The bulls have it. Well, for the time being. Yesterday, Macquarie Bank economist and interest rate sage Rory Robertson claimed victory over Steve Keen, of the University of Western Sydney, with Keen now having to hike up Mount Kosciuszko wearing a somewhat unflattering T-shirt.

The bet was considered of such importance in the financial world that Bloomberg reported yesterday that:

Steve Keen, 56, plans to start in April the 230-kilometre (143-mile) hike from the Australian capital to Mount Kosciuszko, a 2228-metre peak that is snowcapped for much of the year, the University of Western Sydney associate professor said in a telephone interview with Bloomberg News today.

The concession follows a report published earlier today showing Australia’s house prices jumped 6.2% in the 12 months through September 30, shattering Keen’s forecast a year ago that the housing market would collapse by 40%. Robertson, 43, challenged Keen to hike up Mount Kosciuszko if values fell by less than 20%.

Showing typical Macquarie Bank humility, Robertson noted: “Keen could scarcely have been more wrong … I wish Dr Keen well on his long walk.”

Despite Robertson’s gloating, it appears that Keen’s only mistake was in thinking that property markets would remain irrational longer than his bet could remain solvent. Or that the Rudd government would be so imbecilic in boosting the first-home owner’s grant and reigniting a latent property bubble. (Admittedly, when there is a choice between sound economic policy and a cheap populist wealth-destroying vote grab it is fair to assume the latter will prevail).

Bloomberg also failed to note that the bet had two prongs — Keen only lost the more minor part of the bet, his main thesis was that Australian property prices would follow Japan, which experienced a 40% fall over 10-15 years. Therefore, Keen has until 2025 before he really “loses” his he wager with Robertson.

Its continued ascent indicates that possibly more than any other asset, residential property is especially befitting of Benjamin Graham’s allegory of “Mr Market”. As Graham’s student, Warren Buffett, told shareholders in 1987:

(Mr Market) the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

… But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.

It appears that Australians have very much fallen under the intoxicating spell of Mr Market.

The ABS, Australian Property Monitors and RP Data are all indicating that Australian residential property prices are nearing or exceeding record levels. That is partially because of Australia’s benign interest rate regime, continued immigration and relatively strong economic growth. However, it is more dependent on the continued use of debt by many buyers to fund the great Australian dream.

Not only that, but Australian banks obtain about half of their funding from overseas, coupled with generous government guarantees on wholesale funding and deposits. Without the generosity of the Australian taxpayer (who probably don’t even realise that their pay-as-you-earn taxes are propping up a housing bubble) it is likely that property prices would be following a similar path to that of Japan in the early 1990s.

Based on price/household disposable income or basic yields, property remains substantially over-valued compared to historical trends or comparable overseas markets such as the UK or US. It is much like buying a share on a price-earnings ratio of 50 and hoping for elusive capital gains. But why let reality get in the way of everybody making so much money for so little work? Heck, you can buy a house, live in it and make hundreds of thousands of dollars in tax-free capital gains. (See Steve Keen’s graph below comparing property prices and inflation — the horse certainly appears to be bolting).

Robertson wasn’t the only one rejoicing at the recent debt-fuelled property bounce. Rismark boss and my occasional sparring partner Chris Joye also claimed victory, noting:

Robertson wasn’t the only one rejoicing at the recent debt-fuelled property bounce. Rismark boss and my occasional sparring partner Chris Joye also , noting:

Rory has delivered the community a profoundly valuable public good: he has finally held extreme views to account. Steve Keen’s dire prognostications captured unprecedented media air-play for an academic economist (and note here that I personally think that Steve is a terrific bloke).

Others would say that Keen’s wise warnings regarding debt would be of more use than the merry-go-round of property spruikers from the real estate industry and finance sector. (See another somewhat concerning graph from Keen below concerning mortgage debt to disposable income making it clear that while the asset side of the balance sheet has increased, so too has the liability side).

But let’s not let debt-fuelled capital gains get in the way of a good story.