I'm going to preface this post by saying I'm in my early 20s, and fairly new to investing so I acknowledge I've still got a lot to learn and experience. I am an Engineer by education and financial literacy comes from what I've learned through the last few years reading. So I apologise to all the economists out there in advance
Anyway, that being said, here is my view as to why I think we will not experience the same 40% shock that the US housing market did.
In my opinion, it all comes down to this point:
Your completely missing the point.
You can walk away from a $500K debt in the US and leave it to the bank.
In Aust you are still liable---so who do you think will do everything possible to save their home???
In the lead up to the GFC, banks in the US had irresponsibly lent money to those it shouldn't have. (Sub-prime mortgages and the like). While the economy was booming everything was fine, as it always is.
Then came a slight bump in the US economy and suddenly banks see some of their customers lose income and the capacity to repay. "No biggie!" says they banks and off they go and sell some of the houses.
Queue more job cuts and more people defaulting on their loans and it reaches a stage where there is a slight oversupply of houses due to banks selling the homes of defaulting customers. As with all supply and demand, with increasing supply prices start to level off and then drop slowly.
Well prices have now dropped 10%. No big deal right? Normal property correction of course, in line with normal cycles.
Well it is a big deal to those mums and dads who just bought a home in the last few months - 'whaddya mean my house is worth 10% less? I just bought it a few weeks ago!'
So they think to themselves, 'hmm, my house is now worth 350k, down from 380k. I took out a loan for 360k... wait a minute, my house is now worth 10k less than what I borrowed! So why am I continuing to pay this loan for when I could get rid of this house and buy a similar one with a cheaper loan!' Boom, walks out of the house and leaves the key on the table. There are no selling fees or costs to pay because the law is that the bank can't chase you for the loan amount!
So now the bank is stuck with a home worth less than the loan amount. Being a bank you want to recover as much as possible so you sell the house for as much as you can get.
So now you have more houses coming onto the market and a slightly bigger oversupply than before. Prices drop again. More people suddenly have negative equity. Queue more people walking out on their loans. Banks put the homes on the market, prices drop again. etc etc.
Suddenly you have a huge oversupply and prices plummeting like mad. it's no wonder they dropped 40%. Here in Australia, you can't walk out on your loan in the same way so we won't experience that self-feeding doom spiral that America has been in.
That being said, prices in all likelihood could come down or stagnate, but it's nothing out of the ordinary considering normal property cycles. If you engage in appropriate risk management, within your means and tolerance it shouldn't matter what the prices do over the next couple of years. (unless you're flipping homes of course but that's a whole different ball game
)
Maybe my view is overly simplistic, but sometimes simple is best. Cut out all the noise and focus on the key factors. The only thing I think that could cause some grief is a high interest rate (15%+). Will see a few people burnt but as has been said on these forums before, it has happened before and will inevitably happen again. If you invest sensibly there should be no reason why you can't ride out such high interest rates.
Australia is VERY different and your damned lucky to be a citizen of hers.
Damn right.
EDIT: P.S. please be gentle. I'm still a newbie!
*Puts on flame-retardant suit*