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Am I mad? Bring me back to reality

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11/24/2016 11:02:29 AM
Posted: 1 year ago
I like to think I understand something about economics, but all my predictions are wrong. I must be living in a fantasy world.

First I'll give you some facts, and then I'll build up some ideas into arguments, and please tell me why I'm so wrong.

I live in Australia. We haven't had a technical recession in 25 years. I'm 31. People in my generation have never really lived through a recession, and we've never really seen interest rates go up (although they did briefly after the GFC, but we had to put them down and join the currency war).

Our last recession was in 1991 when Japans economy crashed. We are a mining economy and Japan was our customer. Our interest rates rose to 17.5%. We had banks go bust. Since that recession, at any sign of trouble we've been able to put our interest rates down for smooth sailing. Now our interest rates are at record lows of 1.5%.

I live in Melbourne. Sydney and Melbourne are amongst the most expensive housing markets in the known universe. There are many arguments for why this is. We have about the biggest houses in the world. Our tax system rewards housing investors above owner occupiers. The Chinese are buying up everything. We have millions of immigrants join our cities every year. We have record low interest rates. Wage growth is at 30 lows.

I don't own a house, I rent. "The great Australian is to own your own home" they keep telling us. Every second TV show is a renovation game show. Every time I'm at a party, I can count on someone starting an argument with me that I have to buy a house, and that house prices always go up. And they're really smug about it too.

I have plenty to buy a house with, I've saved 50% of the value of a house at least, although honestly that deposit would have bought one outright 5 years ago, which feels like a shame.

I've noticed all of my predictions for 2016 have been wrong. I'd like to think I have the luck of a broken clock but not this year!

I was about 100 certain that there would be a recession in Australia this year. Commodity prices collapsed. Iron Ore, coal and copper are our biggest exports, collapsed. I thought this will cause a recession. The Shanghai stock exchange crashed, I thought this will cause a recession in Australia. Housing markets in all the Australian mining towns like Perth and Darwin crashed. Those mining towns were the economic powerhouse of Australia, I thought this will be the sign of bad things to come, it didn't, it pushed house prices up in the big cities as everyone moved home. All of our car manufacturers all wound up and closed their factories. I thought all this unemployment will cause a recession. All any of this has done is push our currency down.

Commodity prices have bounced and they're growing well again.

What is going on? What would actually cause a recession in Australia?

The Baltic Dry (shipping prices index) hit a record low, I thought that would suggest a world recession.

Donald Tump won the election on a platform of bringing in tariffs, the stock market rallied? but the experts have been telling me tariffs are the worst thing we could do.
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11/24/2016 2:23:55 PM
Posted: 1 year ago
Fortunes are made and lost based on market predictions.
No eye opening insight there.

So, a housing bubble is in the making, for your location.
Not if, but when.
You and I seem to agree.
You may have miss read the when. It seems most of the experts here in the USA did as well, sometimes to their own benefit.

I don't see why this knowledge you have that others ignore would stop you from buying.
I have family members who bought at a bad time, so they were upside down on their mortgage, not a total disaster.
They bought houses to live in, not as an investment.
They are finally getting on the right side of home debt, and one got a refinance for a new roof and other upgrades. They are no longer upside down.
The other is finally at even keel, dispute going through a divorce.

Worst case scenario, you will pay $500k for a home worth maybe $300k next year.
This idea of homes being a good investment is relatively new to many of us.
They really are not, should not be looked at that way, IMHO.

it seems I am on your side on many points, but would still be encouraging you to buy, especially given that you have such a large down payment available.

As I understand the situation, outside investors buying up your properties is part of the problem. I used to hear rumblings about China buying up USA real estate, not so much anymore, do not know how that is progressing.

I suspect you have non-financial reasons for not buying.