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KurwaJegoMac,
I personally use the example of US property market only as an example to contrast against the mantra that property prices only go up and that they cannot possibly crash. Whether the Australian property prices crash or not is not dependant on the US property market.
Firstly, it seems to me absolutely clear that property prices internationally have been rising due to a long period of cheap credit, declining interest rates (due to central bank interventions) and an unsustainable path of credit expansion which has occurred significantly over and above the rate of economic growth.
The US is not the only example although it is used the most frequently. What about Ireland, what about Spain, Greece, Portugal, Italy, Iceland, England and Canada? All these markets have experienced similar property market issues. The most obvious similarity to our market is Canada and in particular Vancouver. Both England and Canada have not experienced the same level of price destruction but it is well recognised that there exists substantial structural stress.
On this matter, Australia is not an island and our property market has experienced similar increases to other countries during the same period of overall credit expansion. It has nothing to do with any fundamentals (except on the fringe) with regards to supply/demand, economic or population growth. It has primarily been driven by an unsustainable expansion in credit and the inevitable contraction of the same credit. Globally, we still face the same issues as a result of this unsustainable growth of debt. We are still in a credit crisis and now sovereign debt crisis.
Therefore Australia is not different. The only area where we are different is the timing and the type of Government bailout - ie FHOG - which brought forward demand and delayed our credit destruction.
Property prices will generally follow the rate of inflation or the rate of real economic growth over the long term. Inevitably assets are mean reverting. This is why we had the credit crises because there were too many imbalances.
Australian property prices will crash because our demand for debt will collapse. It has nothing to do with unemployment levels as the act of credit destruction actually leads to higher levels of unemployment.
The only saviour in this process will be extremely high levels of inflation. However this is a long term concept. In the shorter term it means that there will still be credit destruction and significantly higher interest rates here and overseas. The overall cost of capital is rising as it is becoming increasingly recognised that capital is to be respected and requires a commensurate rate of return for the risk involved. Therefore, Australia banks will face higher funding costs due to a) higher cost of capital due to a re-rating of the cost of capital and b) rising inflation expectations as central banks throughout the world deal with their debt burdens via inflation.
So, regardless of how strong our economy is locally - although it seems reasonably weak outside the commodity sector - we are facing a period of rising cost of capital and higher interest rates. This is coming from a period of historically low interest rates, easy credit, high debt participation rate and the highest private debt levels that we have ever had. I'm not sure how we could tolerate 15% interest rates with our debt levels.
I think that in the short to medium term we have a lot of pain and price collapse resulting from inability to service debt and the increased perception from property investors that their investments will not grow sufficiently to offset the cost of holding (especially with rising interest rates). I think that this will be combined with inaction such as the concept of frogs boiling in hot water, as people do not believe that interest rates can rise when the economy is weak.
Also, don't look at historical interest rates from the 1950s. You need to look back even longer to the 1900s to provide a reasonable long term appreciation. Even if you look at the rates since the 1950s, imagine a 1970s scenario where we have sustained high interest rates for a decade.
I personally use the example of US property market only as an example to contrast against the mantra that property prices only go up and that they cannot possibly crash. Whether the Australian property prices crash or not is not dependant on the US property market.
Firstly, it seems to me absolutely clear that property prices internationally have been rising due to a long period of cheap credit, declining interest rates (due to central bank interventions) and an unsustainable path of credit expansion which has occurred significantly over and above the rate of economic growth.
The US is not the only example although it is used the most frequently. What about Ireland, what about Spain, Greece, Portugal, Italy, Iceland, England and Canada? All these markets have experienced similar property market issues. The most obvious similarity to our market is Canada and in particular Vancouver. Both England and Canada have not experienced the same level of price destruction but it is well recognised that there exists substantial structural stress.
On this matter, Australia is not an island and our property market has experienced similar increases to other countries during the same period of overall credit expansion. It has nothing to do with any fundamentals (except on the fringe) with regards to supply/demand, economic or population growth. It has primarily been driven by an unsustainable expansion in credit and the inevitable contraction of the same credit. Globally, we still face the same issues as a result of this unsustainable growth of debt. We are still in a credit crisis and now sovereign debt crisis.
Therefore Australia is not different. The only area where we are different is the timing and the type of Government bailout - ie FHOG - which brought forward demand and delayed our credit destruction.
Property prices will generally follow the rate of inflation or the rate of real economic growth over the long term. Inevitably assets are mean reverting. This is why we had the credit crises because there were too many imbalances.
Australian property prices will crash because our demand for debt will collapse. It has nothing to do with unemployment levels as the act of credit destruction actually leads to higher levels of unemployment.
The only saviour in this process will be extremely high levels of inflation. However this is a long term concept. In the shorter term it means that there will still be credit destruction and significantly higher interest rates here and overseas. The overall cost of capital is rising as it is becoming increasingly recognised that capital is to be respected and requires a commensurate rate of return for the risk involved. Therefore, Australia banks will face higher funding costs due to a) higher cost of capital due to a re-rating of the cost of capital and b) rising inflation expectations as central banks throughout the world deal with their debt burdens via inflation.
So, regardless of how strong our economy is locally - although it seems reasonably weak outside the commodity sector - we are facing a period of rising cost of capital and higher interest rates. This is coming from a period of historically low interest rates, easy credit, high debt participation rate and the highest private debt levels that we have ever had. I'm not sure how we could tolerate 15% interest rates with our debt levels.
I think that in the short to medium term we have a lot of pain and price collapse resulting from inability to service debt and the increased perception from property investors that their investments will not grow sufficiently to offset the cost of holding (especially with rising interest rates). I think that this will be combined with inaction such as the concept of frogs boiling in hot water, as people do not believe that interest rates can rise when the economy is weak.
Also, don't look at historical interest rates from the 1950s. You need to look back even longer to the 1900s to provide a reasonable long term appreciation. Even if you look at the rates since the 1950s, imagine a 1970s scenario where we have sustained high interest rates for a decade.
