Property bust not here yet … worse to come

  'Twas ever thus(??)   I recall my earlier readings of books (about 15 years ago) making this very observation.  And yes, examples of High-end properties taking a huge bath in tough times were presented.   Those with lots of dough or a high income will pay over-the-top for high end accommodation during good times, but once they lose their high-paying jobs, or global factors intervene, their natural reaction is to downsize into "medium" properties.  Thus values at the top end crash !!

  So yes, the opposite ends are in a separate cycle.  Everyone can afford the low end, and many can afford mid-range.  The high-end though is subject to volatility that can be massive – in such times you wouldn't want to have one to rent….

Benny

Bend over and grab your ankles… if things keep unraveling at their current rate (especially China) Australia can expect to be in a whole heap of pain in about 6 months. Ukraine may be the black swan that actually kicks this thing off. Sanctions and energy restrictions in Europe (by Russia) could see a few economies go over the edge and trigger wider financial system collapses.

This thing has the potential to go off the wall very quickly if either the two primary antagonists (US & Russia) do anything stupid. I can't see either of them backing down.

Chinese Exports Collapse Leading To 2nd Largest Trade Deficit On Record

No 50/50 about it. It's a 100% certainty. You can't beat the maths.

And heres an illustration of why. 

A property developer (over 50% of debt in China is property) pledges the asset to a bank as collateral. He repledges it to multiple banks as security for more loans and then finally sells it while still holding the loans. This is common practice in China. They do the same thing with copper (that's recently been banned) and iron ore and any resource they can use as collateral that eventually is rehypothicated to the moon. That worked until recently because the cost was covered by increasing asset prices. Now that's stopped and assets are stalling or collapsing (copper, iron ore etc) this thing is starting to unwind.

A real example..

"Magic" Collateral: A Frank Look At The Sheer Credit Horror About To Be Unleashed In China

I feel for all the muppets out there who are leveraged to the gills or about to leverage themselves up in the belief that AU will somehow sail through any problems like it has in the past and that property always go up. 

China built a sand castle and now it's starting to fall apart.

Not long now….

The GFC woke me up and I started taking a lot more notice of what was going on. By 2010 I saw the writing was on the wall. I projected a timeline some years ago and made plans to make a dollar or two, sellup and hunker down. I tried to tell a few other the same thing. Most said, "no way…..China will run for 20 years". Those I told then are either under water, going broke or in receivership. 

There is no escaping the correction that is coming. The winners will be those with low levels of leverage and enough capacity to take a hit and carry on. The recovery will take decades if ever (think Japan).

If the newbies here get their head out of their guru training manuals for a minute and take a look around they'll find that just about every top tier property investor is deleveraging as fast as they can. The smart money is getting ready for the next crash and they will be the investors who will clean up after the dust settles. All those newbies heading into the markets over the last few years are just cannon fodder and largely kidding themselves into believing they have a foot on the gravy train. 

Simple logic. You can over complicate this thing but the reality is you can't grow debt faster than income indefinitely. China has been growing its debt at twice the rate of growth for a decade now. Its debt burden is twice its GDP and mostly held by corporations. In 5 years its banking sector grew to the same size as the US sector which took 100 years.

Debt is simply borrowing consumption from the future. To repay it you have to reduce consumption at somewhere on the timeline. When you reduce consumption you kill jobs and the economy. It's what you get when economies are predicated on continuous growth to survive.

If you look at historic native economies that lived on islands you can understand what a sustainable economy looks like. Growth in everything is miniscule. Population growth is near or at zero. The local resources (land & sea) are utilised in a sustainable way. Compare that to the Easter Is culture that destroyed itself by overpopulation and over utilisation of natural resources. Their economy and resource supply crashed and their population along with it. A realistic model of our own destiny if ever there was one.

Globally everything we do is unsustainable and the signs of an impending collapse are everywhere. People choose to not recognise it because as population growth continues we all have less on average so competition for more or to simply hold one's ground increases. You can't stop a starving man from eating his last bowl of corn seed to survive another day so he eats it and dies another day. That's the mentality we face as a civilization. You will never get everyone to collectively abstain from doing the things that will ultimately destroy us.

We are caught in a trap of our own making. Grow or die but ultimately we outgrow our resources and die anyway. The only difference is die today or die tomorrow. In order for the system to survive some must die for it to return to a sustainable state. The only problem there are no volunteers so a return to equilibrium will almost certainly be a catastrophic experience for many when it arrives.

At the end of the day its simple age old truism.. spend more than you earn and you go bust. No individual, entity or God is exempt from this rule.

So when you use debt to grow and you outpace your incomes ability to service that debt then there is only one conclusion.

The biggest risk is sitting on the sidelines in my opinion. I'm going to the US next month if you want to come Freckle.

Guys, I think we have fundamentally two completely separate topics here.

First one raise by Freckle, that AU economy and RE are more than likely to be visited the recession of some severity.

Second is what 'sciencesurf" is talking about, that money to be made on RE.

In regards to recession, I would agree with Freckle, we will see it, we actually already see it in Australia. In jobs market (go and try scoring $200K/year job that was easy to get in 2006). RE, I just purchased 1M+ house with 30% discount compared to 2006 pricing. So high end is folding. Jobs: last time we employed was in 2006-2008. Been shedding people since then. Last payrise thru the factories was some years back, workers are still on the same money as in 2008. Talk to business owners, very few are positive about company's profitability next 12 months, most are happy to maintain the current levels and not to contract further.

Times are very though for wast majority.

About money been made, sure there are pockets and opportunities. You can make some handy profit in falling or raising market. You can make money while it stagnates as well. It's no been said that you should NOT play in RE market. It's just that you have to be BLOODY good as market is very patchy and you are more likely to loose than to make.There is no capital 'growth guaranty' that was there to help you in 2004 when you buy RE.

I know people that made several millions developing and selling in Brisbane in 2009-2011. Started from fairly conservative $900K. But they are exclusion, and to one of them there are 100s who are in the red now days.

SS you can argue the toss all you like but I don't know any top tier investor that is leveraging up. Every smart investor I know, know of or read about is deleveraging. That doesn't mean they're not active but they are far more judicious and conservative in their assessments and are reducing their gearing as they go. Most I know have been doing it for the last 2 years.

Your average leveraged to the gills Pi won't be able to re-gear when the proverbial hits the fan. 

The bias is on the pro side and outnumbers my voice by a 1000:1. But let me correct your interpretation of my perspective. I've never said don't invest. What I do say is that the landscape is far more challenging and complex than what it was a year or two ago. If you're going to wet your feet by all means do. I do not advocate a sudden stop in commerce simply because debt piles are potentially catastrophic. 

There are 2 types here on this forum. The small band of industry integrated pro investors who have a pecuniary interest in encouraging new investors and the wannabe's with a sprinkling of novice investors. I rarely see anyone warn the newbies of the risks inherent in the market place. That would go against the theme here that property is the key to wealth because it always go up.

Most Of my rhetoric is targeted at the dumb as chips novice who swallows the marketing hype hook line and sinker which is constantly reinforced by active players who are barely any more knowledgeable than the newbies or players with a industry interest and do nothing tangible to dampen the hype.

The only thing that sustains Australia is China printing $200+billion per month and the property ponzi that the banks and govt sustain because they have no other bullets for their gun. 50% of AU's exports go to China, Sth Korea and Japan. They're all printing as fast as their printers will go to hold this baby together. When they run out of ink its game over.

Debt piles of this magnitude have never been seen before but every preceding pile ended in tears. There is no evidence that this time will be any different.