entail.

(I personally rule house ownership out for reasons a), b) and d))

Regarding point a): something to bear in mind is that rent payments are more or less guaranteed to keep going up, all things being equal. Mortgage payments are not.

You also get some equity out of mortgage payments, whereas you don't out of rent. OTOH, getting money out of a house is more expensive and time-consuming that most kinds of investment I'm aware of.

I don't entirely disagree with the reasoning, mind you, but I think that direct comparisons between renting and buying are problematic.

True, but if you're investing the difference in index funds dividends will generally keep going up over time (somewhat in line with the capital appreciation).

>> I don't entirely disagree with the reasoning, mind you, but I think that direct comparisons between renting and buying are problematic.

It's a fair point but as you have to pick one or the other the only thing you can really do is crunch the numbers and account for the intangibles and then make the best decision you can.

Thanks for the reply. Some very good points.

Rent is quite a bit less than mortgage payments would be, but at least with mortgage payments you're paying off your loan, not someone else's! I'm not too worried about (b) because I'd be trying to start something in my spare time, then only quitting the day job if it was actually paying enough for me to do so. Part c - well, I'd be looking for a fairly new place .. and as for (d), it's much too late for that ..

I think that what I'm taking from this article is that I have to identify a lot of "unknown unknowns". I admit that I was naively assuming housing prices around here would just go up forever; this article raises the question that they might not and I need to sit down, learn about this stuff and make an informed decision...

On the topic of "paying off your loan": be a little careful with that, because for the first several years of a mortgage (at least as usually structured in the US, but I think this is typical elsewhere too) you're not paying off the principal by very much; and if you rent rather than buy, you are not responsible for building upkeep and the little surprises that an owned home always seems to throw at you at inconvenient times.

>> but at least with mortgage payments you're paying off your loan, not someone else's!

As an example, if you're looking in the Sydney CBD you could easily be borrowing ~$400K (or more). At interest rates of 6% a year initially you'd be paying $24K/year or approximately $460/week to the bank.

At least for the first few years you'll be paying almost the equivalent of rent to the bank just to service the loan, in addition to the repayments off the principal.


I can't answer your question but interesting things I have learned reading around this subject :

- Since WWII in most of the west house prices have risen in real terms (meaning as a percentage of average wages, compared the food bills etc, so not just inflation.

So many people think that's the way it works, but data on the price of housing going back to the 1600s says this isn't the normal state of things, house prices stay constant in real terms.

- Check whether you are relying on the 'bigger fool' principle. If you could rent a nicer place for less (don't forget maintenance and taxes) but are only buying because you think someone else will be willing to pay even more, even though they could rent somewhere nicer. Question whether that's sustainable.

> data on the price of housing going back to the 1600s

Care to share a link to this data (or at least a pointer to where is comes from)? I'd be interested to know where this came from because my first reaction is to distrust the accuracy/validity of such data.

That being said, how valid is data going that far back (in relation to now)? Isn't the political as well as economic landscape completely different now? I'm not saying you're necessarily wrong, just that I'm not really sure if you can apply that data as a proof.

My mistake, the data only goes back to the 1700s

Piet Eichholtz the Amsterdam series 1628-1973


It's interesting data if you have this conversation :

"Buy property it always goes up" "It always goes up due to inflation" "no over the long term it always goes up in real terms, if you pay A x average yearly income for a property then in 10 years you can sell it for A + B x average yearly income!" "Well here is a graph that shows B is hovering around 0 from 1628 to 1945 and has risen dramatically since then".

It certainly is a different way to look at things.

> "Well here is a graph that shows B is hovering around 0 from 1628 to 1945 and has risen dramatically since then"

Ah. That also answers my other questions. Talking about data from the 1600's doesn't really inspire confidence that it has any relevance to today, but talking about a trend that held from the 1600's through to just recently (for varying levels of 'just recently') has more weight behind it.

As someone who, like you, is trying to figure out the right thing to do in Melbourne, it's hard to say isn't it. On the one hand things seem so ridiculous in terms of debt. On the other hand we have strong population growth and demand here it seems. Although, I have no idea what our growing population is doing for jobs.

Because, things are very centralized here, the options for buying are getting further and further out and the public transport systems doesn't look like it's going to be upgraded to match any time soon.

Inner city apartments are currently pretty small and expensive too, which hopefully changes with some more supply.

Wish I had a crystal ball on this one. All that said, Melbourne still rocks :)

I assume the situation in Melbourne is similar. Here is just crazy. The two bedroom apartment I rented a few years ago for $450/w is now $700/w. A one bedroom apartment in any decent location is now minimum $400/w and probably more like $500.

Rent has gone up 50% in the last 3 or 4 years and seems like it's going to keep going. To comfortably rent a decent 1-bedroom apartment, ie to keep your rent around 30% of net income, you now need to earn $100k. Will it be $150k in 3 years? I'm not sure I will be making that much!

Maybe I should move to Brisbane, which is like Sydney 5 years ago ..

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