Its pretty clear that the bulls are clinging to the notion that the property market will not run out of steam.
This is despite property being a massive illiquid, leveraged bet for most.
Look all around you - leverage is now dead. Bank's can't even borrow. The only reason why property has boomed over the past 5 or so years is because banks have stretched out their borrowing multiples (to income), stretched out the loan to values and tried everything they can to lend you money.
That has now stopped. Unoquivicable. Don't believe me? See how many RMBS (basically wholesale mortgage funding programs) can't fund themselves any more. Macquarie has shut down its lending arm, Rams has failed and many more smaller lenders have bitten the dust. The big Aussie banks are even finding it harder and more expensive to borrow.
Summary - the days of cheap and easy credit are over.
What does this mean for property? You simply can't borrow that extra $100k the vendor has decided to put on the price.
This is even ignoring the financial bloodbath that is taking shape everywhere. Share prices are being eroded by record amounts daily. This has a big impact on anyone who has touched the market - they are feeling less wealthy, less optimistic, less likely to 'upsize' their property portfolio. Confidence is draining from the market like a sieve. Go ask any real estate agent (honest one) and they are terrified of spring. Clearance rates have fallen through the floor over the past 6 months, and that is even before the flood of spring supply has hit the market! There is and will continue to be desperate sellers who, because of high leverage and a fall in market prices, are now underwater on their LTV - they owe more than what their house is worth.
This creates an accelerating spiral - sell, depress the market, sell more, depress it further. Have a look at what is going on in the US - as soon as the real estate market loses confidence, it capitulates and crashes. Property is so illiquid, so stuffed full of taxes that you can't move in and out of an investment overnight.
The economic slowdown is happening. Read the 'dinkum index' report by Fitch Ratings - delinquency rates are rocketing, and its not just the outer suburbs now, its the inner suburb professionals who are seeking debt counselling.
Businesses are finding it harder to borrow, business insolvencies are rising. Job losses will follow. Job losses will kill confidence in the real estate market - who would take out a massive mortgage if their job is on the line.
Will the resources boom save you? NO! Look at WA - it is already correcting big time. Commodity prices have taken their biggest drop in 50 years, BHP, RIO, Fortescue all are down more than the banking stocks. China is slowing on the back of slowing US/Europen growth. 80% of Australia's trading partners are facing material economic slowdowns.
I could go on, and on, and on and on about reasons why, going FORWARD property is pretty much doomed for the next 5-7 years. The IMF believes that, judging by historical standards, Australian residential property is at least 30% over valued. The scary thing is, when the market corrects it will swing well past 30% (just in the same way it has swung up above this over the past 5 years) before it comes back up again.
Think the Reserve Bank will save you? Think again. If the RBA cuts by 50bps next Tuesday, the Big 4 will only cut by a MAXIMUM of 25bps. The RBA no longer sets interest rates in this country - the debt capital markets do. And right now, and for the forseable future that market is stuffed.
The BIG turn of the property cycle is coming, and it ain't gonna be pretty.
