When boom goes bust

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Say all you like about how Aussie home prices won’t come down. In Sydney housing prices are 12x income. In 2007 they were 7x income. Sure debt servicing levels may be lower but there will be a whole lot of people drowning in the coming 12 months.

Take the mining town of Gladstone. In the last three years housing prices have plummeted 52%.  Over 10% of the property is up for sale not to reap a nice return but cut losses. It is a completely different dynamic. Average rental prices per week have dropped from $320/week to $150/week as mining activity leaves high vacancy rates. Real estate agents there have been talking up the market saying panic wouldn’t ensue if landlords weren’t flicking the chicken switch. Talk about defending a lost cause.

Australia has a private sector debt to GDP ratio of 160%. Australia has the highest level of property related debt on their loan books at 60%. The next is daylight followed by Norway  at 40%. Australians aren’t buying property just to live in but make bets on whether further interest rate cuts can make property (a quasi bond) prices keep rising. Sad thing is unlike a share market property transaction liquidity dries up like the Sahara when it crashes. If Australia suffers a credit rating downgrade then mortgage rates will rise and that will bury quite a few. Mortgage default will trigger a time bomb which is why I think the Aussie banks are staring down the barrel of needing a bail out.

The US stock market meltdown is what will trigger this and I fear it arriving in the next 9-12 months.

Like I wrote yesterday if markets lose faith in central banks which I’ve shown they’re losing the monetary policy game royally then that will be the trigger. What gets me is how naive people can be. After the disasters of Greenspan and Bernanke why would you trust central banks to do the right thing.

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