12 April 2011

The familiar path to financial crisis

Critics have been vocal about the efforts by government to pump up the property bubble – including the doubling of the First Home Owner Grant, negative gearing and the halving of capital gains tax.

However, there's another measure that seems to have been overlooked.

In a statement on Friday, Treasurer Wayne Swan said:

"Today I announce that I have directed the Australian Office of Financial Management (AOFM) to invest a further $4 billion in high-quality, AAA-rated Australian residential mortgage-backed securities (RMBS) to help smaller lenders continue to offer competitive loans to families and small businesses."

Source: www.news.com.au

Sounds innocent enough. No one would criticise the government for helping families and small businesses, would they? This blogger would!

The government’s meddling in the property market is going to end in tears. And it will be tears of those families and small businesses (or at least their owners) that the government is supposedly trying to help.

Let me explain:

Banks are in the business of giving loans and collecting interest. Without going into the details of fractional-reserve banking, in order to make a loan, banks need to find money to loan out. Ideally, this would come from other people depositing their savings. But because saving is out of fashion, banks need to find the money from elsewhere. They could borrow it from another bank, but this is expensive because then the other bank can’t make as many loans of their own.

So this creates somewhat of a natural limit which prevents debt from growing too quickly. If people are not saving, lending is automatically constrained.

American banks weren’t happy when they came up against this restriction in the first half of the last decade. So they invented a product called collateralised debt obligations (CDOs). This complicated derivative involved bundling up existing home loans and on-selling them to institutional investors. The banks got cash up front. And the investors got the promise of on-going mortgage repayments from American home owners.

Because it was believed that house prices could never go down, and that Americans loved their homes so much that they would do whatever it took to continue paying off their mortgage, the rating agencies gave these bundles of goodness the highest possible credit rating, AAA.

The banks used the extra income from selling CDOs to make more loans, which they on-sold for more cash, and so on. Finally, they had found a way to make an almost endless number of loans.

More importantly, they were able to do so without risk – because this was transferred to the investors (who weren’t too worried because the CDOs were rated AAA because house prices can never fall and Americans love their homes). The result of this transfer of risk was that home loans were given to families that could never afford them.

Of course, house prices in America did eventually fall, home owners defaulted on their loans, the AAA-rated CDOs become worthless and the institutions that bought them filed for bankruptcy. Banks could no longer transfer the risk and so stopped lending to families, to small businesses and to each other. Credit ground to halt. The punch bowl had been taken away from the debt party that had been keeping the American economy going and the resulting hangover is what we call the GFC.

Fast forward to the present day and Aussie banks are now falling over themselves (and even breaking up with each other) to give out home loans. And, as happened in America, they can’t find enough money from depositors.

So they too have bundled existing mortgages in the hope of on-selling them. In Australia, these bundles are called residential mortgage-backed securities (RMBS) and are also rated AAA (because house prices cannot fall and Aussies also love their homes). Even so, Australian investors are not keen to buy them.

This is the market’s cue that we’ve reached out natural debt limit; that we in fact need to reduce debt in order to get the economy on a more stable footing. Or going back to the party analogy, it’s time to go home and sleep it off.

Enter the government who doesn't want the party to end on their watch. So they’re buying another $4 billion dollars’ worth of punch – or so-called high-quality, AAA-rated residential mortgage-backed securities … with tax-payers’ money.

The result:
  1. Banks are able to continue lending without risk;
  2. More first-home owners are encouraged to buy into one of the most inflated property markets in the world – with virtually no deposit – to keep the property Ponzi scheme going a little longer;
  3. Over-indebted households and taxpayers are left to suffer the consequences when the bubble inevitably bursts.
We’re repeating the mistakes of America. The only difference is that in America, the taxpayer bailed out the banks after the crash, while in Australia, it’s happening in a futile attempt to prevent it.

Comments welcome.


Click here to vote for the GetUp campaign to stop tax-payer funding of the housing bubble.


  1. scary stuff.

    so it's the inside job all over again!

  2. How is it that the govt can do this without it being front page news? I'd like to believe the press still have a free voice and aren't paid for silence. I'd also like to believe that mainstream media have some financial nouse to make it front page news - these people have homes too. Another GetUp campaign to educate the masses may be in order?

  3. John Murray12/4/11 10:47 AM

    OAFM says they are buying high quality AAA rated- but I seriously wonder about that.

    Standard and Poors recently announced that 1.59% of loans underlying Aussie RMBS were 30 days delinquent- and suprise suprise-

    "Arrears for sub-prime loans backing RMBS jumped 126 basis points to 11.45 per cent, the agency said."


    That shook me somewhat as I clearly had fallen for the local spin that Australia does not have subprime!

  4. Don't forget about the introduction of covered bonds alongside this "innovation" - an instrument, which in the event of bank failure gives the people whom the bank loaned money from access to our deposits first. Within a few short months of their introduction, the amount of covered bonds banks could issue (read: give away our hard earned savings to carry less risk themselves) was more than doubled by the govt. This pattern will undoubtedly continue - all in the name of mythical "cheaper loan rates". That the govt can allow other people under law access to our savings ahead of us is truly despicable.

  5. John Murray12/4/11 10:52 AM

    Maybe the OAFM is buying them so heavily, in the hope that other investors think they are a goodthing to buy.

    This happened in America where the banksters bought and sold each others RMBS' artificially increasing their value until other investors could no longer ignore the percieved growth, and they then jumped aboard!

    Nice little scam..... I really hope we dont have a Government agency playing the same grift!

  6. articles like this need to be sent to every politician, so they cant shrug their shoulders and shirk responsibility when the proverbial hits the fan

  7. Playing the devil's advocate here - and I don't know much about RMBS - but, couldn't the government simply put controls / restrictions in place, so that we could get some of the positive effects of RMBS without going overboard? Or is everyone saying here that RMBS is completely bad even in moderation, with no positive outcomes, and can't be controlled?

  8. you are so right. i didn't buy a home here in the States BECAUSE it seemed like everyone had gone right mad. Don't let it happen in Oz (PLEASE).

  9. John Murray12/4/11 3:51 PM

    Hi David- RMBS is an simply an act of desperation to further bail out the banks- which is compounded by government allowing banks to issue covered bonds- useing peoples savings as insurance.

    So those who haven't maxed out during the credit binge, and have saved something despite all of the negative impediments to do so, will be taken down as well- how very socialist!

  10. Quite honestly a very brilliant and succinct piece Andy. I also noticed this announcement and was quite angry actually. Just like the good ole US of A our policy makers also seem to think that high prices for houses are a good thing. They seem to think it's REAL wealth and that we should divert assets to support this wealth. This shows a profound misunderstanding of the USA govts. role in creating the sub-prime crisis (preferential treatment for Fannie and Freddie) and the distortions this meddling created.

    Housing produced no utility.....why do we keep pumping taxpayer money into this sector?? As you can tell by now i'm completely exasperated........

  11. Australia is like Ireland - banks borrowing lots of debt so that Australians can borrow manically to buy over priced properties off each other until the whole system collapses.

    A report by Forbes looked at the exposed position of the Australian banks and the charts they produced looked remarkably similar to the US banks just prior to the collapse of the US property bubble. No worries - we're SUD's - special, unique and different. Could not possible happen her could it.

    It could be a double whammy as we are also experiencing 'Dutch disease' in terms of the effects of a prolonged resource boom and overvalue currency.

  12. Peter Fraser13/4/11 9:46 AM

    Andy - this is simply the government regulating money supply. It's not a high risk investment as some suggest.

  13. The problem seems to be that governments around the globe have been failing to manage the banking credit system with prudence. With a snowball effect the dangers of allowing credit to grow uncontrollably are now obvious and living standards are falling.
    That hasn't happened here but I can't believe that the Australian government is not extremely concerned that our own situation is risky. To be honest, the cynic in me presumes that they are worried that this house of cards will come down on their heads so the plan is to stave it off and have it come down on the opposition when they get in at the next election. So imagine our current position as being like a bus with the government driving, foot to the floor as we head for a cliff with the windows blacked out so we can't see what's coming. I pose this question; if we can't trust the government to manage the monetary system responsibly (and you surely wouldn't trust the bankers) do we need to create an independent watchdog with the responsibility of maintaining a sustainable monetary balance. I would have thought that was the job of the RBA but if so what have they to say for themselves.
    I suspect that when the s..t hits the fan we will have no one taking responsibility and a lot of excuses. How about this; WE ELECT THE GOVERNMENT TO BE RESPONSIBLE. I don't think you will get anyone in authority to come clean about our parlous situation for fear of starting a stampede for the exit.

  14. Thanks everyone for the feedback and comments.

    Peter Fraser – even if the aim was to regulate the money supply (which I don’t believe it was) surely you don’t think that purchasing residential mortgages with tax-payer money is the appropriate way to go about it?

    Also, the point is not that it’s a high-risk investment (although I suspect it is), but rather that it encourages risky loans to be made - pumping up the housing bubble and leaving us all exposed to the risk of collapse.

  15. What a load of crap, yes property prices do fall, they fell just a few years ago, then they went up again, and now they will fall again. It's called a cycle. When prices are down and interest rates high, the smart investors buy when no one else is buying. When interest rates drop and prices start increases the smart investors stop buying and everyone else starts buying driving prices higher, until get get a bit too high and they start easing again, and the cycle starts over.

    Andy, you also forgot to mention one of the major differences between USA & AUS. In the US when ahome owner cannot make mortgage repayments anymore they can just walk out of the house and have no further dept to pay the lender. In AUS this does not happen, if the house is sold for less than the amount of mortgage the owner still has to pay the difference. This one factor alone will keep AUS properties falling as much as those in the US even if there was a major crash.

    NB: Negative gearing and 1/2 capital gains (if held 12 months or longer) is also available on other assets like shares.

  16. Well Anonymous, it looks like we agree on one thing - that house prices are set to fall. Of course, this is not the ordinary cycle you make it out to be. We've just had a 20-year property boom that dwarfs any asset boom in Australia's history. Smart investors will only return when the rental return once again becomes attractive – which in my opinion requires a 40-50% fall in house prices.

    No, I didn't forget to mention the difference between USA and Aus re recourse vs. non-recourse loans. It's just that I'm yet to hear an argument as to why this difference should mean that a property bubble cannot form and burst here, so I don’t see the relevance.

    Not too sure what point you're making at the end - but negative gearing cannot be used on business ventures and is rarely used for shares because most people don't borrow to buy shares.

    1/2 capital gains can be used for all assets, and obviously encourages focus on capital gains rather than income, which is the cause of bubbles.

  17. No 1/2 capital gains encourages holding assets for the long term instead of speculation and trading over the short term, and just because you don't borrow to buy shares, I know a lot of people who do. Have you heard of margin lending. And even buying warrants is another form of gearing.

    And yes, house prices are flat and falling in some areas already and will possibly fall further especially if interest rates go up further in the second half of the year, but they will not crash unless unemployment rises considerably or some major legislaqtive changes are made (like changes to negative gearing) which is unlikely. Because if people still have jobs a price fall of about 10% to 15% in house prices whilst interest rates start falling will bring out the bargin hunters, increasing demand and help prices to increase again.

    The reason house prices kept falling in the US and things got so bad is because once the value of the house fell below the amount of loan still outstanding, the banks then got stuck with the falling assets with thousands of houses left unoccupied. In AUS people won't just leave their houses unless kicked out by the lender, they will try to do all they can to keep their house. And when the lender sells the house they aim for the highest price they can get, even if the loan amount is much less than the sale price, I know because I attended and bid and bought a number of motgagee sales in 2008. You are very lucky if you can get about 5-7% below the reserve, even if you are the only bidder, or else the bank will not sell.

  18. Peter Fraser13/4/11 10:53 PM

    Andy - a few major points. The government is not normally a buyer of RMBS, but when then gfc arrived they became a buyer to stabilise the market. Initially they were the only buyer, but they are not the only buyer now.

    So it's a transitional solution, not a permanent one.

    point two - if the RMBS issues are NOT secure investments - point out one issue that is in difficulty - have you ever seen a news article that pointed out one that is in difficulty?

    point three - You say we have had a 20 year property boom, but check the graph for our largest markets. View Sydney graph -


    Growth from 1990 to 1997 was slow, then we had a takeoff until 2003, and the an almost stagnant market until now. Do you not see a normal cycle there?

    I can't find a Melbourne median price graph, but as I recall that had a cycle as well.

    What you will be getting confused with, is the resource states of Qld and WA who had enormous gains (in particular WA) and now they are seeing the downside of that, especially the tourist areas.

    We had a two speed economy, and now we will have a two speed downturn, Look at the graphs, and the downturn will be proportionally and directly opposite of the boom.

    Basic maths...

  19. Peter Fraser -

    Re point 1 - you seem to be agreeing now that the purpose of the government buying RMBS was to prop up the housing market, not to regulate the money supply? The fact that it’s a transitional measure (although we’re into the 4th year now) is irrelevant. They should have no part in propping up the housing market for the reasons I’ve mentioned.

    Re point 2 – I’m not sure I follow.

    Re point 3 – That is a pretty terrible graph (or a great one if your aim is to hide the Australian property bubble). As you say, it’s only for one city. It uses an uneven (log) scale which hides the exponential nature of prices. And finaly, it only covers slightly more than the bubble period, making it impposible to identify that this period is not in fact normal. Try this one on for size.

  20. Anonymous – we’re getting a bit off topic (although you’re giving me some good ideas for myths to bust in future posts).

    So back to the point – do you support the government buying RMBS? If so, why?

    ps - I never said I don’t borrow to buy shares.

  21. Non recourse loans are not a bad thing. Here are two positives that seem to be misunderstood.

    1. A non recourse loan really makes the lender consider both the asset and the borrower. If implemented properly, the lender is the one left holding the risk - and should shoulder some responsibility for the partners they choose!

    2. The 'walk away and leave the keys' may be true - but to think it is easy or a get-out-of-jail card is a myth. Look into the tax implications that this immediately creates for the borrower, not to mention the harm to the borrower's financial history. It is effectively the same as declaring bankruptcy here - an option available to everyone in Australia should they so choose.

    Im all for non-recourse loans, provided they are backed by the lending institution, and not secured by the taxpayer. This is the real failing of non-recourse loan policy in the US.

  22. Andy, the point is that you only wish to look at data and information that will support your point of view that the property market is going to crash. You disregard all other points of view different from yours. Remember it is only your point of view. And just because you may think property is expensive, others may not, and a price drop of about 10% would bring alot of people back into the market.

  23. As someone at the pointy end of the much respected (cough ) Real Estate industry.The area I operate in - The Sunshine Coast Qld.Has allready been in decline since 2008.Our prices have reduced by 10 - 20% and yes there is a lot of stock on the market but we are nearly at the level that investors consider appropriate i.e. the 1000 multiplier.....Rent $350 per week -Purchase price $350,000.
    Volumes of sales are low.Which has nearly halved the number of r.e. agents in our area. I can hear the tears coming from the public...so sad.
    The point is though that the market hasn`t crashed.The bubble hasn`t burst more of a fizz than a bang.
    I personally believe we will see a further reduction in prices here by another 5-8%over the remainder of this year but whilst employment remains high, the risk of a U.S.A. style crash is remote.
    Qld and WA will create over 100,000 jobs in the mining and gas industries .This will underpin the housing market.
    China holds the key to the future of house prices in this country not Wayne Goose.

  24. Here's why I believe the affordability issue is normal...

    First of all, it seems to me that it always comes after a significant property price increase. What we've seen in the last 3 years is a big jump in prices of property.

    But to qualify this - the price increase was not across all area. That's not how it works.

    So what happens next?


    The people who get priced out of the market because of affordability issues will become renters.

    Again, the normal process a typical real estate market goes through.

    According to RP Data, across all capital cities, rents have increased by 2.7% in the last 12 months.

    Now that's not huge. But it is predicted that in the next 12 months you're going to see similar increases if not more.

    Also, consider this...

    Unemployment is at an historical low, which means many workers are shopping around for a better job with more pay... and they're getting it.

    The RBA is concerned about this scenario, because quite simply it puts pressure on wages (on the upside) and potentially leads to inflation. The likely outcome is that wages will increase in the next 12-24 months as well as the cost of living.

    So, all normal stuff, just part of the economic cycle.

  25. Anonymous @ 11:12AM: Not true. I read information covering a range of views, and then form my own opinion.

  26. Hi Gremlin – great to hear from someone in the RE industry. Unfortunately, I suspect you’re in for an even tougher time than you might think for the following reason:

    You mentioned that “we are nearly at the level that investors consider appropriate i.e. the 1000 multiplier.....Rent $350 per week -Purchase price $350,000”.

    That gives a rental yield of 5.2%. This might have been acceptable while property prices were rising. But while they’re flat lining or falling, wouldn’t investors be better off in the bank earning a risk-free 6.5%?

  27. Slightly off topic here.

    Recently, there's a social media campaign against negative gearing at Facebook.


  28. Anonymous @ 2/4/11 10:41 AM – good idea re another GetUp campaign. Done! Click here to vote.

  29. Andy, what do you believe is an acceptable rental yield for a property to be considered a non-speculative asset? (as a percentage).

  30. The argument that investors will rush back into the market when a particular ratio is reached (ie 1000 multiplier) is rubbish.
    The "Mum & Dad" segment of Australian investors (who caused and will once again be required for an upswing), do not base their investment decisions on cash flow/rental yields.
    Their decisions are influenced more by seeing their piers achieve enormous capital gains (in gross terms) and trying to replicate.
    This pack mentality can (IMO will) work the opposite direction and create a negative sentiment towards property investment.
    And unfortunately, like any cultural shift is played out over years & decades rather than months.

  31. Andy @ 14/04/11 8:24pm.

    You will only be getting 6.5%+ in the bank whilst interest rates are on their way up. If the property market keeps slowing down and falling even 10% to 15% (and if they do fall more it will only be due to much higher unemployment), then interest rates will start falling and your 6.5% in the bank will be around the 4.5% mark. At the same time rental yeilds could be as high as 6% to 7%. I am acheiving rental yeilds of 7% to 9% for properties I purchased in wester sydney in 2008, and I wouldn't purchase a property if the yeild wasn't more that 6%.

    Most smart investors feel fear when the mob is greedy, and become greedy when the mob becomes fearful.

  32. Andy you are arguing with a Idiot?
    Remember he has a role to play in a Ponzi scheme "The Greater Fool" that professional investors rely on to offload Crap onto at the peak

  33. Dear Property Spruikers

    Read and enjoy!!


    Read it all! It's a never-ending list of great news for you guys...

    Bon Apetit!

  34. Dear JB, I am no property spuiker, I am not trying to sell anyone property or get anyone to buy any property. 3 years ago the doomsdayers like yourself and Andy were saying there would be a property crash, then the year after prices started increasing again. I agree totally that property prices will be weak over the coming year or two, and even fall in some areas, but I disagree that there will be a crash of somewhere between 40-60% across the board.

    I am simply a property investor who holds property for the long term. I do my own research and don't rely on the media or other so called gurus or spruikers to tell me when to buy and when not to buy.

    When you are in the market looking at what is going on and talking to people involved in property (whether it is people selling or buying, looking to rent, real estate agents, other property who own properties and other investors), and getting to know an area back the front, you learn alot more about what is actually happening and what is likely to happen in the future than from stupid so called economist who sit behind a desk all day and just look at selective statistics which they choose to use to prove their point.

  35. Anon

    Trust me - "on the ground" its just as bad!
    The market has changed overnight virtually into a buyers market and sellers who truly want/need to sell are having to drop their prices by up to 30% in most cases in order to get their property sold!
    Else it just lists forever without even one call of interest...

    The bubble has popped mate.

  36. Even Australia's so-called "bullet proof" property market - MELBOURNE - is rotten to the core ... and is being deflated as we speak...

  37. JB, you say: "...sellers who truly want/need to sell are having to drop their prices by up to 30% in most cases..." Well where is your proof of this overnight change. If it is so wide spread then surley you can give me at least 10 examples, or is this just another figure you've manage to pluck out of the air.

    I was buying property in 2008 in western sydney when interest rates were 2%+ higher than now, people's savings were less, and everyone was screaming "the recession is coming, you are crazy to buy houses now, the housing market is going to crash." But I tell you what it was hard to buy a property at 10% lower than the year before. I bought at between 15% to 25% below prices from the previous year, but it was quite hard to find them, and usually there had to be something out of the ordinary. Either the property needed quite a bit of work or the vendor had gone bankrupt or had a mortgagee sale, or there was a death or break-up in the family.

    I found that properties that were on the market for months and not being sold were taken off the market and then a year or two later put back on when conditions were better. Even the banks had their limits on how low they would go down at mortgagee sales, and that was ususally upto 5% below the reserve they had set. If they didn't sell at the auction they would put it back onto the market as a private sale. Within 1 to 2 months the place would sell for more than their reserve price. (and I know what the reserve price was because I used to ask the agent at the end of the auction).

    Yes, as I have already said, house prices will drop, but they will drop at most 10% to 15% over all. And yes you will get some localised areas where the drops will be more, but these will more likely be country areas.

  38. That is one stupid website that suggests you should boycott buying real estate until the prices come down. No doubt the creators of this movement are the ones who can't afford to buy real estate in the first place... and probably first home buyers.

    The first home buyers in our market represent only about 12% of all buyers.

    They're the ones who get all the handouts from the Federal Government, grants from the State Government and stamp duty concessions.

    ...if they're building their first home they get even more support financially.

    So these guys who have set up this "boycott real estate" website are the ones who get the biggest leg-up in the industry.

    Let's face it - even if all of the prospective first home buyers in Australia went on strike, there are so few of them in real terms that it would have very little impact on the overall market.

    What first home buyers should be doing is getting educated getting in the market rather than whinging.

    What I mean by that is you don't have to wait until real estate prices come down... there are so many deals and opportunities at the out there that you can get in at great prices if you do your homework.

    All in all, the current climate is beautifully setup for smart, savvy professional investors.

  39. Prices are up 20.3% in my suburb in the last 12 months.

    Some bogan infested areas, such as QLD, are suffering.

    Interesting times.

  40. I see the roaches have infested this site as well.
    oh well, it will be amusing to watch them squirm and flee for the exits as the Titanic goes down...

  41. Tim, Anon, and other deluded property bulls:

    Even your 'poster-boy' RE city - Melbourne - is having a new a-hole torn ...


  42. The tide is a turning ...


  43. I'm not interested in Sydney, nor Melbourne.

    My local suburb is doing very well.

    Jb, you're an idiot. Even when some suburbs do badly, others are doing great - as both articles you link to point out.

    I take it you're in a shit area.

    Bad luck buddy.

  44. lol

    Dont shoot the messenger mate!

    I realise it'll be really hard not to be grumpy during the coming ten years or so as property tanks ... best to see a skilled professional

  45. Don't worry JB, prices will be weak for a year or two, and then they will start booming again. And in 5 or 6 or 7 years time you will still be saying the bubble is going to burst.

    Interesting the house next door to me just listed at $100k above what we bout ours at a couple of years ago. Gee I think the bubble has burst, or maybe its booming, so what is happening. Nothing, just part of the normal property cycle that's all.

  46. Your comments assure me that Australians are clueless about whats happening in the market.
    That's good - i will be able to get me a nice waterside property cash one of these days...

  47. JB, I own no property at all but even I can see that the australian median house price is yet to show any real fall.

    One thing is for sure you have no idea what is going on.

    Speculate on the future all you like my guess is that hasnt worked out well for you in the past and now you are digging the same hole for your self again.

    Doing the same thing over and over and expecting a different outcome - its you who needs professional help.

  48. lol

    I believe the links i've supplied above as well as those supplied by others are more than sufficient evidence indicating that prices are heading south.

    You're just in denial..

  49. But thats okay ... i'm sure if feels warm and safe in that dreamworld you're living in ...

  50. JB, today there is a story about house prices crashing, tomorrow there is a story about property prices booming. The reality is that if you are relying on these stories to make up your mind wether to buy or not you are a goose. Don't always believe what you read. The people that do are those that usually end up in financial ruin.

    The only way to make up your own mind is to pick an area you want to buy in and do your own research. Spend six months or a year inspecting different houses, going to auctions, looking at comparable properties, research what price they sold at previously and how long ago, research recent sales. Do all this and then you can have a real picture of what is going on in the market.

    We did this back in 2007/08 and bought 8 houses, one to live in and 7 investment properties. Our rental returns (when we bought) were between 6% to 8% and one was about 10% as it had a granny flat (double income). We spent our about 7 to 8 months researching before we bought our first 2, then another 4 to 5 months before we started to buy the others. The market was down about 10% from its highs of early 2007, but we managed to negotiate or through auctions get a further 10% to 15% below this. This is what is called bargain buying in a buyers market. Since then prices have gone up about 25% to 30% above what we bought at, and our rental returns are now all between 7% to 9%, with the one with the granny flat above 11%. We are positivley geared and have still a buffer of about 3% interest rate increase before we are at the point of break even in weekly nett rental income. Even if prices did drop considerable due to a future recession, we have a large factor of saftey built into our strategies.

    The problem with most novice investors whether it be in property, shares or anything else, is that they don't consider the risks involved and the worst case senario, and thus don't have a risk strategy.

    If you are looking to buy a property for cash you might be waiting forever, unless you have quite a stash of money being wasted away in a bank account. All these stories of the property market bubble burting are exaggerated, just as are those that say that the property market is booming. Do your own reseach and don't listen to this rubish.

  51. No one here who is predicting the property market to crash has considered recent changes in 2007 that now allows borrowing within SMSFs to purchase property. This is just one other reason that properties will not crash in Australia, and why Australia is different from other countries that have had property crashes. Yes there may be a decline of 10 to 15%, but no crash of prices reducing by 50%+.

  52. New report just out, share traders drop by 40,000 in 2010 back to pre-2008 levels, and along side todays drop of 1.4% in one day on the share market on top of last weeks falls of 2%, this must mean the share market bubble has burst!!! WOW !!!

    This is how stupid you guys sound !

  53. SMSF's being able to borrow for RE WONT MAKE A SHRED OF DIFFERENCE ...

    The Ponzi RE Titanic has a destiny with an iceberg called Credit Limit.

    Personally i'm going to enjoy the carnage!

  54. ButJB, since the GFC credit has reduced and banks have tightened their lending practices, and savings levels have increased, but still house prices went up in 2009 and 2010.

    As of June 2010 there are 815,000 people who are members of 428,000 SMSFs. This represents 99% of all super funds and almost 1/3 of all of Australia's super fund assets (source ATO).

    This is a large number of people taking control of their own finances, alot of them resigned from the poor results from the share market in recent years and shifting their funds out of the share market and into property. The single biggest reason for people to move to a SMSF is to be able to buy property through it. And now that you are allowed to borrow to buy property through SMSFs it is increasing the demand for property in that area.

    Another issue relating to superannuation, as more and more baby boomers start retirering, they will start to move their fund out of the stock market and into less volatile assets such as cash and bonds. This will create a large withdrawl from the share market causing a crash like you've never seen before.

    So maybe it is the share market you should be worried about not the property market.

    Remember your veiw on the property market is your veiw on the property market, your veiw of what data you choose to look at and what data you choose to ignore. Just because it is your veiw does not mean it will happen. That is why some people make money investing in property and/or share and others loose money in property and/or shares. It is because they are trading their veiws on either the property market or the share market.

  55. Anonymous, the fact that a SMSF can invest in property doesn’t mean that they will want to, and certainly doesn’t mean that price cannot get ahead of itself and then correct/crash.

    While the rental return on property is poor and the expectation is for price falls, most people will not put their retirement funds on the line.

  56. Andy, rental returns are not poor. I am getting between 8 to 9% rental returns. And just because your expectation is for a price fall, doesn't mean everyone's is. This is just your veiw of the property market, not everyones. Regarding SMSFs, most people I know who have set up SMSFs have done so so they could invest in property through their SMSF.

  57. Anonymous – rental returns Australian-wide are, on average, currently under 5%.

    I do realise that my own expectation of price falls will not drive the whole market down. My expectation that the market will crash is based on my prediction that the majority of people will soon be expecting prices falls.

    Regarding people you know setting up SMSF to invest in property, I imagine this is because there was an expectation (until very recently) that house prices only go up in Australia. People are gradually starting to realise that we’re not different.

  58. On the contrary Andy, the people I know buying properties in SMSFs wait for market weakness before they buy. So they understand that property like all markets go up and down in cycles.

    So you expect the market to crash because you predict the majority of people to have the same expectation as you. That sounds like speculation to me. Your veiw on the market is based on you having the veiw that others have the same veiw as you. And you do this by reading different articles written by people with their own veiw on the market, who are selective on the data and information they provide in order to prove their veiw on the market. That is your downfall.

    I, on the other hand, make up my veiw on the market based on what I see when I go out looking at property. I talk to other property owners and investors, property sellers, real estate agents, and renters. I look at what properties are actually selling at, their move over the long and short term, and their comparison to similar properties in nearby areas.

    Neither of our veiws may be correct, but at least I change my veiw when I see things happening in the market that are actually happening, and I plan for the worst senario but aim to profit from the best senario.

    Re: rental returns, that depends on where you buy, when you buy and how well you buy. I could find you stacks of properties which are returning over 6% in todays high prices, and if there was a downturn of 10% would be returning over 7%. Would you just go and buy an avaerage property with avaerage returns or would you aim for a good property with better than average returns. Its just like saying that the share market has gone nowhere over the past 6 months, so the average return on shares is 0%, but if you selected companies with increasing profits and good uptreands, you may have made anywhere between 20% to 50% or more over the past 6 months.

    You are over simplifying the property market based on your biased veiws. Tell me have you actually been out inspecting properties over the last 6 months or have you just based your veiws totally on articles you have read and on data you choose to look at?

  59. Gee my previous post must have spelt out some hard truths about you Andy, is that why it has been removed.

  60. Anonymous - nope, I am yet to remove any comment. For some reason, it went straight to spam. I will release it.

    Out of interset, are you the same Anonymous who set up your own property blog and moderated my comments out?

  61. No sorry I don't have any propert blog and am all for open communications about any subject, unless they aim to hurt someone.

    And thanks for reposting my previous comments.

  62. True, I may be speculating Anonymous – but anyone who expresses their view on where the economy or a particular market is heading, is doing so.

    I form my view by reading as much as possible on the topic (from all sides – not just those that agree with me), following as much data as possible (short term and long term) and applying common sense.

    I have been going to one auction per week over the last 6 months, which is great to get a feel for current sentiment and price. But of course, it’s limited to the physical area I can get to, and doesn’t provide a big-picture, long-term view of what’s happened in the market or what’s going to happen.

    Re: rental returns, the figures I quoted are averages. If you are able to find several properties well above the average, then by definition, there must also be several properties well below it.

  63. That's right Andy, just like there are shares that have returns way below the average of 0% for the whole market, but would you invest in these shares?

  64. Anon

    Good luck at finding these crackers you refer to ...

    Me thinks you'll be having much more luck a couple of years down the line at finding bargains, so why dont you follow the smart money like the rest of us and give RE a very wide berth...

  65. Anonymous, my point was not that there are some properties with low returns, but rather that the market overall (on average) has low rental returns – historically and compared to other countries. The fact that you can find some bargains doesn’t change this.

  66. JB, I actually don't intend to buy anymore property until possibly end 2012 or early 2013, as I think interest rates may have peaked by then. However, I also still think that the falls will be much less than you guys are saying overall, and especially in the areas I will be looking to buy in.

  67. Any reason for alternating between ‘Anonymous’ and ‘Tim’? Much less confusing if you choose a screen name and stick to it.

  68. Andy - you should block the anon option...

  69. JB – I wish I could. There is an option for that – but it also gets rid of the ‘Name/URL’ option – which means people need to create an account to comment. That’s a bit too restrictive.

  70. No reason, just quicker as don't have to type in tim each time. If it remembered who i was would have no problem.

    Was reading a small article in the paper while I took my daughter to the eye specialist, titled "Feeling poor but truly rich" - according to ABS individual wealth is at record highs and personal debt levels are at 4 year lows. It goes on to say "For most the perception is that they are going backwards - cost of living is rising, incomes aren't keeping up and wealth levels are stagnating." and then further "But the reality is that incomes continue to grow at a faster pace than prices, while balance sheets are improving through record wealth levels and reduced debt levels." It goes on to say that "... consumers were more focused on economic perceptions than reality."

    Gee Andy and JB, I thought one of your main arguments for a burst to the property bubble was unsustanable levels of debt. But that doen't seem to be reality does it, only perception.

  71. Anonymous - that record “wealth” is due to the increase in property values (in many cases, just the increase in the value of the family home). However, that wealth is illusionary and could evaporate if the bubble bursts, leaving just the debt that was used to fund it.

    Regarding the debt, it’s not personal debt levels that are at 4 year lows, but rather private sector debt, which I beleive includes private-sector companies as well. Companies have been deleveraging since the GFC. But household debt (thanks to mortgage debt) has been increasing, up until very recently.

  72. Andy, or should I say Drew, have you read the first line in the article:

    "Data suggests that individual wealth is at record highs and debt levels are at a four-year low."

    And if you read the headline you would see that they are talking about households. As I have said before our biased view dictates what part of the message we choose to rely on, and so we end up trading our view on the markets.

    I have never said that the property maket cannot crash, I have just said that the way things are now, I don't see falls greater than 15% across the broader market just as in 2008. I see interest rates starting to fall and support coming back into the market again once these levels have been reached. In order for that to not be the case we would need to have a very deep recession where unemployment levels increase dramatically. At this stage I don't see that happening.

    Also, you have made the point previously that cheap credit is part of the problem, and we are no different from the USA. Our interest rates have in fact been quite high compared to other western countries where property crashes have occured, the US having offical rates at 1% or lower since late 2001. Since that time our offical rates have been avaeraging around the 4.5% with a low of 3% (which only lasted a short while in comparison).

    I could go on, but as you can see, depending on what info you chose to use and how you interpret that info will produce your bias on a subject. And the more biased you become the more you become selective of the info you chose to look at.

  73. Tim,

    I have a feeling that article may have mislead you. This is the article I originally read which reported it differently - http://www.heraldsun.com.au/business/australians-hit-the-jackpot/story-e6frfh4f-1226038737052

    But if you can point me to the official figures or press release that say household debt is at 4-year lows, I will stand corrected on that point.

    Regarding easy credit, I was referring to low deposit requirement, not low interest rates.

  74. Andy, since the GFC it is much harder to have low deposits, but yet prices have still increased.

    Try this post which I am sure you already know about Drew:


  75. Anonymous / Tim, yes that is the article I think mislead you. It never actually mentions individual debt (only private sector debt) but certainly makes you think it’s talking about households.

    Anyway, let me know if you find the official stats or press release. Happy to be proven wrong.

  76. Andy it is low interest rate that really entices most people to buy houses, especially those that can least afford to. Becuase even if they purchase with low or no deposit, they still need the income to afford the repayments if interest rates are on the high side. But if interest rates are very low, people who cannot afford even a small jump in interest rates are the first to get into trouble.

    Its funny how the articles both talk about individual's wealth increasing and individuals wages increasing, but you seem to assume that the debt they are talking about is totally related to businesses only. There have been many stories about people reducing their credit card and personal debts as well. And I think these types of depts is what ends up getting people into trouble more so than mortgage debt.

  77. Why the bubble won't burst:

    - near full employment

    - a growing stable economy

    - real wages growth

    - increasing rents

    - good support levels for property

    - australia's ongoing love affair with property

    - many cashed up buyer waiting for the right time to get into property

    - government support for a continuous stong property sector.

    - tax advantages for investing in property.

    -etc, etc, etc...

  78. Anonymous, I don’t believe low interest rates are the main factor that entices people to buy (it’s clearly not helping in America). I think the expectation of capital growth has been the key driver.

    Also, I didn’t say private sector debt was “totally related to businesses only” – I said it included businesses.

  79. Hi Dan, even if you believe that the economic cycle no longer exists, and that the points you listed will continue to be true forever, it still wouldn’t mean that property cannot become massively overvalued and then correct.

  80. Dan - what a load of drivel

  81. Andy, I believe that the economic cycle does still exist, that is one of peaks and troughts. I didn't say the points I listed would continue for ever, and who decides if a property is overvalued or no? Not you or me but the person buying the property. Property is in a long term uptrend and has been since the 1950s. If the fundamentals as I listed above don't change, then why would the uptrend?

  82. I agree with Dan. There is nothing to stop this train. You can stay off the train (I am), but you will need to make sure the money you save from rent is invested extremely wisely to beat the extrordinary leveraged gains in property.

    I am not a property owner, but I note that despite the gloom on certain blogs, the australian 8 capital city median property price has not fallen by $1.

    When will the fall begin?


  83. I actually can't help by laugh at Dan and Tim's comments on this blog. That is, laugh so hard and so much that I almost spilt my coffee on my keyboard.

    Ironically, Tim, despite these "extrordinary leveraged gains in property" you reframe from entering the market. You live in a dream world buddy.

  84. Tim? I am not Tim.

    Anyway - I have been in the property market, and am now out of it as of recently. Great ride for me.

    Im not your buddy, dont be an asshole.

  85. Anon @ 25/4/11 3:03pm,so what is your position on the property market?

    You say: "Ironically, Tim, despite these "extrordinary leveraged gains in property" you reframe from entering the market. You live in a dream world buddy."

    Do you think property is a good investment right now or are you attempting to be sarcastic?

  86. Anon?

    You reckon Australian real estate has not fallen one single dollar yet???

    What planet have you been on the past 6 months mate??

    I'm afraid the rot has already set in ... and falls have been many thousands and tens of thousands all over the country already.

  87. JB is right. Stats from the RBA are just in - click here.

  88. Andy, you mean ABS not RBA stats.

    By the way, all these stats say is that there is a slowdown starting in the property market, not a crash. There were bigger falls in 2008, followed by larger gains in 2009/2010.

  89. Ah yes, I did mean ABS – thanks for the correction.

    Agreed that these figures don’t show a crash (I think that will only evident in a couple of years). The comments was a response to Anon (24/4/11 11:17 PM) who said prices hadn’t yet fallen $1.

    Interestingly, the term you used - “slowdown” - also implies that prices are still rising, just at a slower pace. The truth is that they have more than slowed down, they are now going backwards. How far, we will just have to wait and see.

  90. Peter Fraser4/5/11 7:04 AM

    Andy - I would use the term "correction"

    Interesting that silver has fallen considerably since Bin Laden was shot. That is what a change in fear levels does to any market. $41.72 at the moment after nudging $50 per ounce only a few days ago.

    JB are you ready to sell that house for $75,000 yet? You are reading all of those Peter Conklin links to mind numbing websites aren't you - surely you are convinced that the world will end shortly, so unload your house now while you still can. It'll only be worth $10,000 in a few months according to Nick and the Conk.

    Can I pay in silver, I have people wanting to unload the stuff on me before it all falls apart.

  91. PF

    I'm buying as much physical silver as i can now during this wonderful buying opportunity.
    if you know anybody wishing to unload their physical ailver please send them my way!!

  92. Peter Fraser5/5/11 11:16 PM

    Well it's a done deal then. I'll buy your overpriced hovel for $75,000 and you can invest that into the silver wonder metal that will go to $200 in the blink of an eye.

    You'll make a fortune.....

    Now how do we get together to do this deal???


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