i see light at the end of the tunnel, page-52

amazing how little we have learned from the past 5 years.

Let me ask you - what caused the credit crisis / subprime crisis in the US?

Answer: people took on more debt than they could afford. Be it through ARMS, nodoc/low doc loans, sub-prime loans you name it.

Australia is no different to the US prior to the crash. In fact we are somewhat worse, with a personal debt/income ratio higher today than the US had pre-subprime crash. We have a higher % of our population exposed to debt via property. We have a much higher proportion of our incomes devoted to mortgage repayments and we have a much more concentrated, vulnerable banking sector.

Please don't tell me how our banks are 'better regulated'. This is phooey and shows you have no idea of how regulation works.

Let me tell you how property WILL crash:

1. People with already stretched budgets will become more and more stretched as interest rates rise. Interest rates will continue to rise because (a) a handful in the mining sector are reaping the rewards of a commodity boom while the rest of us are just getting more inflation. Add to this the government crushing immigration and you have wage inflation out of control soon! (b) foreign investors are making our banks pay a lot, lot more for their foreign funding (partially because of their fears of the housing market, partly because funding spreads are just higher than what they were before the banking crisis as risk is better priced and partly because some of the bank's current funding was subsidised by the governments AAA guarantee). So interest rates will rise, rise and rise. Why do you think the government, through the AOFM is still in the market funding the Australian RMBS market? It's poured $18bn of taxpayers money in buying mortgage bonds because international investors don't want them. Australia is already struggling to fund itself.

2. Mortgage delinquency will start rising. Yes, its at a low base now, but will start to move up sharply with each progressive rate rise. Think of all those first home owner suckers who bought in when the government introduced the FHOG boost and cut interest rates to a 60 year low. They all went out and got mortgages they couldn't afford with deposits they didn't have, and lo and behold interest rates have started to rise and reality has hit home. Why do you think there are no first home owners in the market? Why do you think the CBA is out doing roadshow after roadshow to foreign investors to get their funding to roll (its because CBA and Westpac had the lion's share of the first home owner market). Why do you think new mortgage lending (see monthly ABS stats) is now 70% 'investors'. Why do you think mortgage stress, particularly for first home owners has skyrocketted (see the Fujitsu mortgage stress publications for proof - about 50% of first home owners are in severe stress (meaning they are missing payments or cutting back on essentials to pay mortgages, even before the rates rose)). See some of the prime and near-prime SPIN numbers from S&P on their un-seasoned RMBS prior to the 2008 interest rate cuts. Delinquencies were rising sharply, 90 day loan arrears in low-doc loans went from around 5% to 19% in 2 years. Now rates will go even higher and debt levels are higher than before.

We have seen the early effects of interest rate rises already - drastically falling clearance rates. Delinquencies will come next.

3. As delinquencies rise, and bank funding costs increase (as lending margins are squeezed) banks will become more selective in their lending. Westpac (Gail Kelly) has already publicly admitted they will be cutting back sharply on the growth of their mortgage book. Ralph Norris is already in hot water with his funding. In the US, UK, Ireland and Spain, a small rise in delinquencies saw banks almost shut up shop in lending. Cut off the credit taps to a debt-reliant economy and it will push the housing market off the edge. People won't be able to buy (as they only way you can buy now days is with massive amounts of debt). Investors with multiple properties (on severely negative net yields) will be dumping property left right and centre to 'get out now' before the market falls further (after all, the only reason to be in property today is for capital appreciation as yields suck). Bank lending will dry up further (as foreigners who lend to our banks will charge more for lending themselves).

I can quite easily see a situation where the average house price moves back to 3-4x the average wage, a level that it had been at for the past 70 years. A level that the US thought it had broken only to be pushed back in again with massive price depreciation. Whats the average wage today? Around $60k? We can pretty easily see house prices going back down to $300k or less on average, compared to $450k in Melbourne/Sydney. It won't 'bounce' from this level ever again soon. The US housing market has been screwed for 4 years now, and still has no sign of a stable bottom.

You are looking at a heavy, heavily loss. I wouldn't be surprised if a few banks were nationalised in the process. Look at Ireland - I was there 4 years ago - they had no inkling of where they would be today either.