It seems that part of the disagreement arises out of simple terminology. How do we define a housing downturn.
In your post you say:
Today prices have not dramatically fallen.
And then in the next paragraph you say:
This is not to say there are pockets going sideways, down and down dramatically.
I think this seeming contradiction can be best resolved by focusing specific housing markets rather than talking about "the housing market" as if it were one homogenous entity. There are regional factors and price range factors that need to be considered. Some segments--regionally and price ranges--are no doubt in something close to free fall. Some segments are holding up quite well. Some segments have seen enormous bubbling over the past few years and will doubtlessly fall even more than Keen's trumpeted 40%, others will probably do quite well and appreciate in value.
I am all for putting this "my economist is better than yours" argument to rest. it is neither productive nor interesting.
Different sectors of the housing market will react to different changes in the economy. Perhaps we would be better off looking at these individual sectors rather than making broad generalisations.
Segments of the market that I see decreasing spectacularly:
1. Luxury, vacation homes. I think a lot of the people who buy these are probably very exposed to shifts in the share market and upheaval in financial institutions. 2nd & 3rd homes can be disposed of with minimal inconvenience and margin calls may result in forced sales.
2. If unemployment rises I think we will see a lot of sales by all classes of people who purchased their homes in the past 2-3 years. People who purchased IPs (without really knowing what they were doing), people who upgraded a little beyond their means, FHBs who took on debt that could only be supported by both partners working full time. Basically everyone who is operating at or near their limit when it comes to servicing the mortgage. And a lot of people are under mortgage stress. When they get retrenched, lose their overtime and/or one of the partners loses their job they may very well have to get rid of the house and get rid of it quickly--especially if they are carrying heavy credit card debt and other debts (car loans, etc.)
Whereas Aus. doesn't have the same degree of exposure to sub prime loans and exploding ARMs, there is a lot of indebtedness and debt stress weighs heavily on large segments of the population. an extended downturn will obviously do a lot of damage to these groups of people. And given all the turmoil, I don't think it is reasonable to assume that you can have your financial markets decimated without it having an impact on your larger economy as a whole. that's just dreaming.
3. Property Investors - one danger of a moderate decline in prices is that the property investors who are in it primarily for the capital gains might decide that there money is better off elsewhere. Again, more houses on the market, more downward pressure. The impact of this will obviously be felt more in areas with high concentrations of investment properties.
4. Affordability & credit. If you talk about demand and rent putting a floor under housing, affordability and credit have to be the ceiling. As I see it certain sectors of the economy have their noses pressed up against that ceiling. Primarily FHBs. Typically they have less income and less savings. Less income makes the wage/debt ratio more daunting and less savings makes credit harder to come by. The FHOG increase may help a little with the latter, but does nothing for the former. In the current climate it does not seem reasonable to expect FHBs to play a significant role in supporting bottom end housing prices for these reasons. Rather than going up, this ceiling is coming down and reducing the maximum amount these people can pay.
That is how I see certain segments of the market reacting to the current state of affairs. I do think it will take some time--at least 1-2 years--for the full impact of this change to make itself felt. Nobody can say for certain what the outcome will be, but I do not think it is "extreme" to predict very substantial drops in housing when you consider how extreme the run up over the past 6-8 years has been and how extreme and volatile movements in the share markets and global financial markets have been.
0-10% either way is extremely conservative, I think. Canberra (my stomping ground) saw a 4% drop in Aug. and a 2.5% drop in Sept, making for 6+% drop in average home prices in two months alone. Yes, this was (in August, not so much in Sept) on very low volume and yes it is too early to call a trend, but the future doesn't look bright. October saw a hellish month for the share markets and that could not have been good for property sales, this volatility will no doubt carry on into November (and well beyond I think), December and January are very slow months anyway so it is not till February that we might see some reinvigoration of the market. But if we get 6 full months of declining numbers... well, people might be inclined to call that a crash in progress.
