Kincella, this con job on inflation has not been a purely Australian phenomenon, the same goes for the UK and even more so the US, yet this has done nothing to protect their property prices.
I agree with you and Duicorp on the point about people who talk but never pull the trigger, but im afraid in this case the fundamentals of Australian property are so poor that you can not ignore them. They are staring you in the face, just like the share market was in November 2007, and i think you will make exactly the same mistake as so many did then!! Take the blinkers off mate!!
Australian property at 7-8 times income is ludicrous. The historical mean is between 3-4, and all of the other world markets that experienced property booms like ours are heading straight back to these levels right as we speak. Why would Australia's market mysteriously buck the trend, when our market grew on the back of the exact same fundamental driver as all of these other markets - CREDIT!! I suggest you pull up a chart and plot housing price growth (on a valuation to income basis) versus household debt growth (also on an income to debt basis). I'll save you the time - the correlation is extremely strong. Australian households have just as much debt as any of these other markets. What are we currently going through - the worst credit crisis since the great depression, so what do you think will happen as credit contracts? Would appear pretty simple to me.
Let me guess you will trott out the old demand vs supply dynamics. Sure this may be applicable when compared to the US but the UK has exactly the same dynamics as us and it hasnt prevented their market from falling significantly – we have just as much debt as them. This factor has a minor influence on property prices when compared to credit growth, and is just a convenient stat for the self interested real estate agents and property companies to trott out to keep the gravvy train running. Anyway I hear we are planning on significantly cutting back immigration in the face of the current crisis.
Next arguement, commodities and china/india will save us. Im not sure if you've seen but commodity prices have halved in the last few months with no end to the fall in sight. I read that there is likely to be 2-3 million jobs cut in the shenzen (China) region between now and the end of the year. This is only one region of the country. I thought it was going to be business investment in the mining sector that was going to save us, but im guessing the business cases of a large majority of these projects has turned so far south that nearly all will be scrapped or delayed for a significant period of time.
Next im guessing you'll bring out the argument that our banks are stronger than the others. Why then are the RBA lending them billions upon billions every day, and the government lending them money from our so called future fund. Our mortgage market sourced 50% of its funds through overseas sources either from securitization or short term money markets. These are rolled over on 90 or 270 day basis on the short term stuff and between 3-5 years on the securitized stuff. Do you seriously think this funding will be forthcoming in the future, at an even remotely cheap cost? This is half the reason (commodity prices the of the other) why our currency took such a battering in the past month or two, as the likes of the Japanese who are big investors in our securitized products pulled their money out. Considering the banks havent pulled out of their mortgages that they used this finance for, they need to find a replacement supplier of finance? So who might this have been - that's right it's been the RBA, hence all the billions they're ploughing in. Is this really sustainable in the long term, i think a contraction in mortgage financing is the only plausible outcome, unless the RBA wishes to see our currency fall to zero. And what does this mean, property prices must fall.
The fundamentals of our housing market are exactly the same as they are in all of the other western markets where people borrowed too much and subsequently created unsustainable bubbles. Just like the UK was 6 months behind the US in it coming to fruition, we are a further 6 months behind the UK. The fundamentals of our economy have fallen out of bed in the past 6 months as commodity prices plummet and people stop spending. A significant rise in unemployment is inevitable. Just listen to Gerry Harvey, he has seen the biggest drop in retail sales in his very lengthy career in the past month.
As unemployment increases, so do the number of people who are forced to sell their homes into a market with few buyers (due to tightening credit conditions), and as household defaults rise banks lending criteria only become tighter again. 30% of our housing market is buy to let investors, and as prices begin to come down, I would expect to see a flood of these looking to sell – lets be honest property investors surely aren’t in it for the yield!! This cycle will continue until the excess debt in the system is purged and asset prices return to their fundamental value. This is exactly what is and what has happened in all of the other markets similar to Aus, so ask yourself the question, why is Australia any different??
I am not trying to say I told you so, im merely trying to save you some pain, as I have never seen a more obvious trade than this. I can not think of an asset that is more overvalued than Australian property. I would be selling up any investment property, and progressively putting it into equities (both Australian and international) over the next 1-2 years, as the relative valuations (and future returns) are ridiculous when compared to property. Trust me I would have no problems pulling the trigger on this trade!!
