And yes I agree in the perfect world we have right now it will continue indefinitely. But the world is not perfect and it is run by humans and the world’s financial dynamics are changing daily! So now we have borrowed as much as we can while the times have been good. The negative side to all this is that as imported goods have been so cheap we have allowed local manufacturing businesses to fold or go offshore. We cannot take on any more debt – we are full to choking point!
What happens when interest rates rise to 8%? Does that mean home repayments will rise? No! Home repayments will rise along with petrol, food, clothing, medical, education, TVs, cameras, etc. You see, we think of rising interest rates as nothing but higher loan repayments. But the rate rises are implemented as a reaction to rising costs of everyday items, not house prices! So when we are having to pay higher monthly mortgage bills we will also be requiring more money for everyday items to get by. That is my concern. Once consumers are hit with double whammy fees for home repayments and rising prices for everyday things then there will be very little money left to feed into the economy. Will our economy be able to sustain long term home mortgage rates at 8% plus?What if the rates go beyond 8% and petrol is over 2 dollars a litre? Would our wages keep rising even though the rising cost of fuel is killing businesses?

If/when this scenario becomes reality then the outcome would be the exact opposite to what we have endured over the last 10 years. We would see money become scarce once again. We will see people fight tooth and nail to refrain from spending because getting money via credit will be very hard and expensive. Once that cancerous action filters through the economy it will then feed on itself. As I said, we have been importing deflation. And with that we have had full control over our economy with the RBA playing with interest rates like a chess game with the subsequent moves being reactive and very successful. But when we start importing inflation (and we will) what happens when the rising rates cannot slow inflation? They then have to be risen more. Eventually inflation will be reined in, but for that to occur sacrifices in our economy must be made. Will we cut back on our food? Will we cut back on our petrol use and heater use? Will we choose to stop buying clothes that we don’t need? Will we forgo to go on that interstate holiday? Will it be all of these? There the problems start. From there the economy will go backwards as business activity will be hit hard. But the sad part would be that core inflation will remain high forcing the RBA to keep rates above the safe level. Falling business activity, rising unemployment and high interest rates. And the longer it goes on the worst the outcome would be.

We know China’s currency is at a great discount to western currencies giving the Chinese the advantage to out-price and to outsell all western manufacturers. This has given them consistent and reliable money flow during the hard times as their cheap goods had remained in demand during the GFC. Whereas America was hit hard as customers were shying away from ordering the latest Boeing Jet Airliners or Caterpillar’s earth moving equipment the China juggernaut kept on rolling as consumers had no problem buying 20 dollar Chinese jeans or 40 dollar Chinese DVD players. But eventually China will no longer be able to keep its currency suppressed due to the damaging effects of extreme inflation. So they will have to lift its currency closer to western levels, which will hurt their exports but will reduce their costs for fuel, commodities, gold, dairy, wheat, etc. So China will then have cheaper access to these items to begin a self sustaining economy. At the other end the western world would be left speechless as the discounted Chinese goods are suddenly expensive. Not only that but fuel and food costs would be soaring due to China’s consumption. Would we be strong enough to do it alone and manufacture our own goods as a result?

It must be said that near the end of a boom 95% of opinions are always bullish, with only a few idiots countering public sentiment. Of course when markets are at their bottom and the news is bleak 95% of the public remain bearish and only a few idiots would gamble on getting in then. I was one of these idiots. I got out of the share market last year in June missing the collapse of Bear Stearns and the almost complete global financial meltdown as AIG had to be given an emergency bailout package by the US tax payer. Then I had the foresight to gradually feed myself back into the share market last December, accumulating good company stocks at great discounts every month since. And as most know the market has rallied some 50% since March! That does not make me right with my forecasts. But it shows that with a little for sight and with some strength within to go against public sentiment one could beat the herd at their own game. No one wanted houses in the 90s. They were cheap but not cheap enough so to speak. Now we acknowledge house prices are dear but not too dear. Time will tell if the housing market bears are wrong.

What I don’t like to hear is hearing the public wishing first home buyers to default on their mortgages with their homes being repossessed. Why would that be good? Why should they be punished? It’s not their fault for living the dream of owning their own home. It’s the fault of the banks for authorising these excessively big mortgages for the young buyers. It’s also the fault of our government for taxing savings but rewarding debt with negative gearing. Hence the crap we find ourselves in now. Who decided it is now okay to give out loans based on a couple’s income rather than the sole bread winner? Did they never consider that times get tough and that unemployment levels can run high. As a result we have no safety net in our economy for high unemployment or high interest rates. If people were encouraged to save, such as with zero tax payments on bank interests earned then the economy would just trickle along at a more sombre, but reliable rate avoiding booms and the following busts. If only!

An excerpt is “More houses are needed to help boost economic recovery and to create a lasting legacy of affordable homes, treasurer Wayne Swan says.

Speaking after meeting state and territory treasurers in Canberra on Friday, Mr Swan said Australia wasn’t building enough houses in terms of population growth.

Mr Swan said the treasurers had discussed social housing, development approval processes and the need for more to be done to improve rental affordability as well as what could be done to get private sector investment.

He said all of these issues stemmed from a lack of housing.

“The Commonwealth has this view that we have got to get ahead of the curve here,” he told reporters.

“We have not been building enough houses. We do have strong population growth so it will be very important we move through to economic recovery to ensure that we don’t have capacity constraints that flow from a shortage of housing.

“That is why we put significant resources into social housing as part of our stimulus plan, not just to create jobs for now, not just to support small business for now but also to leave a lasting legacy of more affordable housing.”

Business Spectator is free at the moment (well it was when I joined) but you have to register. It is a good online newspaper.

The situation will eventually correct itself. With or without government intervention. As you do, I believe it fundamentally comes down to house price inflation running ahead of wage inflation. This can continue for a time, but there comes a point where wages aren’t able to service increased debts.

From that point, house prices can’t increase unless credit becomes more available or wages increase. Alternatively, we’ve got things like shared equity mortgages and siblings/friends going into debt together. Taken to it’s logical conclusion, people won’t be able to buy a house unless their parents use their own house as collateral for their children’s mortgages. Perhaps expectations will change such that that is the accepted way to do things.

Sandra,

Your points about Stevens and the RBA raising rates is an interesting one. Raising rates could well pop the real estate bubble. Or it might not – people might just go on believeing the spruikers and house prices rise anyway. In the event that it does pop dramatically, our entire economy will collapse and the RBA will have to slash rates again.

You make a lot of sense! This country is in for a big reality check, upon which time it will become evident that our economy and banks are NOT as strong as we’re being lied to about.

In the meantime Simple Stevens will ocntinue to perpetuate this lie by pumping up the interest rates, and so inadvertently help to set up the impending collapse of the Australian residential property ponzi scheme.

Say Mr_Clean, you sure you’re not really Sayce?? lol

http://www.smh.com.au/business/banks-to-fight-against-push-by-regulators-to-raise-liquidity-levels-20091025-henj.html

So we have a crisis that exposed the leverage of the banks and they respond that their very future depends on continued massive leverage. Actually remaining more liquid directly impacts their ability to further expose themselves to the real estate bubble. So their plea to APRA – please let us remain highly leveraged so that we can continue to make bets on the property market. I reckon the banks are going to go all out here and then claim they are too big to fail and wait for the government to bail them out. Moral hazard, anyone?

Governments have shown they are incapable of managing these sort of intergenerational issues well. They are trying to manage a slow deflation of the property bubble as well. They introduced the first home buyers grant boost to stem house price falls and support the banks. But they’ve only succeeded in blowing the bubble even bigger. And now it’s all so big that even moderate adjustments would devastate the banks. Every bit of tinkering only makes the problem worse.

But from the sounds of it, Goose has flagged more stimulus if required. I find that deeply worrying but I’m not surprised. It seems that there is almost no level of debt that they are willing to tolerate if it means they can put off the crash for a bit longer. I can’t blame any government for trying put the pain off for a bit longer and not wanting to take the medicine.

It’ll be interesting what happens come budget time. K Rudd and Goose have shown us they are reluctant to take tough budgetary decisions. But with the debt piling up, surely they’ll have to show a bit of restraint. But I think that the current government is completely gutless we’ll have continuing debt and deficits into the forseable future. Rudd’s claims of fiscal conservatism have been obliterated. I don’t have any confidence in these turkeys – this will be left to the next coalition government to clean up (at leat 3 1/2 years away). It’s just a pity that the current opposition are too weak to mount a coherent argment for any more then 5 minutes.

Overall, now is a tough time for property bears. All the surface indicators point to increasing prices – primarily I would say to confidence that we’ve willed the recession away and the resilience of the notion that house prices only ever go up. But I would argue that confidence only gets you so far. Our economy is living on government stimulus and little else. And that is winding down. Personally, I think the appetite for further stimulus in the community is not great. The government has been talking up Australia as the most resilient in the world. They would have to start talking about doom and gloom and the need for more bailouts in order for more stimulus to be credible. For mine, if the government doesn’t launch another another round of stimulus, things will get very interesting. So until then, we wait and see.

cb: there are people that for example in last even 5 years ,8 years have seen houses leap & bound beyond comprehension & their affordability . a house worth 100K is now 500k , maybe more .
now that has caused a lot of people (understandibly )regret ,frustration,anger,fear etc etc & alot of industries ,wages have simply not gone up in proportionate to the house prices & that is sad .
someone once said ” they missed the boat ”
imagine visually standing at the pier & missing the boat & that is wats happened .
now the goverment is expecting melbourne to accelerate immigrants from current 1800 per week ,to even much,much more to a pop. of 7-8 million .
infrastructure in alot of areas is terrible ,eg.jobs are further away ,roads are extremely congested,no BROADBAND in new areas ,where younger families will most obviously connect on etc etc .
its like “pack em in “mentality,
worry bout the consequences later
who ,what,when & where has got the answer to these drastically needed soloutions?
rents ,loan repayments will start increasing way too high unaffordably , houses in the end have to be a whole lot more affordable

any way interesting article below
http://www.elliottwave.com/freeupdates/archives/2009/10/23/15-Forecasts-That-Came-True—-and-More-to-Come.aspx