agree menta. a key observation is that the demand for credit and the writing of new credit has slowed dramatically. this is a fact. its effect on prices, however, is not yet so clear.
as the boom and bubble developed, a gap developed between prices tied to real wealth (e.g. a conservative multiplier of cash/deposit/equity) and current prices (e.g. sydney 8x earnings). this was caused in large part by easy credit.
there is now another gap unfolding. this is the drop in demand for credit while prices remain high. what is this gap? its the stunned/scared/ignorant bagholders of these mortgages that either cannot get out, can't psychologically commit to getting out (like taking a loss on a stock) or are not yet aware of what is happening.
additional to this group is the other side of the fence, where potential buyers (like me) forecast declining prices over time and find it hard to commit to using leverage to buy a declining asset. hence my greed factor (saving a bigger deposit, paying a lower price in the future) coupled with bagholders' fear of being stuck with a large liability + greater risk of income loss during a downturn is working to bring the market back to reality.
so far, these forces have evened out and the changing psychology and conditions have acted to arrest the rise in prices. the question now is what happens to credit and what is the markets net outlook. this will determine whether we crash, decline, stay flat or rise in my opinion.
credit demand is coming down. building starts are dropping. developers can't move stock. buyers are dropping off and sellers are struggling. these are facts but we need more time to see how this trend pans out.
so just as on the way up, where the market chased up the price forecasting that the gap would continue to widen, we now have the reverse happening, where credit contracts and price follows down. there is a lag between the curves but the fear factor will be as strong on the way down as the greed factor was on the way up once it gets going. in fact, i think the fear factor will be stronger.
people generally fear loss more than they yearn for gain.
