Steve Keen: Property Prices to Fall 30 Percent in Next 5 to 8 Years

Here I am down at site, as I usually am on Tuesdays. It is 6:03 p.m. (when I started this) and I am sitting in my motel unit eating some Nobbies Nuts and sipping on a Little Creatures Pale Ale. There is not much else to do really. I bring my camera most times but it is hard to find things to photograph. I am totally NOT into the usual tourist pictures. I HATE tourist pictures, and pictures of sunsets (but yes, I am guilty of taking a few myself), and pictures of animals, and close-up pictures of frigging insects (which seem to be all that is on 500 pixels some times).

I was just watching an interview with Steve Keen on SkyNews. Mr Keen is a Professor of Economics. The interview was rather disturbing.

Mr Keen is adamant that Australia in is for bad times ahead economically and this will be especially true for real estate values. In his view, regardless of what the government keeps telling us, all the key economic factors are in place for a huge disruption to Australia’s economy. Sadly, if Mr Keen has it right, the government is the primary agency that has set Australia up for what is to come.

As one example, Mr Keen’s view is that the government should never have brought in the upgraded first home buyer’s scheme at the height of the Global Financial Crisis. This, it seems, dragged tens of thousands of people, those who could least afford it, into taking out insane mortgages to buy a house—simply because the government would contribute about $20,000 to the purchase (taking into account both Federal and Local Government assistance packages being offered).

Worse still these people were encouraged into buying property when property was near its peak.

Mr Keen’s view is that almost every single one of these purchaser’s are now in the red because Australian house prices have fallen an average of 10 percent in the last two years. Almost all of these first home buyers have well and truly burnt the $20,000 of combined government assistance just in the amount that their purchases have devalued.

For example, the average low-end $450,000 property bought two years ago is now worth about $405,000 or $45,000 less than they paid for it. If these first home buyers have been able to keep up payments over the last two years they will have been paying $2,870 per month off their mortgage (assuming a 30 year mortgage and that the $20,000 government hand-outs were used as the deposit).

They will have paid about $4,000 off the capital so, with the government cash added, they have paid $34,000 off a property that has fallen in value by $45,000. They are $11,000 in the red and they still have to keep making mortgage repayments or sell now at a loss. And this is the average case. Many first home buyers are further in the red because they bought more expensive properties and/or their properties have devalued by more than the average.

For a bigger picture view Mr Keen offered these numbers. In the early 80s the total of Australian’s mortgage debt was 17 percent of GDP (Gross Domestic Product). Since then Australia’s GDP has increased massively (mainly due to mining), so one might expect, as a percentage, that the value of mortgage debt has reduced in relative terms. Not so. Me Keen says that due to the massively higher number of mortgages (partially because of the various government schemes) plus the impact of the higher buy-in prices, mortgage debt is current sitting at a very scary 90 percent of GDP.

Based on this Mr Keen’s unshakable concern is that property prices are in for a massive correction in the order of 30 percent over the next 5 to 8 years.