Australian Money Forum

[wulfgar]

I was a property bull until early this year. The property bears have been hanging out for a crash for years. Since 2003 in fact.

Now in a sense I could argue that they were right to believe that. Sydney for example has been stagnant since then. However other regions have posted periods of gain. Now if a property correction didn't occur post 2003, then what was different? In Australia's a general property crash was averted by government. The wonders of Keynsian finance was put to work. The RBA began directly plugging the gaps in the banking system since 2004. Of late the RBA has created a new bonanza for the banks. The RBA is taking their MBS style rubbish on repo for terms up to a year. On a temporary basis the RBA exchanges cash for the less liquid paper. This prevents the real declining value of the banks assets becoming apparent. With the cash the RBA provides, the banks can continue lending.

But what happens when these repo's run out? What happens when the federal surplus is no longer there to finance the arrangement? So far the government has averted a monetary crisis that would have spilled over into property. The question remains how much more ammunition does the government have? It is the government providing the liquidity, not the market that has too little cash.

I recall the panic beginning to spread to PI's back in April. The fundamental bear argument that divergence between the real money earnings on property (rental) and the overall price of property is valid. The PI nominally banks on capital growth making up the difference. But their expectations of the markets ability to create money are way too high. The PI's will hang on until the monetary bubble really does begin to burst. But how soon? For the moment, for next 12 months the government has provided the liquidity. But how much further can they go after that?

It's really not a fair system. The government rigs the market to advantage the investor over average Joe.

Could the government simply print heaps of money and dissolve the debt that way? Despite what people think, this is not really an option for the Australian Government. The Government is limited in how many AUD they can print, by the quantity of the main world currencies. And the problem for the main world currencies is the investors can walk out on any currency that doesn't perform. So printing heaps of money, is I don't believe an option.

We know the Aussie private market is way over leveraged with debt. There is little scope for extending this further. Could the Aussie Federal government create T-bonds to raise capital? This is the last resort that could be used. The other two tiers of government (state and local) are in debt.

The world banking system is very vulnerable. It doesn't have the traditional cash reserves to fund the money bubble. The banks created paper instruments to replace their cash reserves. Paper instruments that can not really raise their nominal value on the private market. As I pointed out it is government now holding the value of these instruments up.

Basically everything is set up for a deflationary crash, once the various governments of the world run out of ammunition. That's when the market finds the iou's of the world, don't have the cash in the system to back them.

And there is an even more dangerous event on the horizon. The potential crash of most of the world's liquidity in the form of US dollars and T-bonds. If the investors flee this stuff. Then a deflationary event of first order ensues. And nothing can stop the deflation if this one occurs.

However for the moment, thanks to the RBA the banks are still liquid. So we are still seeing some positive spin on property. The market is still in the main, holding up.

But how much time we got? Despite what some think, the argument that Aussie property is significantly overvalued by historical standards is quite correct. I'd measure on average 50% overvalued beyond the historical mean. When the money bubble bursts then property will be going to hell in a hand basket.

[Vass]

I agree that Australian property prices are inflated but the only way it can bust is if Aussie economy gets significantly worse. Say if unemployment hits 10% mark it will greatly affect not only the buying/renting power but the immigration as well. Then yes, the prices will fall.

If the government somehow manage to handle the coming crisis and unemployment stays in 7-8% the prices will stay flat. It’s Australia, mate. Some people still probably don’t know what stocks are but they know for sure what never goes down

[spikegomez]

I agree to you 2 man, it seems true.