Both will happen … a correction in house prices and a corresponding decline in interest rates. Typical cycle.
 
The key question really is how long and how deep and for a large degree that will depend on what unemployment does.

I think the BRICs and other emerging markets will slow in growth but continue to grow, that will slow demand for commodities but it will stay robust, commodity prices will drop from their peaks (like oil has already done) but they will still remain high compared to a few years ago and hence a large part of the Australian economy will remain strong and unemployment in certain states will suffer less than in other states and therefore I think we'll see a wide spread in declines between states. This will make it difficult for the RBA to manage rates as inflation will stay above target due to high but not extreme commodity prices so the reduction in interest rates will be slow.

US, UK and continental Europe will suffer most with. Canada, Australia will tread water but keep their heads above water and emerging markets will continue to grow, but some will suffer a severe correction in the process.  

Well… Rudd does speak fluent Mandarin, doesn't he?

Back onto topic, I found the following article on housing prices quite interesting: http://www.realestate.com.au/doc/review/july08/housing-prices.htm

In Australia and most if not all other western countries too many people expect too much too early in their life i.e. a nice big house, a fancy car, the latest electronic gadgets, overseas holidays etc. and all that without putting in many years of hard work and saving. The years of easy credit has made people believe that it's their god given right to have all this without compromise and without first having had to work for it. This will change, it has to and if people can not adjust it will be a very rude awakening.

Scamp, true, but the interesting point about the current (global) inflation debate is whether the inflation can actually be effectively influenced by reserve bank rates – some believe firmly that the current global inflation is due to high energy and food prices which are due to accelereated demand/growth in emerging markets and that therefore increasing base rates is unlikely to make any real difference and these individuals argue that avoid further economic damage base rates should be lowered…

I expect the RBA to hold the rates for now, but probably start indicating when they think rates can come down so that an expectation of lower rates is being built into the market… but heck I might be completely wrong!

I'm no believer in ultimate Doom & Gloom, but some good point's have been raised above and it's interesting to see that the mood of the discussion is heating up so much! If as bulls we are getting too upset with posts from the bears, maybe we haven't got our backsides covered just in case the bears are right, i.e. maybe we're not setup to ride out the rough patch?

I say thanks to all you D&G'ers as you've helped me to look more critically at my own position and make sure I can ride out a rouuh patch – and now that I'm sure I can I see the near term as a great opportunity! But I'm going to take my time to find the next bargain.

By the way, just looked up UK house prices for an analogy — in 1989 UK house prices peaked at GBP 117k and then dropped to GBP 77k around 1992/3 (35% drop). It took until 2001/2 for house prices to get back to the 1989 mark (that is 12 yrs) but then they grew by some 60% in the next 5-6 yrs to GBP 191k and now they're in decline again. That was a pretty long and nasty decline, but again if held on for the long term you would have been ok (depending on your financing etc.)

These are real prices, i.e. adjusted for inflation. The data is from Nationwide (http://www.nationwide.co.uk/hpi/historical.htm)

At the same time as the housing price peaked in around 89/90 interest rates also peaked around 15% and then stayed lowish (6%) for many, many years. Interestingly the UK market suffered from similar ups and downs between 75-77 and 80-82 with corresponding interest rates moveemnts but these cycles were short and not deep.

I don't believe that AU is in the same place as the UK was in '89 and I beleiev that of most western nations AU is well placed to ride out the coming rough patch, but I will read up on my history… as they say, history repeats itself so if only we could learn from it!

Carol, before you head off in any direction do a bit of research / reading on investing principles, i.e.:

(1) do you want your investments to generate an income on a monthly basis or do you want capital growth or some combintaion of the two. And how much income or growth do you want? A combination is often (but not always) the best in that you get cash from your income producing investments but you get capital appreciation (i.e. protection against inflation) from your growth investments. Typically the recommended ratio shifts towards more income focus as you get older.

(2) think about your time horizon as you do not want to have to exit any investments too soon and then have to face a loss as a result of that, property typically has a 7-10 yr cycle and shares I would suggest you should be looking to keep them at least 5 yrs (less if you have a great bull-run) 

(3) think about your approach to risk – would you mind if your invesments went up or down by 5%, 10%, 15% or 20%. Your attitude towards risk helps to determine how you split up your investment portfolio between the different asset classes i.e. property, mutual funds, shares, bonds, cash etc. This is called asset allocation (just google it).

(4) think about how much cash you need as emergency funds whether you need any (additional) life insurance

I would suggest that you first read some of the free stuff that is on the web or get some books from the library and then find a financial planner who gives advise on a fee basis rather than a commission basis so he/she doesn't try and sell you something you don't want / need.

Scamp… I actually live in a third world country, have been for the last 6 years and the US most certainly isn't one whatever we might think of their financial mess. Making statements like that undermines your credibility hugely which is a shame as I was enjoying your bearish posts – I don't always agree with them, but they challenge my thinking and that is always good. 

As for interest rates … the RBA just like every other central bank is in a dilemma in that they face inflation rates higher than their targets which would drive them normally to increase rates, but the various economies incl. Australia are weakening and would normally need the lift from reduced interest rates. According to some the inflation in energy and food prices will not be halted by increasing interest rates and would only further weaken the economies …

Mel, make sure you get to see actual income / expense statements from the current owner. I looked at a few retirement properties in SE QLD and by the time all the management fees, rates, body corporates etc. where included (don't forget your tenants usually get 3 meals a day included in the rent) the cashflow was only just positive and simply too low in my view if you consider most of these places will have limited capital growth at best.

Looked at the site and their stock quite a few times, but never used them. I did find though that often, by good searching/googling you can find the same (kind of) properties in http://www.realestate.com.au or other sites and the you save yourself 2% commission… most of the stock is pretty standard positive cashflow type anyway e.g. student accommodation (most of what they list is in Sippy Downs, QLD) or homes in mining towns. Most of this you can find yourself. Also when I did some calcs myself I often foudn that their expectation of rental returns was alwasy on the optimistic side, but why wouldn't it be because they're trying to sell you something!!

I have a couple of foreign currency loans in place and pay <4% interest, what you need to keep in mind is:

– most banks only lend in the currency you earn and typically up to 70%-75%, some to 80% if the loan is big enough and St George goes up to 100% if you provide additional security e.g. an investment portfolio

– you can get loans in curencies different from what you earn but then the bank's margin often goes up and the LVR goes down to 60% to 65%

– you can get loans that offer free swicthing between currencies. My loan allows me to witch between USD/JPY/EUR/GBP/CHF/AUD at anytime without incurring a fee. That is why my interest rate is not the lowest in town, but I can move from curency to currency, and I typically look for a currency with a stable trending exchange rate, that is why I took USD rather than JPY when I took the loan out, now I'm considering moving to out of USD into another currency

– using a mulliple currency loan is my way off hedging, i.e. I can move out in and out of 6 major currencies at any time and worst case you just go back to AUD and pay teh rate everybody pays! Real currency heding using options will simply cost you more money than it's worth

– be careful with loans that limit you to a single currency and the AUD because you have much less flexibility and when go are forced into the AUD you often have pay pretty high rates

– currencies move easily 10% or 15% per month and that is when there is no scare! So be careful, our loan has been reduced by about 5% due to currency movement and I've the benefit of low interest rates. I keep a very careful eye on the exchange rates for all major currencies and actually pay for a currency trading service, not to trade but to get their insight in likely trends.

– worthwhile if you can stomach the risk and ride out any volatility and understand the combined effect of the interest rates and the exchange rates on your loan balance