To the people of Australia,

I would like to clearly state, with no ambiguity, for the record, that Australia is in the mother of all housing bubbles.  That this housing bubble has indebted millions of Australians, financed an unprecedented level of credit-driven consumer spending that is the basis of our economy.  To add salt to the wound, we have borrowed extensively from every well-spring of credit we could find (i.e. credit cards, personal loans) without adding to our industrial capacity... we have gone spending crazy with other people's money.

How do I know there's a housing bubble?  I draw your attention to the following exhibits:

1)  100 year inflation-adjusted house prices (American and Australian).  As you can see, our housing bubble is worse than America's, which has famously burst... we're just running a little late.

2)  There is NO housing shortage

This one is the popular one I keep on hearing.. that we have a 70000-80000 shortage of homes across Australia.  So if this number were correct, the shortage would be more evident in some States compared to others.  However, the key word in my last sentence was 'if'... turns out, we don't have a housing shortage.  Did anyone every ask, 'Hey, where did that number come from?'... well, thanks to the fine people at http://www.dailyreckoning.com.au we now know.

It turns out that there was a report that fabricated this number (government fabricated, what a surprise).  Here's the bottom line, and I'll quote:

"The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008. This is based on the incidence of homelessness and the low level of vacancy rates in the private rental market."

I'll give you a moment to digest that statement... yes, the number that were using to fraudulently convince people that there will be a market for mortgages in the future is based on the number of homeless people there are in Australia.  I don't know about you, and no disrespect intended, but how many homeless people do you know are contemplating buying a house within the next year or so?  In case, like me, you were wondering how much of the homeless contribute to these numbers, here's the breakdown from the report:

"Dwellings required to address homelessness - sleeping rough = 9,000

Dwellings required to address homelessness - staying with friends and relatives = 35,000

Dwellings required to house marginal residents of caravan parks = 13,000

Dwellings required to increase rental vacancy rate to 3% = 26,000"

The funny part for me is the vacancy rate... it's just hilarious in light of this statement that the report makes:

"The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008. This is based on the incidence of homelessness and the low level of vacancy rates in the private rental market.  The Council acknowledges the crudeness of this estimate and also points out that there were some 830,000 vacant dwellings in Australia at the time of the 2006 Census."

So yeah guys, those numbers are bogus, they're fiction... if anything, we have an oversupply of homes.  This report came out in 2008 btw.

3)  Some experience from the boys on the real estate field.

I have a friend who works in real estate, and I'll quote his comments to me:

"I am in the industry and this is happening. The situation for most buyers right now is - 1) buyers are stretching themselves financially, 2) purchasing over priced properties, 3) think just because the interest rates are at record lows, they can afford their homes. Whats going to happen, once the Reserve bank increase rates or the banks themselves increase rates by .25% a lot of people will find it difficult to pay back. THEN they will want to sell to clear the home loans which they can't because house prices will have fallen by then or atleast the buyer activity will be lower and thus people selling will either have to hang in there & wait for a sale or go under. I'm seeing people now, who need to sell but they need $50,000 more than what the home is worth because they have to pay exit fees on fixed loans, agents commissions ($400k sales price is approx $11,000 commission) plus paying back the house loan. Banks aren't exactly giong to have a loan with no security... I believe buyers are being tricked into buying a home by the increased FHOG. They aren't researching the market at all. The truth is even if a buyer takes the $14,000 or $21,000 off the purchase price of their home, they'll still be paying too much. Buying a home is what most people are told to do, it's the Aussie thing to do! "Invest in bricks and mortar and you cant go wrong"<---- THAT'S OBVIOUSLY NOT TRUE. All the 1st home buyers I'm speaking to currently, all want to purchase before the end of September to "take advantage" of the FHOG.

I want to be clear here for the record, as I stated, that this housing bubble is going to unwind our economy and we are going to enter probably the worst recession in our history (maybe worse that the 1930s).  How did this happen, bottom line blame:

1.  The government

2.  Reserve bank (big one)

3.  Us, we should have known better.

How this will all happen and why it will be so severe will be elaborated in future posts.

God bless,

Dr Washo