Very nice summary there, Tom.
My awareness and understanding of the current credit crisis (and how it potentially affect Australian properties) were gain quite recently but I have come to the exact conclusion as yours.
Rising property values are largely because of the era of cheap credit first introduced by Alan Greenspan back in the 2001s and as a result, directly influence the cost of money in Australia. In fact, the era of cheap credit may have gone back as far as over 20-30 years ago according to some experts.
Your comment on that you have been a bear on property for the last 5 years is very interesting. I wished I had attained the same kind of knowledge I had back then and gauge how my perception on the market be back then. However, we still need to realise that the markets CAN BE irrational for longer than one would think.
Speculating back several years ago would have been extremely profitable, and obviously, at the expense of those at the top of the property pyramid scam. That is, property value rises only if someone else is willing to get into much deeper debt than you are currently in at the moment.
How all this will come out will depend on how US will respond to the current crisis in the near future. The possibility of a staginflation is becoming more of a reality where inflation occur during a recession, which was previously regarded as impossible by Keynesian economists. (i.e. mainstream)
It's now a fight between inflation and deflation, where the former will occur if the central banks continue to drop money from helicopters in an attempt to simulate growth, or deflation where defaults and leveraged financial instruments loses continue to increase and spread to other assets. (i.e. potential massive defaults from bond insurers on CDOs were mentioned recently, and this is serious stuff and would make the subprime a child play)
The US Federal reserves have already announced their intention to prevent deflation at all cost after the stagflation happened back in 1970 when Paul Volcker decided to pump up interest rate to the mid-high 10%.
I agree with Tom on this one. It is naive to assume China be completely decoupled from this, while they are more independant they have ever before, China's growth is still highly dependant on export with their majority of factories are geared for export. Alot of critics are saying but US is only 30% of China's export, however, US is not China's only customers. There have been talks of global recessions as the global credit crisis hits other developed countries where the public and private sectors are leveraged to the max. There are now talks about staginflation occuring in parts of Europe.
Global consumer demands will drop and and this would put a huge break on China's demand for resources. And everybody would know what this will do to Australia.
Uninterruption in real wages rise, employment rate? I wouldn't bet on it.