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Financial Crisis In Australia - Is It Time To Panic?
By Mark Boulton of Mortgage Choice
I have been surprised by the efforts of some experts and media commentators (who should know better) to create panic. If you hear some of these comments – you can tell that somebody either does not know what they are talking about, or that they are being cheeky to get some airtime. By the way – I am not saying that times are great, but just that events need to be kept in perspective. Don't Panic! (First for my favourite!) Australia’s national debt is now x hundred percent of GDP! This is deliberately misleading, as it is comparing a measure of total debt to income.
They should either compare national interest costs to GDP (which is a measure of Australia’s total income). Otherwise they should try to guess the total value of Australia, and compare the total debt to that. This misleading measure is sort of like saying that a couple that are earning $70K per annum after tax and have a debt of $140,000 are in a crises as they owe 200 percent of their net income. Comparisons to the 70s, 80s and early 90s! The 70s through to early 90s were a period of high inflation and high interest rates. Comparing our level of debt to this era is ridiculous. This era had the highest level of inflation ever recorded internationally. (There are examples of hyperinflation in Germany after world war one and Zimbabwe currently for example – but these episodes never crossed their borders to become international problems). We may be in for another 1930s style depression! This is a load of rubbish. The 1930s depression arose from a similar crisis to now. However in that era the authorities decided to stand back and not intervene to solve the problem. They decided that the speculators needed to be punished along with everybody else. The amount of intervention occurring at present is hyperactive, and will solve the problem. It may take time to filter through though. Melbourne house prices have only fallen by 1% from the peak! I hate to say it – but I believe house prices have fallen five to ten percent from the peak. (We probably had 25% growth lat year to get to the peak – so property values are still probably 10 to 15% higher than what we were two years ago.) The mis-use of statistics is at fault here. The statistics quoted are median house prices. If you lined up the houses sold in Melbourne from the lowest priced to the highest priced and picked the middle one – this would be the median property value. The problem is that the economic circumstances have slowed the property market in the outer suburbs (more sensitive to petrol, food prices and interest rates) more so than the inner and middle suburbs. So if there are more higher and medium value properties being sold than lower value properties – the median value will rise or hold up well. Housing is difficult to measure via statistics. Valuers look at house values by using comparable sales. On my home I know it went up about 40% in value last year, but I believe it has dropped about 10% from the peak, based on similar properties sold in the area. The scary thing about using median statistics is that when the market recovers in the outer suburbs (which lower interest rates and petrol prices should assist), the statistics will show that Melbourne Median house prices have plummeted, when they are really recovering. This will be used to create panic in the near future by panic merchants. This negative commentary may stop the market recovering as quickly, but may throw up opportunities to those who understand how these statistics are calculated. Median house prices is really mostly sensitive to property turnover ratio at each end of the market. Some other nonsense “panic-mongerisms” we don’t have time for today: - The stockmarket has had its nth biggest fall ever. - Money is disappearing. - You would be better off leaving your money under the mattress than investing it. - Property is severely overvalued. - X% of households are suffering debt stress. - The financial institution bail outs will cost tax-payers a fortune. - The US will never recover from the sub-prime crises. The current economic situation has plusses and minuses. I’m personally going to benefit from lower interest rates and lower commodity (food and petrol) prices. How about you?
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Contributor's Note
This article first appeared on my blog at http://www.finassist.com.au
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This intel first appeared on: http://finassist.com.au/2008/10/is-it-really-time-to-panic/
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