property correction risk in australia high, page-12

The global Real Estate boom was a sham boom, folks thought their property investments were going up when in reality the RBA was increasing money supply by 14-16% a year, it wasn't your property going up in value it was just that there was more dollars to buy those properties, your dollars were worth less not your property more.

Think of it this way if someone built a wall around your suburb and helicopter dropped $100k to every household then folks would be 100k wealthier and money is just paper so it doesn't cost anything at all to produce.

This causes asset inflation, folk with the extra 100k then borrow and bid up the cost houses and buy flat screens, in monetary policy terms its called the "the asset monetary transmission channel", if you also provide low teaser rates available to everyone, folks feel more able to borrow and bid up the houses even more, if you really want to stimulate things you cut taxes and make the tax cuts neutral to government income by further increasing the monetary supply, that is cut tax as a percentage but increase money so net dollars collected is the same, basically the thing they refer to as "printing money" or Bernankes helicopter drops. So your surburbs GDP might be showing growth but its really those helicopter buzzing around above your local bank.

The theory goes that by doing this folks feel wealthier and because they do they spend this wealth by accessing their equity through bank credit more or else like a virtual home atm.

Its a way governments cause consumption, the money they printed didn't cost them anything and so folks are tricked into utilizing it for spending. If your milk goes up its inflation but when your house price goes up its equity growth

anyway in 2001 when we had that Nasdq set back, the worlds central banks got frightened that the economy would go into deflationary recession, so they pulled all the levers I have described above so that a recession wouldn't occur

They dropped rates, increased money supply and purposely caused asset inflation, so folks would borrow more and spend up big, it worked the recession fears passed.

government love it, when asset prices go up the government can tax your more but you dont mind so much because you fink your wealthier, its a way of raising taxes and not have the tax payer care to much.

This kind of monetary policy came into vogue with Greenspan, before then it was frowned upon because the risks we well identified by economist like Keynes, Galbraith, Friedman, Schumpeter etc

Then came along the new age economists like krugman, Bernanke, Delong etc

So there you have it, put very simply the reason there will be a 20-30% pull back is that it was an artificially induced rise in the first place, there are limits to how much debt that can be pumped into the system, the key question is are those limits upon us or can they pump the bubble larger. The reality is we are at the very top of a credit bubble and housing prices will suffer a severe correction.

Think about how many homeowners got sucked into thinking they were wealthier and borrowed against there extra equity or upgrade their house to another by untilizing more debt

ever wondered how property prices go up?, where does all the money come from to make them go up, do folks all of a sudden inherit on mass?, do all the immigrants arrive with suitcases full of money?, think about where you all got your money to buy that new house, it comes from the credit cycle and the feeders of the credit cycle are the banks and the feeders of the banks are the central banks of the world

so when the US raises its money supply , it devalues the US dollar, if the other countries want to neutralize this so they maintain their terms of trade and keep exporting they are forced to devalue as well by printing money, if the RBA didnt do this the AUD would be $3 by now, so in a way they have no choice, so the US Feds actions have created a wave fo money printing and thats why there is a global real estate bubble, Spain, UK, most of Europe are the same, its the knock on effect

Its like opening a brokerage account with Opes based on the glossy and not reading the fine print, all the real economic data is in the fine print, its all there to be found but folks dont bother or dont know how to read it so they assume the glossy is the read deal

To much sugar makes you fat and you might die earlier, similarly to much monetary stimulus creates dysfunctions in the health of the economy in particular asset prices, money supply stimulus creates what Schumpeter, Minsky and Keynes called malinvestment, that is investment is channeled into lots of unproductive place like housing and eventually you have what they call a "Minksy Moment" and the bubble pops.

I know there will be all kind of folks telling us they dont make any more land, some areas will recede but other wont, hosuing always goes up, but history proves them and we always return to the long term average, this has no consquence to wholly owned investors, price falls are not investment falls they are just your dollars getting scarcer.

Highly leveraged folk though suffer because just like the levarage worked for them on the way up it eats the equity part of the investment on the way down.

We are now in a process of debt deflation, the exact inversion of the credit inflation, folks who think that housing wont crash dont understand why the boom was a sham and why it has to correct because the sham has been uncovered . If your highly leveraged in Real Estate IMO you should start seeling assets asap

http://www.debtdeflation.com/blogs/