Better to be safe than right

A university professor had a bet with an economist in a renowned investment bank.

The bet is about the Australian property price in the midst of the global financial crisis.

The professor argues the property market will decline up to 40% over a period of 2 years (I may be wrong about the exact time period) becausing of deleveraging of the highly-leveraged household.

On the other hand, the economist predicted that the property price will hold because of the supply and demand fundamental in the housing market.

At the time of GFC, the professor was few people who had such a dire forecast about Australian property given the historic track record in creating "wealth" for Australian.

The bet was looking rosy for the professor at an early stage where major cracks started to appear in the holiday home market then spreaded across to the top end of the market then somewhat to the middle and low end of the price bracket.

The tide turned soon after the federal government annouced a "first home owner boost" of doubling the existing first home owner grant for existing houses and tripling for newly contructed home.

Coupled with a ultra low interest rate environment one has seen for over 40 years, the property market has taken off from the bottom end and quickly worked its way through to the top end.

(For those unfamiliar with the first home owner's grant (FHOG), it was introduced in early
2000s to help the first home buyer to enter the market as the then booming property market appeared to have priced the first home buyer out of the market.

The irony of such grant is that since its introduction, the property price has been pushed up even higher (i.e. less affordable) to a level that non human sense can be made from the activities in the market at its hype left alone any economic sense.

The following is a real example from friend of my mother, who signed a sales contract to buy a property during 2002 to 2003 without knowing some of the basics of the home purchased.

A conversion between she and my mother"

Mum: Congratulations on the purchase of your first home. Tell me about the property, you know how many bedrooms, what it looks like?

Friend: Mmmm..... There were lots of the potential buyers waiting outside the door for their turn to inspect the property and to make an offer. Oh..... I was this close not being able to buy it because the real estate agent was pushing for a higher price knowing that someone waiting outside will make a higher offer.

Mum: So what the house look like? How many bedroom?

Friend: Oh.... yes of course. It was, let me see, it was three, no..... Mmmm..... four bedrooms maybe with a sizable garden.... Who cares....? The important thing is I bought it.)

The professor was right in theory that the debt-laden households will commence a process period of deleveraging when they start to feel insecure.

However, I would say that in reality it will be safer to predict softer downturn than a 40% decline over 2 years. For the economist, it is no brainer to go with the consensus like many other economists predicted because even he was wrong, he was just one of the many who got it wrong. His job won't be on the line.

Having an extreme view of the market either upside or downside will have a high potential of damaging his career/reputation.

In a game show term, an extreme view/prediction is equivalent of "double or nothing".
If you are right, you will become the handful like John Paulson's famous billion-dollar trade on subprime derivatives.

If you are wrong, it will haunt you for the rest of your life.

So next time when you read a prediction from some economist or market commentator, think twice about the real concern behind their predictions. You will find a lot more than professional views.