Finance Roll

Will property prices rise or fall?

Here is something to consider....Australian banks have broken away from lending only what they have on deposit and, for the last 20 years, borrow offshore funds to lend in Australia. The domestic savings rate started to decline around the same time we introduced credit cards.

Now due to the economic crises those foreigners want their money back and are no longer prepared to continue to make it available. One of the major concerns our country has, is many short term commercial loans used by developers and business can no longer be rolled over simply because the money supply is no longer available. (30% of the money out in the market is not ours) We will see more developers fail as they fail to roll over their loans not because the money in total is not available but because the banks are limited by the reserve bank as to how much they can lend, and the foreigners are not giving us the 30% back as it falls due (the RBA insists our banks hold funds back in reserve to cover such things as a run and these safety measures are reasons why our banks are healthier than other banks around the world).

The fact remains as lending gets tighter property prices will drop as fewer people can buy. As prices drop banks will further restrict lending causing prices to drop further and so the spiral continues.This will affect the top end of the market more than the bottom end where small drops can reflect big dollars

Point 2...Our large foreign debt we created to fuel our excessive house prices (which are 4.5 times average wages compared to 2.5 in other countries) worries overseas lenders and in turbulent times they will be reluctant to see these funds held hostage in Australia, a country which produces very little compared to how well these capital funds can be treated elsewhere in the world. The govt grants make it easier for people to buy and hence we see prices rise which explains why sellers using vendor finance receive greater profits than those that sell out for cash, but the grants will stop as the govt needs cash to cover a whopping deficit which itself will force interest rates to rise.

The bright light is the students who learn that property profits are made under the terms that properties are bought and sold, and not the price, are better equipped to whether the storm ahead...

...hand me an umbrella