Sucking Beer Out Of The Carpet: Nicole Foss At The Great Debate in Melbourne

Cory-
The only thing dead on you is your conscience for a stunt like this.

TonyPrep-
I’ve got plenty of empathy for real events but in this case I think cory is lying and is just trying to find another way to post here after saying he was done. Let “Ann” post a link to an obituary or something to prove me wrong. Unless I see some real proof otherwise I hold the view that this is a tasteless move to get back at somebody he blames for his choices.

Ann, Cory was asking us to repudiate our entire analysis in previous exchanges. It is not wrong. A probabilistic assessment of timing is the issue, and that is a minute fraction of the body of work presented here. Credibility does not hang on one dimension of a complex picture. I spent considerable time explaining to Cory in detail the complexity of the picture. All of us are going to have to get to grips with both complexity and probabilistic risk, since we’re going to be facing far more of both that we’re at all used to. No one can give exact predictions of all the specifics, but it is possible to provide the big picture, which is what we do here. That big picture is quite stark, and will come as a major shock to most people who are going to feel that the rug has been pulled out from under their feet. For anyone who understands the scope of that picture, exact timing is very much secondary. The point is to remove oneself from the leveraged position and sit on the sidelines in cash. This was then and is still our position today. Leverage is incredibly dangerous. Cory would have been vindicated if he had stuck it out. I am sorry he did not. Any death is a tragedy, particularly a premature one where children are left behind. We are all going to have to learn to be very adaptable in the face of considerable uncertainty if we want to survive. The future belongs to the adaptable who can roll with the punches. Many people will struggle enormously with this, but we will have no choice but to get on with it.

Ann,

You essentially suggest that holding a long term leveraged bet for over a decade, on a property market clearly in a bubble, would have been a good bet. The assumption is that the balance of risk would favour this choice, but that is absolutely not the case. It is an extremely high risk choice with no exit strategy, other than foreclosure and probably bankruptcy, if such as thing is even available down the line.

Property ownership is a long term commitment, and can only reasonably be assessed as an option through an understanding of the market and the longer term macro trends involved. Most people who own mortgaged property have no idea of the risk they are taking. Their choice seems so normal because almost everyone is making the same one. There is an assumption that if everyone is allowed to borrow large amounts of money to purchase a home, then nothing bad can happen because ‘someone’ would not let such a bad thing happen to so many people. Unfortunately, just because something will be bad for so many will not stop it from happening. The ‘someone’ being looked to as a rescuer, whether it be the Fed or the government, does not have the capacity to prevent this eventuality even if they wanted to.

Just look at what is happening in the parts of the world at the leading edge of the deflationary crash. Property markets crater under these circumstances. At least most Americans can walk away (jingle mail) because mortgages are non-recourse loans in most states of the US, unlike the rest of the world.

There is another assumption, that the smaller the mortgage gets, the safer one becomes over time, so holding leveraged property would become less risky. Unfortunately this is not the case. In a financial crisis, banks will likely call in the loans (ie make a margin call on your home). The smaller the mortgage as a percentage of the home’s value at that time, the more attractive a target it will be, since there will be money to be made by the bank on the sale. Loans can be called in even if you have never missed a payment.

Even paying off a mortgage completely does not equal ‘complete freedom’ as there are many other costs of ownership that may not be serviceable if one has not taken many steps to prepare for an economic depression. Property taxes are a major one. As I said, it is a complicated picture. Even a paid for home is a liability, not an asset, if it is the wrong place to be stuck in an illiquid market. Assessing whether or not it would be the right place to be stuck involves a assessing a long list of potential advantages and disadvantages (dependencies, vulnerabilities). One the good side of the ledger would be no debt, proximity to friends and family (ie social capital), proximity to depression-proof employment, proximity to essential goods and services, ability to provide for essential goods and services from the property itself etc. On the bad side would be debt, social isolation, no ability to provide for food/water/energy, dependence on ephemeral employment, dependency on travel etc. Everyone needs to perform the cost-benefit analysis for themselves in order to decide where the balance of advantage lies. It may be best to stay put and commit all resources to one location, accepting that one will be stuck, but in a good place, or it may be best to remain flexible. Renting allows for flexibility. It doesn’t mean one has to be highly mobile, but it allows for that possibility, whereas ownership does not.

Please understand that you are looking at this issue as if it were simple, but it is not. Treating complex issues as if they were simple leads to a blinkered, one-dimensional view, predisposing people to placing all their credibility eggs into one basket. This is what leads to tragedy, and what we are trying to save our readers from.

Interesting back and forth. I must admit that I found the notion that banks would call in loans from sound mortgagees, during a financial crisis, bizarre. Aside from what Ann writes, wouldn’t that be cutting off their noses to spite their faces? With good payers, they have a steady income and the property as collateral (and all bankers know that property values can only rise in the long term ;)).

One of the lessons, though, that I hope Nicole has learned is not to place time lines on her analysis because they are virtually certain to be wrong. I think it would be appropriate for Nicole and Ilargi to admit that they got the timing wrong 6 years ago. Nicole seems to be desperately trying to avoid saying that, even though it is patently obvious (indeed, a fact of history).

Exactly how to approach our uncertain future is a gamble. All one can do it try to take on board what everyone is saying, examine it, and take a stab at some strategy for oneself, accepting that the only one truly responsible for that decision is oneself.

Nicole, you may have said the timelines are probabilistic but in the quotes from 2009 that Cory gave, last year, I don’t recall any probabilities being attached to the “within 5 years” thought. To be fair, though, you did say, then, that you “think” prices may have fallen that far within 5 years, which is different from saying that they “will” fall that far.

So, do you have any thoughts now on when house prices will tumble here in New Zealand, and what probability is attached to that? (Aren’t I evil?). I ask only because I also expected prices to start falling after they stalled about 5 years ago. But the pressures that stopped prices falling much before recovering to new highs (average asking price now over $500,000 and well over $700,000 in Auckland) seem to be set in for some time.

I was hoping to see some comments from you when you became a spokesperson for the New Economics Party, last August, but haven’t seen anything from you in that time. Anything planned?