Comments on ABC report by Peter Ryan "Housing bubble could burn investors, warns Nobel Prize-winning economist", 30/07/2015
A Nobel Prize laureate economist, Professor Vernon Smith, is reported saying that Sydney and Melbourne's real estate markets are showing every sign of being in a dangerous price bubble, and speculating investors could get burnt when a down turn occurs.
I quote some paragraphs from the Peter Ryan's report:
'"Sydney real estate is growing faster than your other cities and Melbourne has a similar experience," Professor Smith told the ABC.'
'"In so far that it's investors speculating and wanting to resell at a profit, some of them are going to be disappointed when things turn around," Professor Smith said.'
Although Professor Smith cautioned a little by stating losses and risk taking can be a normal part of the free economies:
'"But free economies involve losses. If you're not willing to take the losses you can't really brag about the gains.
'"Prices go up and to some extent that will include some speculation. But a good bit of this might just be normal functioning of the capitalist economy."'
As I have argued before that the Australian housing market cannot analysed in isolation from its unique features and a seemingly bubble can be sustained if the external factors do not go against it.
So, in a sense, a Nobel Prize laureate economist may not necessarily always get the fact right, particularly as far as the Australian housing market is concerned. The main reason for that lies the unique Australian housing market that differs from most other industrialised countries, particular the US. Applying a general theory to a quite different market is bound to miss the mark.