The Housing Bubble..

As reported in the Sydney Morning Herald (21-Jan-2011) "Sydney ranks as the second-most-unaffordable housing market in the English-speaking world."
The Brisbane Courier Mail reports 11-Feb-2011 "Beware the Housing Bubble".. They are a little late, the rest of the worlds experts have been reporting on "Australias Housing Bubble" for over 12 months. Our article (below) was written Sep-2010..
There are Local and Global factors involved..



The problem Locally..
Australia doesn't have the USAs 'Sub-Prime' problem but neither did Ireland which has just had a spectacular housing crash!
Irelands 'housing bubble' would have been manageable except that Irish banks threw obscene amounts of money at it and created a 'feeding frenzy'. Those banks have now gone insolvent and are demanding the Irish Taxpayer bail them out!

Bankers are famous for throwing money at Land & Housing speculation bubbles.. This dangerous practice has caused over a dozen financial 'crashes' since the crash of 1796! (when a Land speculation bubble burst)
The famous bubble related 'Crash' years are.. 1796, 1819, 1837, 1857, 1873, 1882, 1901, 1929, 1938, 1973, 1987, 2000 and 2007. (Every generation!)
In each crash, the public looses an enormous amount of 'savings'. The Bankers loose nothing because the 'feeding frenzy' generates enormous bonuses for them (in the Cayman Islands) and the banking sectors generous Political "Gifts" ensure the bankers will never be held accountable!
Encouraged by the government, Australian Banks have also been "throwing money" at the local housing price spiral. Fanning the prices to un-affordable levels. (and making handsome profits.)
It is almost a sub-prime problem because banks were lending to folk who only had 3 to 5% deposit. If prices drop another 2%, those folk will be "underwater" and some will start to panic sell. Even a few "panic sales" will be enough to spook the market and the bubble will burst.
Some of the above references are from www.Classic-edu.com - [the Article Here..]

The problem Internationally..
International investors and Monetary funds worldwide are about to suffer massive losses as trillions of dollars worth of toxic assets come home to roost.
These assets consist largely of empty hotels and empty housing estates that were built on top of a speculation bubble.
Hundreds of banks were guilty of fanning the flames and throwing money at the 'feeding frenzy' - money belonging to International investors.

Banks have tried to hide their levels of exposure to toxic assets, hoping that the bubble would recover and those assets would be redeemable. With that possibility now gone, these banks are now technically insolvent (bank-rupt) and are demanding that the taxpayers bail them out or else the sky will fall.. Political parties (who bask in the massive donations from the banking industry) try to convince the taxpayers "We can't afford to let the banks fail."

International Monetary funds are now extremely worried that the already struggling taxpayer will not be able to afford the trillion dollars needed to bail-out the Sovereigns and their foolish banks.
This could rapidly become a world-wide banking and monetary crisis.

Australian Banks immune?

Australian banks claim to be raising their interest rates because "the cost of international funding has gone up".. That's not quite true, the real reason is that they are anxious that their credit rating is about to be downgraded and they are desperately trying to buildup their cash reserves. A downgrading will indeed increase the cost of funds.
There are four areas of concern..
1. International investors are alarmed that Australian banks have been throwing too much money at the housing sector and investing too little in the wider portfolio of industry, agriculture and business. They have been placing all their eggs in one risky basket and have thus made the same mistake as Ireland.
This practice has artificially inflated the price of the housing market and the overseas investors see the potential for a correction in the housing market and a resulting wave of foreclosures. They obviously now see Australia as a higher risk and will charge more for their money.

2. International Rating Agencies are extremely concerned about this highly possible crash in Australian Housing prices, and the impact that will have on any lending institutions that are exposed to it. They are also concerned that Australia has higher international debt (to GDP) levels than many of the basket case Sovereigns! (in the top 6!)
It is almost inevitable that Australia will loose its 'AAA' rating and then all the banks will need all the cash they can get (take).

3. There is growing concern that Australias two speed economy is under serious threat from a reduction in demand for its minerals by China.. There are two reasons for a reduction..
• Chinas frantic construction era has produced a glut of housing and even whole empty cities. They are wisely scaling back on construction. This will produce a small drop in imports from Australia. - see the article on 'A China Bubble.'
• The much bigger danger comes from the inevitable price-war between the suppliers of iron ore and coking-coal..
Brazilian mining giant 'Vale' is the worlds largest supplier of iron-ore and is currently purchasing many of the best deposits of iron ore in the world - notably in Africa.
Ominously, Vale announced in August 2010 that it was cutting its price in response to the fall in demand from China. Vale says that in-spite of this price cut, they intend to double their revenue [in this year.]
It isn't hard to see (except for the Australian politicians and media) what Vales intention is. To achieve a doubling of revenue, they need to take a large portion of our share of the Chinese demand.
Now that the annual negotiated price has been replaced by a quarterly semi-negotiated price, the iron ore market is now open to sudden discount wars.
Subsequent to the jailing of Australian 'Iron-ore' executive Stern Hu, China is angry at "Australias" attempt to bribe and corrupt the pricing negotiation process - China would eagerly cut Australias share of the market.

4. Another major concern for the housing market in Australia is the many surveys of 20-30 year olds where over 80% affirm that they do not intend to EVER commit to paying off a million dollars for the average Australian house! (with bank interest, that is what it will cost you over 25 years!)
Lets face it - That sad looking 3 bedroom house in Sydney is not really worth a million dollars out of your modest wage.
Twenty years ago, 80% of young workers intended to 'buy a home'.. Today, 80% don't believe they ever will.
This attitude of this critical age group is common to most countries and is a serious threat to all property markets and is alarming policy makers worldwide..
This attitude - and unaffordable rents - is becoming a huge political issue! Governments will have to address this issue or loose office!

Latest News..

A readers comment from MoneyManagement.com Apr-11.
"Our IT company has noticed a massive drop in the cost of contract programmers in the last 12 months. Last year, the average was $80 an hour - it is now $40. The pressure is coming from "Off-shoring" and the million "English proficient" graduates PER MONTH produced by Asia. Most of these graduates are lining up for western IT and back-office jobs.
All of our colleagues are reporting a similar drop in 'expected wages'.
90% of our workers are NOT connected to mining and will soon be affected by lower wages - this factor alone will make the average house totally unaffordable!
Once the Baby-Boomers notice this end to 'rising house prices' they will all try to unload at the same time! And that will be a disaster!