In Home prices set to surge again, fuelling debt crisis, it says:
Australian Property Monitors predicts that in the next decade many in the mortgage belt of “average Australia” will reach a point where they are unable to put food on the table because loan repayments swallow their incomes.
Now, let us compare the Australian Property Monitors’ ?prediction? with a turkey’s reasoning from our previous article:
Let?s say you are a turkey. Ever since you were born, humans had always fed you, took care of you and ensured that you were healthy and fat. In all your long life of 1000 days, humans were always your friend. Therefore, you forecast that the next 1000 days will be like the average of the past 1000 days?great care under the hands of your human friends. Life has always been good and you see no reason for otherwise in the future…
As the parable goes, by Thanksgiving Day, the turkey ended up being a meal on the table.
What is wrong with Australian Property Monitors’ forecast?
As we said before in Australian property good investment? Part 3?prospects of capital appreciation,
What drives capital appreciation of property? Traditionally, it is the rising income levels that drive property prices upwards over the years. Naturally, as people?s general income level increases, the prices paid for property will increase as well. Recently, we have another phenomena that drive property prices upwards?the sudden availability of easy credit and low interest rates, which are manifestations of monetary inflation (?printing? of money). The result is a short-term property price bubble, which is currently deflating slowly. Japan, on the other hand, had their property price bubble burst, which led to a long painful recession and continuous deflation of property prices for around 17 years.
Currently, with the Reserve Bank of Australia (RBA) worried about price inflation, it will be quick to pull the interest rate trigger the moment it sees any signs of ballooning wage rates fuelling the inflation fire. As empirical evidence shows, over the past several years, wage rate had not kept up with the rise in house price.
Now, with these two conditions in place:
- Housing is already generally unaffordable
- Any signs of wage inflation will be met with a response of interest rate rise
How can property prices continue to soar, even until 2016 as ?predicted? by Michael McNamara of Australian Property Monitors? The only way for property prices to rise further is for lending standards to fall to the point of recklessness i.e. mortgage lenders going berserk in a mindless lending orgy. If this happens, we can be sure that the current US sub-prime crisis (see Sub-prime fears return) will be a piece of cake compared to the mortgage crunch that will follow. When a mortgage crunch happens, there will be painful house prices deflation (see What can tip Australia into a downward property price spiral?), which makes Australian Property Monitors’ ?forecast? a load of nonsense.
Alas, there are too many financial turkeys around. And these turkeys are charging money for their ?research!?
