The house price bet is on! Tony Locantro takes the offer

Fri, 21 Sep 2018  |  

While Martin North from DFA rejected my generous offer to have a wager based on his call for a 40 to 45 per cent fall in house prices, Tony Locantro, an Investment Manager with Alto Capital in Perth has decided to take up the offer on the same terms that I offered Mr North.

Specifically, we are wagering $15,000 to $2,500 that Sydney or Melbourne or national wide house prices will or will not fall by more than 35 per cent from their peak at any stage before and up to the December quarter 2021.

The measure will be based on the Australian Bureau of Statistics Residential Property Price Indexes, Eight Capital Cities, Catalogue No. 6416.0.

This means that if, at any stage the price index for any of Sydney, Melbourne or the aggregate eight capital cities prices is down 35.0 per cent or more, I will give Tony $15,000 cash. Conversely, if by the time the December quarter 2021 data are published and the peak to trough decline is 34.9 per cent or less in Sydney, Melbourne or the eight capital cities, Tony has to give me $2,500.

Who knows, it might be the start of a wonderful friendship. We have added a nice informal touch – when the cash is handed over, the winner will buy a dinner with a nice bottle of red to console the loser.

I will be providing regular updates as the numbers roll out.

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The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.

Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.

The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.

A few terms first.

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In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.