will our children live in caves?, page-10

I first visited Tokyo on business in 1989 right near the peak of the great housing bubble which was supposedly built on high demand and limited supply in an over-crowded city with a growing population due to the nations rural urbanisation (just as they purport in China today).

Over the following years real estate prices in Tokyo fell by an average of about 90%! The housing boom leading to a massive bubble was not driven by the laws of supply and demand for housing but by ever increasing demand for credit due to a speculative mania.

But like every fever, every mania breaks too. And when it does, only after the most marginal borrowers and the greatest fools have been lured into the market, the resulting credit contraction and debt default leads to cascading forced sales, a property price collapse and a resultant banking crisis.

When a flood of existing properties hits the market en masse the supposed supply shortage of houses is exposed as a myth. And a deflationary spiral in prices deters buyers from entering the market because of their collective expectations for further price declines (the opposite of a speculative mania).

Together they equate to an historic housing collapse, the likes of which Tokyo experienced after their housing bubble burst, as history has revealed over and over again. The only questions are just when, and how far, will Australia’s housing bubble deflate.