New danger zone ahead for global markets, oh, and our housing bubble

Talking at an Asia Society Dinner in Sydney, World Bank president Robert Zoellick has warned that fragile confidence from recent events in the United States and Europe have pushed us into a new danger zone “And I don’t say those words lightly.”

But these comments come as no surprise to the average Australian. When surveyed in an Essential Research survey last week, almost half believed the world is close to another global financial crisis. Only 8 percent thought a GFC mark 2 was not very likely.

But the more surprising indicator from the survey shows the majority of Australians said if there was another GFC, they did not want the government to provide any further stimulus like in 2009. It appears Australia voters now see through all the grants and handouts used to prop up the Australian economy. This public opinion should mould well with comments from Chris Evans, the Minister for Tertiary Education, Skills, Jobs and Workplace Relations who said last week that despite the slowing Australian economy and rising unemployment, the government has no plans for new stimulus.

With a rapidly deteriorating global outlook in the past couple of weeks, property speculators have been betting on a rapid reduction in interest rates to fuel a new credit spurge and property surge. However, Philip Chronican has dampened that enthusiasm today saying the Reserve Bank of Australia is still very much worried about inflation and “There’s very little reason for them to cut rates other than the crisis of confidence that we’re starting to see in the rest of the world.”

Today, the Herald Sun reported on comments from economist Harry Dent who says Australian real estate is the most overvalued in the Western World and that our property market could follow a path similar to Japan in the 1980’s. “That’s what Australia could be looking at. I think prices will go back down to where they were in mid-2000, to where young families can start affording a house again – so that could prove a good thing.”

We support Harry Dent’s comments that a crash could prove a good thing. While a crash in the property market of our magnitude would result in considerable short to medium term wealth destruction, in the long term will we gain a sustainable economy again. As Australian’s are gradually waking up too, bailing out or propping up the economy is only a short term delay to the inevitable.

ยป Danger zone ahead: World Bank chief – The Sydney Morning Herald, 15th August 2011.
ยป World heading for next GFC: survey – The Sydney Morning Herald, 15th August 2011.
ยป Don’t bet on the Reserve Bank cutting interest rates – News Limited, 15th August 2011.


  1. If common sense prevails, yes prices will come off. But common sense is what allot of people don’t have. To believe a lie is to deny the truth. Houses are extremely over valued and as a builder, are not worth what they are asking, infact if you do your sums they are 40-50% over valued including land value.
    But we are dealing with a society that bases there self image on materalism and status.

    The market is begining a correction that will last for years and that is a fact. If you wait you will pick a bargain or should I say, “A correct market value”.

    Do not be misslead, make your own destiny don’t let others decide for you.

  2. Its so hard to imagine though isnt it.
    Weve paid off our mortgage and would like to upgrade from about a 400k house to a 700k house. We havent done so because I very much believe prices will drop.
    Just think of that 700k home being at year 2000 pricing, say about 250k.
    Just seems impossible, feels everyone could afford a mansion at those prices.
    But I guess harder economic times come with that sort of price drop so not everyone has the income levels they do now.

  3. One of the news stories on AM radio in Perth this morning was a creation of a new “partnership” between builders and a bank – not sure which one – that would offer home loans for new construction with 3% down! What a deal!

  4. I really get annoyed when ‘they’ (the media etc) talk about “wealth destruction” if the price of housing goes down. It’s an overvalued and potentially very illiquid asset class – DEAL WITH IT. If you are an ‘investor’ and lets face it, here in Australia a large proportion of low to middle and high income earners have investment properties; you run the risk of getting burnt.

    Just think of the opportunity for young people to be able to afford a house and pay it off in their lifetime without being completely buried in debt. Imagine having a choice of either mother OR father working and one parent can spend time bringing up the kid(s) instilling their values rather than some day-care-worker AND having a reasonable lifestyle.

  5. @ Freewilly. That opportunity you are talking about happened in the 60’s and 70’s and yes the baby boomer generation have a good life with minimal dept, with 1 parent working + you didn’t need a top salary to achieve this. Any parent on a decent average salary could achieve this.

    Now 40 years later we have bigger mansions, narrower view points and huge depts that force both parents to work whether they like it or not.

    The key is unemployment and if this continues to increase then you will see the knock on affects and asset prices plummet. Bring on “wealth destruction”.

  6. “Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” — John Mills

  7. Well I have bought a house. I have taken the profits from the sales of our inflated IP prices and put in towards an entry level house that I can paint any colour I feel like. It is a renovators delight which we can do ourselves as owner builders (and hopefully add back the value of any deflation in price ๐Ÿ™‚ ). I figure if we live there for 10 years plus and with only one parent having to work it works for us.

    If the market does crash I still have a bit of cash put aside to get a few positively geared apartment bargains again though ๐Ÿ˜‰

  8. IMO, “land” only equals “wealth”, if it is productive, i.e you are able to grow food to sustain yourself and others. “House” is a depreciating non-productive asset, that requires maintenance (with exception of a few houses that double up as a shelter and an office for a small business), and does not generate any “wealth”, unless it is rented at a net profit. Today, a typical investment property sits on a piece of former farmand (destruction of wealth), and is rented througha negative gearing scheme, which is another form of a gamble (also destruction of wealth).

    A house is a shelter, not an investment. An investment is finding an opportunity to provide shelter to others at a profit, i.e. creating an enterprise by providing supply to satisfy a demand in the market and making money out of it.

  9. @Romsey, quite an interesting link and yes I can (or it is obvious) that recessions and depressions are neither economic slumps (maybe for everyday folk they are) nor corrections. Indeed it is when a great transfer of wealth occur. Whatever the mechanism albeit mortgages, derivatives, ponzi schemes… The very top end up with more valuable assets and cash than when the “ecomony is going well”.

    This is (has to be) evident with the U.S. Many corporation, conglomerates that originated from the U.S. are going absolutely fantastic, things can’t be better for them, AND never have been better. Registering your head office in Delaware (apparently one of the world’s best tax havens), declaring your company broke, attaining huge stimulus packages, not paying anymore tax, and investing (and building) in factories China, Vietnam, producing stuff (crap?) for dirt cheap, retrench the local population and there is a humungus wealth transfer.

    The global economy couldn’t be better for the more upper echelons of the world. There is recession/depression for everyday folk, the ecomony is not good for everyday folk, there is a slowing down of economic activity and resources for everyday folk, and the onus of this huge debt burden is on…OK I won’t say it again.

    Reminds me of when I was younger years ago during the “Recession we had to have” my boss saying to me, “BotRot, don’t worry about the recession there is still all the money in the world flowing, its’ just flowing through different channels, you need to think of different ways of getting your hands on it”. Well yes, and no.

  10. @Steven Shaw, in most peoples cases the Debt is still there so if the value of the property
    you have borrowed aginst crashes then you can end up spending the next 20 years just trying to get back to even.
    So in answer to you question what is destroyed? Its your ability to invest due to your negative equity mate!!!

    @ Average bloke the fact that you think Steven makes a good point shows a true lack of understanding of
    what creates weath!

    You only create wealth when your not loosing money soundssimple but lots of people dont seem to understand the basic fact, if you want to create wealth use the money you have payed tax on to invest and the money
    that is made from that investment gets taxed and then reinvest that and so on and so on…..

  11. But Negatively Geared property reduces your income tax it allows you to ‘hold’ the property longer than you otherwise would be able to whilst you wait for the next boom. Well that’s what smart investors do anyway.

    You seem to get stuck on using the recent spate of dumb Investors whilst forgetting about the Smart long term Investors who are not in the least bit worried as long as Swanny leaves their sacred cow untouched.

  12. @ Average Bloke,

    The “sacred cow” of negative gearing is a mathematical certainty for a person to lose money. The only way negative gearing scheme helps to make money is with capital gains -> greater fool theory. “Smart” money involved in these types of investments are not the people who got involved long time ago. Smart money are the banks who perpetuate this manna about negative gearing, and making money off loans, and governments, who get to collect fees and taxes on higher valuations of homes.

    “Only suckers buck the tiger, the odds are all on the house”

Comments are closed.