Did everyone see today's research released by LF Economics founder Lindsay David? Mr David said the current property downturn signalled the end of the “Ponzi finance model”.
“People have to understand that there are simply too many investors already tied up in the housing market and they can’t go and buy more real estate unless the value of their home rises,” he said.
“That’s how everyone was able to accumulate so many properties in such a short time. They bought a $500,000 investment property, 12 months later it’s worth $600,000, with that $100,000 equity you’re able to go and buy another $500,000 property. You can’t do that anymore, it’s in reverse.”
According to him we are in stage 2 of a 5 stage process.
Stage 1 - Safter sharp rises in property prices and mortage debt levels, prices start to fall. There is little to no impact on construction.
Stage 2 - As prices continue to fall further, a small number of property developers become insolvent or cancel future projects.
Stage 3 - Property prices fall well past thresholds that owners are comfortable with. Bank profitability stalls and an escalating number of property developers default and / or cancel future projects. Panic slowly starts to set in, especially among those with high LVRs, LTIs and DSRs.
Stage 4 - Recession starts and panic sets in. Lenders experience an NPAT wipe out with losses starting to mount. Mortgage defaults begin to rise, as does the unemployment rate.
Stage 5 - Property market eventually finds its floor price. With limited credit availability, properties are relatively cheap but most people have difficulty accessing credit.___________________________________________
As a side note, I personally know more than one property buyer who has lost money recently because the builder became insolvent. So maybe we are somewhere close to stage 3 now. Or maybe there is still a long long way to go.
