Wearing a T-shirt that announces “I was hopelessly wrong on property prices – ask me how”, Professor Steve Keen has finally admitted defeat, and set off on 15 April from Canberra on an eight-day, 225km hike to the top of Mt Kosciuszko.

This is the outcome of a wager taken by the University of Western Sydney economics professor at the start of the Global Financial Crisis (GFC), where he predicted that Australian property prices would fall by 40 per cent.

Rory Robertson of Macquarie Group disagreed, and promised to do the walk wearing the T-shirt if prices did collapse. Professor Keen agreed to do the same if his prediction proved wrong.

To add insult to injury, Keen sold his apartment in Pyrmont for $540,000 in October 2008, which reinforced just how serious he was about his prediction that Australia had a housing bubble that would be popped by the financial crisis. I wonder what the apartment is worth now? $600,000?

House prices did initially fall by 5 or 6 per cent as the uncertainty of the GFC swept across Australia, and as the high levels of debt damaged many businesses and institutions. However, rapid-fire interest rate cuts and the First Home Buyer’s Grant proved just the right medicine, and property prices across the country soared to 15 per cent above the level where they had originally made their bet.

Property prices in Australia are supported by many factors. One major positive is the extent to which homeowners will reduce their expenditure even on essentials in order to meet mortgage repayments and hold onto their homes. Owners tend to take their properties off the market in uncertain times, thereby reducing supply, which in turn supports prices.

Another supply and demand issue driving prices is the imbalance caused by unprecedented population growth, and an inadequate rate of new housing construction.

As a professor of economics, Professor Keen will teach the law of supply and demand in Economics 101. It’s surprising, therefore, that he was caught out on what is probably the biggest pillar of support for property prices in Australia, i.e. lack of supply, amidst huge and growing demand.

Aside from missing out on the capital gains of the apartment he sold, Professor Keen is probably a renter now, and will have to fork out ever more rental money as property prices rise. Rents are marching northwards due to inflation, interest rate increases and shortages of rental property.

One thing is clear: Professor Keen will have lots to think about on his 8-day march to the top. One issue would be where to invest, and how to resist the positive outlook for property. Price rises in 2010 have continued at a cracking pace after rising by 12 per cent nationally through 2009.

Meanwhile, Rory Robertson will be having a quiet chuckle as Professor Keen sets off. Robertson reconfirmed that he would undertake the walk himself if house prices ever fell by 40 per cent, and that he would also do it “if Dr Keen proved the existence of the Loch Ness monster”!

In the mild weather we are enjoying this autumn, Professor Keen’s T-shirt won’t be covered by a jersey. Everyone who passes him will therefore know that they have seen the man who got it so hopelessly wrong on property prices, and who sold his own home into the bargain.

“These boots are made for walkin’….”

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