The steps to watch for in the coming Australian housing correction

how about all the doom and gloomers offload all your property to the rest of us, go spend the proceeds on conspicuous consumption for a little while, then come back to the property market in 12-18 months time, and tell us all your tales of woe about how hard it is to crack the property market.

Hi cuteyoungchic,

these are all the people who fervently believe that the sky is falling when it comes to property – whether it be property they don't own, or property they do. People have been shouting out the decline of property as an asset class for a very long time now, and good property will always remain to be good property.

I'm not spruiking property at the moment, but I'm not sitting here wondering how I'm going to sleep at night

This is very true. Over a long period of time it wont really matter because the end result will be sitting on on asset valued around about the same as everyone else in your peer group.

But when you buy in matters.

If you brought in in 2008 – you will be in a better place in 25 years than if you brought in in 2009/2010.

If 2008 is set to repeat, to greater extremes, you are better off buying in then.

I looked at some places in 2008 with a sale price of low 300s. They weren't moving. I was offerring high 200s. I would have got a purchase if it wasn't for the FHB boost and been happy that I was paying off a 250k debt over 25 years and lived my life around it.

Same places recieved high 300s by the end of 2009 and low 400s beginning of 2010. That's 25% more debt based on when you brought in.

If similar places are going back to sub 300k prices – I'll buy in then. Even if they don't, it's better to save 15k PA than pay it in interest if prices aren't rising.

I used to think this way but what I have found is that when it comes to property, time in the market is far more rewarding than timing the market. In 25 years time the theoretical 5% that you may think that you have saved ( and it is a theoretical number and doesn’t include the rent you are paying whilst you find this market beating bargain) will look like peanuts. The market is very forgiving over time so much so that you could pay well over the odds and still come out ahead.

I had to do some old records for tax recently and when I looked at my first purchase, its value and repayments I couldn’t believe how small both were . I also remember at that time everybody warned me that I had paid to much and was overcommitted to the extent that I believed them when in fact with the benefit of time these comments and felling were totally inaccurate.

ALF1 wrote:

Defense rests

No more questions Your Honour

ALF1 wrote:

25 years………
Bought first home PPOR in VIC 1984 for $55,000 a bloody fortune -worth $ 650,000 today
Bought first IP 1987 for $129,000 with 18.4% mortgage – worth $580,000 today
Owned freehold IP in Bunbury WA in 2000 worth $61,000 – sold in 2002 for $153,000 (ecstatic!) – it sold in 2003 for $249,000 – worth today $780.000.
Defense rests

Plot your wage growth (or average wage growth) against those values over the same time frame. You will see that they are not increasing by the same amount.

Great post.

I am also not a finance whizkid but I agree with Mattnz. I have a layman’s understanding of the goings on and am aware of the cloak and dagger operations in finance and government. I think that all that mattnz mentions is not only possible, but if we go blindly down the path we are at present, it is probable. It is a worst case scenario, but I don’t see the US out of their hole after 3 years. Europe has huge problems, China is a sleeping giant(dragon) of epic proportions. The US certainly is doing a great job of digging themselves a bigger hole than they are in and history tells us this is most often so, in similar crises. Why is Australia different?

Did KRudd save the country in 08-09 by giving some people $900 cash and swinging his magical cash reform sword with the FHBG and freeing up foreign investment? No, he inflated the market, stopped it running its normal course and placed thousands of unsophisticated first homebuyers in potentially dangerous, financial, situations. Now Gillard has less of an idea but expect more from her with even less forethought, if the occasion arises. SO if the proverbial does hit the fan, don’t expect the politicians to save you, they have no idea, but they are excellent at fanning an inferno. I think the only thing to save Australia was the resurgence of the mining sector, but if you remember when the stock market took a hit, that same sector fell sharply and quickly, so keep that in mind and an eye on the markets in China.

As far as profits in 2010 go the biggest areas have been in resources and banking. We all know that. But if you take away the banking and resource sector from 2010 profits our economy grew by -3%. Is that good? No its not. It stinks.

There are also a lot of things we are not privvy to until the damage is done. Take the banking industry as one example.If we were privvy to what goes on behind closed doors, we would have a very different perception of the stability of Australian banking, the economy and various markets, including housing.

How many of you believed that in 2008, the 4 big Aussie banks were in a safe position, (because they told you they were!) unlike the precarious ones most, if not all US banks were, when the GFC first took hold? Most of you I would hazard a guess.

How many of you know now that the NAB and Westpac borrowed BILLIONS from the Federal Reserve in the US in 2008 and 2009. None of these loans were disclosed to the market as I understand, otherwise we all would know about it right and bank shareholders would have had fatal seizures, correct? I understand the CBA and BankWest also borrowed over 100 million in 2008. Not huge money in the scheme of things, but you have to ask why was all this money required, when our banking system is like no other. It is sound and without exposure to the negative factors at the time. Maybe that was basically true, to a degree, but at the time the only way to get access to credit it appears, was to do what everyone else was doing and that was knock on the Fed’s door and beg. (If you were JP Morgan, I’ve heard, you went back 253 times)

So, Mattnz is correct in his assumption regarding a credit problem worldwide and how it will affect Australia. The credit market in 2008 froze. Liquid funds were required to ensure that the banking system of credit rollover was sustained to avert insolvency. Aussie banks were in the same deep black hole as everyone else. No special policy had been adopted, no special protective measures were in place by them. Today their exposure as I understand is at much greater heights ( in the housing market in particular). I wouldn’t be holding bank stocks for the long term, thats for sure.

That being said, I think the main thrust of this post is in having the knowledge at your disposal of the factors at play, rather than arguing over the right and wrong of it. Analyzing how it affects you, if at all and then putting into place protective measures to ensure the best result for you in a worst case scenario. It’s not a case of “run for the hills!!”, but it always seems prudent to have exit strategies in property investing, so why not here when we are considering variables that could have a serious effect on our portfolios.

Like mattnz, I have also been investing in precious metals and the returns have outrun my property investments by 100:1. Property is a great investment and it can be really exciting and fulfilling, but it isn’t always the best. Diversity is the key and a bit cliched but knowledge is the answer.

Ian
http://theblockblog.com
Free Property Investment Info, Tools & Resources for Property Investors – US. Aust. NZ

Matt, you are so convinced that the proverbial is going to hit the fan, I bet if you were a young adult in the 1970's you would have built a nuclear bomb shelter convinced 'the end was nigh' and no one would ever have been able to convince you that not only would the Berlin Wall come down but we would see the fall of Stalin's communism in our lifetime. I once thought I would never see an African/American President of the United States in my lifetime.
Instead of continuing trying to convince everyone that 'the end of property is nigh' why don't you sell up, buy all the precious metal you can, hide in a property bustproof bunker and wait for all us suckers to lose everything. You will rise a wealthy man in a new age of worthless property and poverty…….strewth, maybe I should start writing science fiction novels….mmmmmmm.

PS Matt – it's late; I know you're going to write a long retort and defend your position again; I must go forth and sleep and will read what you have to say in the 'morrow!