The level of securitization is very relevant. It's these securitization deals in the US that caused the US housing crash.
It doesn't matter what causes the crash, the point is there is always a crash where there is a bubble.
I'm not arguing whether it was a bubble, to each their own on that point, but given the cause of the 'pop' is not there, I can't see the Australian housing market crashing.
Every country will have a different cause - there is no requirement whatsoever for them to be the same.
SCM - a question for you. If the Australian market is in a bubble, does it mean it has to crash now? What is stopping it from inflating some more? Would like to hear your thoughts.
Many reasons.
First of all, credit growth in Australia is completely flat. That means prices are not going to rise. And this is with extremely low interest rates.
Second of all, baby boomers are past their peak spending ages and are moving into retirement as of last year - so the big demographical cycle which caused the bubble in the first place is now going to cause it to pop.
Third of all, Australia's household debt is over $1Trn, over 100% of GDP - and much of that is mortgage debt. There is only so much mortgage debt people can service. It is impossible for it to go any higher.
Fourth of all, there is significant over-supply across the country which will force prices down. On that note, the quantity of properties on sale is at record heighs. This means prices must fall.
Fifth, tens of not hundreds of thousands of foreign speculators - highly leveraged have bought into our bubble and many of them did so at the peak. They are seeing their "investment" go down in value, and our currency is now dropping as well. They will run for the exists.
Due to bubble mechanics, once a bubble has finished going up, it must crash straight away. There are countless domestic negatively geared "investors" who are not going to put up with losses, and will also head for the exits. This is especially true of the aforementioned baby boomers who are moving into retirement. There is no tax benefit in housing if you have no income.
Next, the bubble has completely destroyed our economy. By hyper-inflating house prices, wages also suffered extreme inflation and now we are extremely uncompetitive with the rest of the world. This has brought about a depression which is only going to get worse, as hundreds of thousands will lose their jobs in the coming years.
The other way in which the bubble has destroyed our economy is through the wealth effect. As people used their houses like ATMs during the bubble phase, the retail sector expanded too rapidly and now there is a significant oversupply of retail outlets. This will only compound problems as businesses shut down and more jobs are lost, and more commercial property is put on the market.
Now days households - freaked out by the global financial problems are saving and paying down debt instead of taking equity out of their properties. It is a double wammy for the economy. Households are now deleveraging - and that will take over a decade due to the enormous size of the debt.
As properties drop in price faster and faster people will begin to panic. Hordes of speculators will head for the exists. No - there is no returning back to the "good old days" up double prices every 7 years. Do not forget that it took all of the following to prevent a complete meltdown during the GFC:
-1.2 million or 5.7% increase in population
- $270 billion increase in housing debt
- $42 billion in government stimulus
- 300 basis point (3%) reduction in cash rate (total 400 points peak to trough)
We do not have the fiscal nor the monetary room to do that again - not to mention all it did was bring forward lots of demand and speculation. This can not be done more than once. Ironically we have also been getting immigrants coming from the countries where house prices crashed. Once ours do, we will probably experience population decline as people go abroad for better opportunities.
Oh and I almost forgot the mining boom. In many ways it has allowed us to leverage what little money we get from it, borrow money from overseas banks, and swap houses with each other, while paying interest to foreign countries who spend it on infrastructure and R&D as we pathetically try to compete with them.
Note that none of this money was saved, none has been invested on Australian infrastructure or R&D. Our economy is houses and holes. And now that the commodity bubble is over, China is going down - we won't even have holes.
No, our economy will be in ruin. Millions underwater on their mortgages, and countless jobs will be lost. Complete and utter devastation. Personally, I'm planning to move to Switzerland.
And right now you are witnessing the start of it. The rating agencies demand that our budget be so tight, that it will bring about a recession due to severe fiscal contraction. If we disobey them, they will cut our government's rating and our banks will not be able to roll over a record amount of debt owned to foreign banks this year. This is it, our economy is headed for a complete crash.
Our crash is looking no different from the US nor Japan at the onset. It will accelerate in the coming years just like the US and Japan. Just wait and see