Working Papers

The Political Economy of House Price Doom-Mongering

The Rismark Monthly for August suggests the following explanation for house price doom-mongering:

It’s very easy to rip into housing since it is a non-institutionalised asset class. All of Australia’s 8.4 million homes are owned by highly dispersed and faceless families.  Australian and international equities, LPTs, unlisted commercial property, hedge funds, and private equity are, by way of comparison, mostly owned and controlled by powerful institutional stakeholders—fund managers, super funds, investment banks, corporates and/or super high net worths.  In turn, most of the analysts, strategists, economists, investors and journalists’ business models are built on these asset-classes succeeding. It therefore makes little commercial sense to bludgeon them with the relentless hysterics we hear about housing.  In contrast, bricks and mortar is easy game. There are few if any institutional constituents to annoy. Just anonymous individual families with little authority and influence.

Making unsubstantiated claims about a forthcoming housing Armageddon is a win-win situation. With one hand you distract attention away from the poor performance of your own Australian equities portfolio, while with the other you boost the likelihood of unsuspecting retail money flowing your way.

While this explains the sell-side bias against housing, it is harder to understand the buy-side interest in doom-mongering.  Presumably, the media know their own market and stories of housing boom and bust undoubtedly sell.

posted on 31 August 2009 by skirchner in Economics, Financial Markets, House Prices

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Stephen, I agree with your comments on the media, but I don’t buy (pun unintended) Chris’s conspiracy theory about a sell-side bias. Much of the housing market commentary is generated by the big banks, who presumably don’t have an interest in undermining the asset class against which they extend so many loans. By contrast, most of the doomsday talk comes from academics such as Keen who believe debt is evil and international organisations such as the IMF and the Economist newspaper, who have been predicting a housing market crash in Australia and elsewhere since 2001 based on traditional price-rental and price-income ratios. Even Prof John Freebairn, who I respect a great deal, has been arguing for some time that Australian houses are over-priced. Of the non-bank sell-side doomsdayers, I think it’s hard to say that someone like Gerard Minack is anything other than a genuine strategist making a good faith attempt to predict future asset price trends.

Posted by .(JavaScript must be enabled to view this email address)  on  08/31  at  04:45 PM

The banks are certainly less guilty of talking down housing than some of the wealth management businesses, although I can think of a few bank economists making gloomy predictions about house prices.

The price-income ratio/over-valuation/mean reversion story is particularly tiresome.  It confuses expensive (true enough) with “over-valued”.  There are strong supply-side reasons why property is expensive.

Posted by skirchner  on  09/01  at  08:31 AM

It seems there were strong supply-side reasons why property was expensive in the US a few years back too…

Greenspan Calls Data on Housing Bubble Inconclusive

`There is no national price bubble in this country,’’ said David Lereah, chief economist at the National Association of Realtors, in a press conference earlier today. ``We have a supply problem. Inventories have been depleted, particularly in the West.’‘
—August 24, 2004

Posted by .(JavaScript must be enabled to view this email address)  on  09/03  at  07:40 PM

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