Australia: one of the worst housing bubbles ever

By Lindsay David

By all accounts, Australia is experiencing what is one of the greatest credit-fuelled real estate bubbles in modern times. On the back of a collapsing mining sector, we can thank the RBA, APRA, ASIC and the political elite in Canberra for creating a flawed household wealth-creation strategy that shares all the hallmarks of a predictable economic disaster.

In plain English, since the mid-1990s, Australia’s strategy is for home buyers and investors to borrow heavily from lenders and flip houses to the next buyer who has taken out even more debt to speculate.

Today, all this country has to show for it is a $1.9 trillion mountain of household debt that will make the US credit-fuelled housing bubble of the last decade look like a walk in the park when our housing bubble bursts.

The unfortunate victims of today’s “wealth-creation” strategy are young home buyers and middle-income earners who are either completely priced out of the market or leveraged through the roof.

While our society lacks a meaningful and open debate on the toxic and rising levels of household debt, new home buyers in Sydney and Melbourne are entering the market and taking upon the most illogical sums of debt, courtesy of our over-leveraged banking system.

Based on median multiples, new home buyers in Sydney will spend the better part of 6.54 years savings (using 30 per cent of their income) for a 20 per cent deposit to buy a median-priced home.

When it comes to servicing the first 12 months of a 25-year/80 per cent LVR mortgage, it will cost roughly 65 per cent to 70 per cent of household income to service that debt at current record-low mortgage rates. Melbourne is not too far behind.

So what have our leading economists, regulators, public executives and politicians done to stop this debt-induced folly? Nothing. In fact, they have bent over backwards to inflate prices via stimulants such as housing grants and allowing retirees to tap into their life savings.

These powerful stimulants have been implemented, not to improve home ownership rates, but to boost prices for the benefit of existing owners, bankers’ profits and government balance sheets.

If new home buyers cannot access (or are not willing to take on) a greater sum of debt compared to previous buyers, Australia’s wealth-creation strategy will collapse just like it did in Ireland. Rest assured, our society is definitely caught up in the same irrational exuberance they experienced.

From 1996 to 2014, housing prices and mortgage debt significantly outpaced economic fundamentals like inflation, rents, incomes and GDP. Yet, our central bankers are more concerned about whether we will pay less tomorrow for a can of soda than new home buyers in Sydney borrowing $50,000 more than last year to buy a home. Where is the logic in that?

If the RBA factored in the expansion of debt required for a new home buyer to enter the market, inflation would officially skyrocket through the roof. Regardless, our political and economic elites are now stuck between a rock and a hard place.

Unfortunately, that is the price a country pays when it builds an unsustainable property bubble while avoiding a debate on the most important topic when it comes to housing: debt.

With Australia having the world’s most indebted household sector, the seemingly unending price rises in Fool’s Paradise will eventually slam to a halt. As I argue in my new book Print: The Central Bankers Bubble, having the largest housing bubble and mining boom in Australia’s economic history going down simultaneously will cause a severe economic and social catastrophe.

Lindsay David is the author of Australia: Boom to Bust and Print: The Central Bankers Bubble. David recently founded LF Economics and holds an MBA from IMD Business School. This article first appeared in Fairfax. It has been republished with author permission.

Unconventional Economist
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  1. Terrific article.

    Short, sharp and totally correct.

    I see it was published in the Sydney Morning Domain this morning.

    Is it actually legal to publish such a radically different view to the mainstream in the MSM these days?

    I think not.

    • “If new home buyers cannot access (or are not willing to take on) a greater sum of debt compared to previous buyers, Australia’s wealth-creation strategy will collapse just like it did in Ireland. Rest assured, our society is definitely caught up in the same irrational exuberance they experienced”.

      The Irish residential property market fell, from peak to trough, 50% to 60% on average

      • ErmingtonPlumbingMEMBER

        The Irish market didn’t have millions of Chinese looking for a safe place to reside and or hide their cash, like the Australian property market does.

        Already Australian born citizens looking to purchase in Sydney or Melbourne “cannot access (or are unwilling to take on) a greater sum of debt compared to previous buyers.” Its not just Chinese but wealth immigrants from all over the globe looking to Sydney just like they do to London and other global cities.

        A falling AUS dollar is just gona make the phenomenon worse in Sydney buy reducing the cost of OUR real estate

      • Spot on, ErmingtonPlumbing, you said just what I was going to say. Great article, but the one thing omitted was the impact of foreign buying.

      • It is more than likely that there will me a major reversal of Chinese $$$ to Australian when the bubble burst in China, this will be even worse for the housing bubble we see currently.

      • First time I’ve read anything from SA since I was at Uni!

        Once you accept housing is a basic right, and not a speculative investment vehicle, the majority of their positions and those at MB (though not all the same) follow.

      • Interesting i’ll have to read that before tomorrows state election in NSW. Interestingly my landlord put this sign up outside my house the other day after fixing a leaking tap…

        I thought it was quite funny, he said “I’m trying to keep the rent’s down” and just shut my mouth and said nothing… It’s best not to argue with your landlord over such things. Instead I’ll just vote in the totally opposite direction.

        Gotta feel sorry for those investors and holiday home owners paying land tax.. Must be a hard life…and all that…

  2. No, no, no, no, no. We should just ignore this and continue to lower the rates to boost the economy.

  3. Australia’s economy and its residential real estate dysfunction nailed nicely.

    When we have pieces (and they are all becoming more and more frequent, and less capable of being ignored) in the press – as we have for the last week – going on about how there is ‘no rationale’ for Australian house prices being where they are and at the same time warning of ‘disaster’ if they fall then we can be 100% sure that our politicians (owners of investment property portfolios worth millions) and our regulatory bodies – particularly the RBA, APRA, FIRB, Treasury and ASIC – have utterly fucked the national economy.

    More pertinently they have all been deliberately looking away from the issues being raised at -places like Macrobusiness for some time.

    They have left us with ….

    – a massive intergenerational divide
    – a pathetic external facing economy (in the context of us needing one very soon)
    – a reliance on mining volumes (in a sector where 85% of the owners of those produing mining resources are owned overseas) against a backdrop of declining long term prices for these resources
    – a population ponzi requiring significant investment in infrastructure (and local state and federal governments unable to afford this after a generations worth of givaways to the affluent)
    – an absolutely disgraceful private debt scenario
    – a media concentration and reliance on bank/real estate revenues nothing short of fucked…..

    It is time for a Royal Commission into Australian economic policies and decisionmaking processes. It is time to put some political heads (both parties) on sticks at Federal and State levels (it should look at the East-West link approvval process in Victoria, the apartment development approval processes under the Napthine LNP government in Victoria as well).

    Politicians and public servants superannuation should be on the line.

    ….a generation ago we had a legal shitstorm about things like WA Inc and how close pollies and business had got in Perth to administrative/regulatory types. We now have a case of Australia limited liability Trust [or SMSF] where reguilators, politicians and an industry has got far too close again….

    • “When we have pieces (and they are all becoming more and more frequent, and less capable of being ignored) in the press”
      It does seem like something has clicked in the past few weeks! Lots of more similar articles on the mainstream media has been sprouting as of late. Let’s hope this forces a change of some sort, even though the change will bring pain to most…

      • Yeah I have had quite a few people who know my views on the economy, AUD and housing get in touch of late saying things like ‘those things you have been on about are making it into the paper now’ – a mate the other day sent me an SMS the other day asking if the RBA was now getting briefed by DLS and LVO.

        There is just so much bullshit out there in our media that ordinary mug punters are starting to cotton on that it simply cant be true and starting to ask a few questions.

      • Yes they have, or at least they plan a maximum of 12 months ahead. But, I’ve got to say I’m amazed that some commenters here think they have stumbled across an issue that isn’t well understood. The IMF and the RBA have been issuing official warnings about our property bubble starting in early 2013. It isn’t as simple as cranking interest rates up to cool activity down because that will impact the productive side of the economy.

        In relation to Sydney prices, not covered here is the fact that prices only grew at 2.90% pa in the 10 year period from 2002 to 2012, well behind cities like Brisbane and Perth. This is completely flat in real terms and, allowing for the impact of renovations on recorded sale prices, this 10 year period is noteworthy as representing a relatively long run of declining real prices. The current boom includes an element of catch-up and is not as intense as the late 1980s and 1990s booms.

    • The tide is turning – last night my wife said to me “The Today show even said we might be in a property bubble – you might be right after all”

      Well f*** me – so she will listen to Karl Stefanovic – a TV presenter with a journalist degree over me, a FCPA, BCom and MBA

      Says it all really

      • “Well f*** me – so she will listen to Karl Stefanovic – a TV presenter with a journalist degree over me, a FCPA, BCom and MBA”

        I’m sorry that I’m laughing @Stomper…but I am! At least you know now how to get a message through to her even if it’s a convoluted process.

        I shouldn’t laugh – my wife doesn’t listen to me but I haven’t found out which TV host she will listen to.

      • I got my wife to read MB. Now she’s seeing things through different eyes and waiting, a little less patiently each day, for this sucker to fall apart so we can buy something and have a life, rather than a lifelong debt albatross

    • Everyone born after 1965, do the following.

      Move to Normanton
      Capture local government
      Free up land supply to make land at agri. cost price regardless of use.
      Secede from Australia, change currency.
      Make AUD worthless, and boomers have nothing else to exchange. (their enterprise, creativity, work ethic… hah)
      Debt still needs to be repaid… hah.

      • Yeah I’d be in, but can we do that somewhere cooler, like maybe Dover TAS? or Bruny Island maybe?

      • Rusty, I was in Normanton the other day, the Purple Pub is still there. Found some Burke and Wills artifacts from camp 119 and took them to the local museum ..WW

      • I’m in. All I need is some decent internet and good growing conditions for the permaculture operation!

    • Yep….it’s that bad.

      There was a piece in Domain y’day spruiking the shortage and also saying that a price fall would be ‘catastrophic’. The horses are jumpy. Things are about to get interesting.

    • “Politicians and public servants superannuation should be on the line”

      I would pay $1000 of my own money to see that.

      I would love it.

      Let’s spend the future fund.

  4. This is why the RBA must hike interest rates. If it does not, the Sydney bubble will just spin (even more) out of control and eventually do serious damage to the labour market. The RBA must preempt that by hiking interest rates and doing serious damage to the labour market.

    • All our financial entities are occupied in an ongoing game of musical chairs at the moment. None want to be the ones that pricked the bubble. Each has been assiduously making public statements passing the responsibility to someone else.
      The RBA isnt going to do squat.

      The best outcome we could hope for would be for a throw away treasurer to implement tax reform and foreign purchase restrictions sufficient to prick the bubble and take the hit for the bubble imploding, then being consigned to the political wasteland forever.

      • It’s only 1.2 million compared to how many other voters that don’t own a house. I reckon the ones owning houses are more informed more intelligent people. Not taking the piss. Why else would it be happening?

    • If they hike rates the bubble will probably burst if they cut rates the bubble will just inflate further. It’s a hopeless situation to be in.

      • Sweeper
        I’ve been doing a bit of a private survey of (small) business here in Qld the past few days. Suffice to say it looks very very screwed. We just seem to have designed ourselves the worst of all worlds.

      • My agent for Qld has said to me that the he hasn’t seen Qld this bad before and its got to be in recession. just crept up on everyone he says…. wtf

      • I’ve got people I know in the Hunter saying that it has never been this bad in the Hunter in some sectors…..and that’s with BHP Steel closing, coal busts, etc, so that’s quite some perspective…


    “Trinity College has warned that the prestigious Catholic boys’ school will have to call in debt collectors if parents do not pay overdue fees.

    However, what is concerning the board is the increase in the number of families who are in arrears and who have not communicated with the college in any form at all; for last year (2014) this was nearly 50 families.”

    Im glad to see WA households are not financially stressed. :((

      • Notice the description of the residence?

        This is one for the discerning eye and the determined restorer/renovator not deterred by the effects of sad neglect of a property unoccupied for 20 years.

        Unoccupied for 20 years!!! Cue moronic mouse. This proves there is no shortage in Sydney. There must be some other explanation for the high price. Perhaps it is expensive because the weather is so much nicer than in Houston.

    • surflessMEMBER

      This is one of the flow on affects if housing crashes. All these private schools go cap-in-hand to local, state and federal government demanding bailout.
      Then influx of students back into already over crowded and under funded state schools.
      The flood of second hand suv’s back onto the market.

      • What’s interesting is that when the Howard Govt started funding Private schools the fees didn’t go down but the school facilities increased enormously.

        I’ve read somewhere that Australia is the ONLY country in the OECD to provide funding to Private Schools.

      • @Stomper
        And since the schools are registered as non profit organizations to avoid tax, they are not allowed to distribute the money out as profit. So they simply buy real estates. Scotch college in Melbourne is a huge holder of real estate. They even have a private beach somewhere. That’s what our tax dollars are funding.

    • KlimashkinaSydney

      Speaking of bubbles, private high school education anyone?

      Fees growing at 8 per cent a year.

      Some one please tell me the justification for that?

      It’s frigging Australian education! It doesn’t hold a bar to Soviet math training back in the 80s… but to do well in Australia you don’t need math or engineering, you just need to dig holes, flip houses, or get in with boy’s club.

      • I think you answered your own question.

        Private education is getting in with boy’s club.

      • They buy real estate with all that money. Scorch college even has a PRIVATE BEACH! An entire stretch of beach that only that school can access.

  6. Lothar Grosserschlongen

    ‘having the largest housing bubble and mining boom in Australia’s economic history going down simultaneously will cause a severe economic and social catastrophe’

    I hate to admit it but there’s some distasteful part of me that gets excited about disasters. Inevitably there comes a point where the excitement turns to dread and I wish it all wasn’t happening / going to happen. This article heralds the arrival of that point.

    • Ha ha ha! Embrace it! The general population embraced this insanity when they thought they’d be rich, rich, rich!

      I’m more than happy to be a vulture when the whole mess undershoots.

      • moderate mouse

        Yep…fuck ’em all! After the crash, you might actually have to be good at something to make a living. No more preening wankers wafting from meeting to meeting talking pure drivel….oh dear, that’s 50% of my workplace in big trouble. At least 50%…

      • Lothar Grosserschlongen

        I fear that there will be many more innocent victims than guilty ones. You can’t blame people for wanting a house to live and raise a family in – it’s not their fault the whole show has been so thoroughly mismanaged that they had to mortgage themselves to the neck just to get a roof over their heads.

    • “This article heralds the arrival of that point”

      If I had a dollar for every time I had heard that…..

  7. We have a state election in NSW tomorrow and key issues (housing affordability, household debt levels, immigration) are not being debated. Instead, we’re bombarded by meaningless political ads “stop the privatisation of our electricity network, etc..”. Can the level of ignorance and stupidity reach this level? Are there no intellectuals left in this country? Why the university professors are not making their voices heard?

    • “Are there no intellectuals in this country? Why the university professors are not making their voices heard?”

      No. The concept of intellectual achievement being well regarded in the western world has been replaced by a society worshiping at the alter of fake celebrity and Hollywood trash stardom. A society that makes a celebrity of the likes of kardashian trash, aspires to be like them and idolizes mind numbing reality tv like big brother and allows itself to be brainwashed by anti science propaganda from right wing religious zealots and nut jobs is not a society that will embrace intellectual achievement anymore.

      There was a time when we embraced intellect, aspired to it and were not afraid of it and demonized it. There was a time when we aspired to great things, did great things. We went to space, we cured disease. Now we aspire to get rich quick and screw the next guy over to get what we want. We are a society that has lost it way.

      In the absence of a great leader the sheep will follow anyone that puts their hands up and claims to be the answer to their problem. Its pathetic and insane and is leading us to ruin. In the end it may be nothing more than we deserve.

      • moderate mouse

        Australia is actively anti-intellectual. It’s a big reason why Rudd got the ass….he talked too much.

        • I agree Australia is actively anti – intellectual

          But I thought Rudd got tossed because he was a psychopath

      • moderate mouse

        @ Gunna

        A psychopath sure, if by which you mean controlling, egotistical, dismissive of others. But really, if he was a larrikin/psychopath, he would’ve survived a lot longer, and probably even been considered a strong leader.

        A nerd/psychopath on the other hand……gone.

        @ Kev

        Yeah right….the Libs are just oozing intelligence. LOL

      • @moderate mouse
        LNP is just the drone of vested interests. ALP cuts anyone who is not a union member down to size. They can’t bear people who are not from a union background who is smart.

    • 2big – In eh economic field anyway where we are at is EXACTLY where the university intellectuals have driven us.
      I’m sure they all think it is wonderful – well bar one or two who want to drive us even furhter down this woeful road even faster.

    • Why hasn’t Baird been asked if he will require proof of purchaser’s FIRB compliant residency status to register transfer of NSW residential land title?

    • “Why the university professors are not making their voices heard?”

      Because they do not have a tenured position that is protected by law.

      • look what happened to Steve Keen…one of the few/only economists with an original thought and run out of town. We are fuckwits.

      • Yep! People here quite often rail against university professors (and with good reason, I might add), but often fail to understand why that is the case. It is useful to bring in Upton Sinclair here: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

        No tenure means you always have to conform. And in Australia, that means you have to be a cheerleader of FIRE sector.

    • @2big2fail. Nicely put.

      I keep saying we’ll get what we deserve. I actually think it’s our kids that will get what we deserve. We’re going to ride this thing until it’s utterly dead. Dumbest most greedy selfish people on earth.

  8. Excellent work, Lindsay David.

    That last interest rate cut was a top idea, heaped on every other land price stimulatory measure our financial regulators chucked on the bonfire.

    We are consuming our nation. The blame does not lie with citizens responding to the place they find themselves in, it is entirely the fault of government – the tax bases, the planning framework, the bank capital settings and ohmigod the overseas debt.

  9. Some of the most annoying responses I get when I tell people that they are at risk (Investors with 2-3 I.P), is that they always say property prices go up.

    But they don’t consider the whole picture… actually they dont consider anything outside the dollar signs in their heads.

    – Older people, likely to be the ones who can afford the 700-800K+ houses, are likely to downsize as they approach retirement.

    So they sell off their bigger houses to younger couples/families who are likely to be “capped” out with debt and low disposable income due to “living” factors and “family”. They are also the most vulnerable to employment changes… if the household income is reduced, they are f%&ked basically.

    – They also like to counter that demand outstrips supply, but they always forget that demand will always take a backseat to affordability. Having 100 interested “buyers” is one thing, but how many of those 100 can afford the asking price? And a lot of houses on the market are affordable by some purely because those “some” have equity on 2-3 other I.Ps.

    It’s a Ponzi scheme if I’ve ever seen one.

    I have a 4 bedroom house 15 minutes away from Melbourne CBD, its new and near public transportation and its within 15km radius. So why am I complaining about?
    I’m not complaining.. I’m pointing out the illogical economy-structure that lots of Australians are being “con’d” to part take in.

    Australians should be investing on companies, new businesses… these are the types of industries that WILL drive Australia’s future as a viable, sustainable country. These industries are the ones the future generations will reap benefits from… they are productive and they contribute to society.

    Australian politicians, Regulatory management, RE Industry honchos and banking honchos are criminals by letting something this big, risky and unproductive control the economy.

    • “Australians should be investing on companies, new businesses… these are the types of industries that WILL drive Australia’s future as a viable, sustainable country.”

      Nope. I’ve about given up on that. If you want to see the future of the poor white trash of Asia, look to South America.

      Yes, we are that stupid.

    • “… but they always forget that demand will always take a backseat to affordability.”

      Foreign investors have no trouble affording overpriced Australian property.

  10. Who gives a flying f%#k that we have one of the worst housing bubbles ever? Cut rates now.

  11. “The clever country”

    “The lucky country”

    etc, etc.

    Never to be thought of that way again, once the dust settles.

      • Donald Horne knew exactly what he was talking about when he used the words “Australia is a lucky country…”

        “In a hot summer’s night in December 1964 I was about to write the last chapter of a book on Australia. The opening sentence of this last chapter was: ‘Australia is a lucky country, run by second-rate people who share its luck.’

        I had in mind in particular the lack of innovation in Australian manufacturing and some other forms of Australian business, banking for example. In these, as a colonial carry over, Australia showed less enterprise than almost any other prosperous industrial society.

        When The Lucky Country was released in 1964, most of the reading public was aware that the phrase was being used ironically. Horne lamented the fact that it had since been taken up by others and given different meanings: ‘… I have had to sit through the most appalling rubbish as successive generations misapplied this phrase’.

        I think we should realise that ‘the lucky country’ provides a descriptive phrase, condemning Australia for what it was, whereas the clever country is a prescriptive phrase, suggesting to Australia what it might become.”


    Ok. So you finally find that dream place up St Ives way. You convince yourself that $1.5m is a good handshake and you take all the capital you can pull together and your ‘out of pocket’ is $400,000 and the bank is happy to put their arm around you for the $1.1m and you step up into the sunshine and everybody you know applauds at how savvy you are.

    Note: There is never any dissent from anybody as this pulls down on, and negatively affects the ‘force’ that controls the emotions and behaviours of those already ‘in the club’.

    As you are a smart middle manager, late 30’s on a decent wicket, you elect for the 20 year term and at 5.01% ( current rates /fees combined) you’re on the hook for $7263 per month or $87,196 per year. If the rate doesn’t change (remains flat) you’re paying back $1,743m and part of you is scared *hitless but the other side is saying, “Maaate! You’re a player now.”

    As you are ‘good’ with numbers, you run a ‘worst case sim’ at 10% to see if it exceeds your comfort redline. It does. But, the ‘connected player’ in your head figures you’ll always land on your feet and shoots a synaptic tranquilizer to ‘Mr Prudent’ in your brain who’s shrieking something about ‘solvency’ before he goes quiet.

    At 10%, with a total loan bill of $2.460m, that darling little place will require $10,254 each month for 20 years for it to be all yours. And, of each month, $5671 of that monthly obligation is the interest going downtown to big bank. That should help your super you determine. All sweet!

    You figure, what’s the chance of worst case showing up and you conclude it’s not likely as all the papers and mass media would be advising against doing this, wouldn’t they?

    So you pull out your favourite good luck pen, twist the barrel and carpe diem.

    Two years later, after paying back a solid $174,312, the formerly top division that you are responsible for is (sort of) in the cellar and the boss is pointing the finger at you.

    As sales have slowed considerably, the ‘kind of important’ annual bonuses did too and cash flow is not exactly keeping up. Not that you can influence rates anyway, but the RBA has moved to ‘raise’ rates to help stabilize the economy and cool those property speculators (they’re morons, you’re not) but not only was that slapping your sales team silly, it was really hitting you pretty hard too.

    It seemed that each 0.25 rates rise took 10% off the value of your place and in the last three months, half the houses on your block have sold up and what was eerie, was they were folks just like you. You learned over the fence and between weekend chores, they all just wanted to get out for what they had put in and that was just not happening.

    One of the guys, an MD for an international operation out of the USA, just wanted ‘the he!! out’ and was happy to take 300k less than he paid as the parent firm would fix things up back in Atlanta he claimed. For all that bravado you get with Yanks and especially southerners, you picked up a very honest sense of distress and that privately, nobody, nowhere was going to re-attach that $300k that had just been ripped from his pocket.

    Curious, but not really ‘that’ interested in selling just now, you called on the old selling agent to sort of sniff things out. In that circular manner of discussion that never quite reaches a conclusion that all agents seem to have, you picked up that ‘something’ had certainly changed in St Ives.

    Well, Mr ‘just sold and gone back to the USA’ might just as well have painted gang colours or hung the flying skull of the Angels on your hand built stone fence as once he sold, ALL houses had an instantaneous 0.8 times factor built in. Even the realtor, trying his best to show compassion so he’d get the listing, agreed that your ‘buyers over $1.6m’ expectation was (showing clenched teeth, and taking a sharp, theatrical inhale while grimacing) not going to get alot of interest considering what had happened and what was available in PC 2075.

    Already intuitively knowing the approximate answer to ‘what’s that mortgage outstanding’ you call the bank and ‘Ms Cheerful’ advises, that would be $1,029,715. As your breathing rate increases and you reach for another handful of Zanax (a worrying development in its own right) you estimate what you might ‘get’ post sale. Quick calcs show about $1,180,000 after costs. Once you settle up with the bank for the loan, you walk with $150,285.

    Considering that your total out of pocket in two years was $574,312, you now realize that you are the ’player’ that the ‘system’ needs to keep going.

    And, with the help of ‘Mr Prudent’ in your head, and following a four finger super shot of Wild Turkey from your never used ‘National Top Dawg’ coffee cup that no longer seemed to ‘belong’ in your Pitt St corner office, you determine that your average annual return on the $574k was – 49%- because you’re ‘good’ with numbers.

    • Amazing case study sample.

      Losing $574,000 in 2-3 years is downright scary.

      The “sane” people would look at that and would make the logical solution to buy a house an additional 20-30 minutes outside the “million dollar” suburbs… he/she then gets to pocket the other 100K and put that in the bank for a rainy day…

      he/she could even spend a portion of that “bank” money and buy a nicer car… so that 20-30 minute additional travel time is less-inconvenient.
      Another year of saving up (and he/she will be able to, since his/her house is fully paid off) and he/she can invest in worth while industries that add productivity to the country… so maybe one day his/her children reaps the benefit and have a country with sustainable employment and living conditions.

      But having a fully owned house, money in the bank and peace of mind…. thats priceless in comparison to being in debt for 20 years with uncertainties in between.

      Live within your means, invest in more worthwhile productive industries.. be a contributor, not a speculator.

    • +1000 great analogy – although you missed the investment property he bought in Blackwater!

      Also did you include the stamp duty on purchase circa $60,000???

      • Great stuff SoMP

        You also missed the two kids in private school and the lease payments on the Beamer.



        Yep Missed BW. Sold the 69 GT 351 to meet the SD and that wound will never heal. ATB!

      • Sold the GT 351??? Get this boy some more anti-depressants…and quickly! Mate…Losing the house that’s one thing but selling the 351…

        As I say – top stuff 🙂

    • Well articulated, SoMP.

      A drama which will be played out countless times across the country in due course……….

      • Seriously. … do you really care what happens to someone with such a large deposit and seemingly good job?

        I thought you guys hated the 1-5%ers.

    • Okay. Just. Wow. Okay.

      I’ve just read SoMPLSBoy’s post.

      And it’s me. I mean. I haven’t bought yet. But me and the Mrs have been looking. The numbers are right. The stage of life is right. The suburb is close.


      Oh crap.

      No way.

      Man that was close. I think I need a drink.

      So, what do I do with the cash deposit instead?

      Get it out of Oz?


      • I would look for a house that you can pay off as soon as possible, atleast you have a house and disposable income to invest on more worth while industries?

        Putting it in a bank is an option…
        but for investment and higher returns.. maybe wait until the economy crumbles and invest on new up-coming companies that are formed by the new-economy..

        I dunno lol, but cash in hand >>> debt.

      • Thanks for the reply, Sauce.

        But even then – living somewhere I don’t want. Still mortgaged up (less, but still).

        Isn’t there another option?

      • Mining BoganMEMBER

        Where to put it? A seriously good question and one that has been asked many a time. I don’t know. Don’t know if anyone does. I’ve just spread it over everything except Australian property and shares. Buying stuff in anything not valued in AUD.

        Panicing now because I just put my place on the market and have no idea where to put the dough for when the crunch comes.

    • blacktwin997MEMBER

      Awesome work SoMPLSBoy, always great to read your [not so] hypotheticals.

      Fancy doing a letter drop in Sydney some weekend?


        Thanks blacktwin!
        Letter drop great idea! Be like kicking the hornet’s nest, though. Leave the Grand Cherokee at home–we’ll need the Hiyabusa to ensure a quick/safe departure. ATB

    • Superbly written Sir!

      ….and just the faintest whiff of thoughts like that would be starting to flavour the minds of some.


        Thanks Gunna! MB is an inspiring place for those who want/see a better path. The current ‘system’ is big and bad and vulnerable as many here describe.

        Change is a heavy pack on portage.

        I’m often thinking of Brill ( Gene Hackman) in ‘Enemy of the State’

        “In guerilla warfare, you try
        to use your weaknesses as strengths.
        if they’re big and you’re small,
        then you’re mobile and they’re slow.
        You’re hidden
        and they’re exposed.
        Only fight battles you know you can win.
        That’s the way the Vietcong did it.
        You capture their weapons and you
        use them against them the next time.
        That way they’re supplying you.
        You grow stronger as they grow weaker.”

        Anyways, thanks for all the ‘ weight’ you carry around here. ATB

    • This could so easily be me too … expect that neither of us would ever put ourselves in that much debt. I think the Mrs internal maximum has gone up to above the 1M mark though.

      The last time the Mrs hot “house horny”, I ran some numbers past and talked the parentals out of giving us a big fat deposit.

      Bought a commercial property instead return ~8%. Might be on the cards again.

    • I’ve had the same conversation with people many times these last few years. They look at me like I have Leprosy. The cognitive overload just freaks them out and they resort to “houses always go up” or “I’m $600k ahead in X years” On paper they are, but the debt hasn’t changed, nor the monthly sucking sounds as it rips out of their bank account.

      About a year ago I talked to a local bank manger in Brighton (VIC). He said “there’s a huge storm coming, most people here look rich but are up to their eyeballs in debt and have no rom to wiggle. It is going to fall over in a big big way”.

      So I asked him if he would have approved the loans that had been forked out. “No way” he said, “but for years now that kind of decision isn’t made at Branch level and there’s the problem. No one has to take responsibility”.

      I walked out, had a tea in the local cafe and overheard three Brighton mummies discussing how none of them had any money and were living right on the edge because of: the private school fees (plus we have to send Sarah to France on the exchange trip and Timmy to schoolies and buy them both cars), making the payments on the Beamer and Lexus, the massive mortgages on the Brighton manor, the house at Rye and the IP, the fast growing utility bills, foxtel, platinum cover medical insurance and the cost of new iPhones all round for xmas and then hubby didn’t pull in the bonus they were praying for.

      Dumb and desperate. Life is going to implode for a lot of people…

      • “About a year ago I talked to a local bank manger in Brighton (VIC). He said “there’s a huge storm coming,”

        I was talking to my mortgage broker neighbor a couple of weeks ago, and having a frank discussion with him. He said most people taking out loans at the moment are fools, he said he trys a couple of times to get people to reconsider, but they are insistent so he signs them up.

        A BIG storm is coming not just for Australia, but globally like has never been seen in generations.

    • Totally unrealistic situation.

      If you had a $400k deposit you would have borrowed at least another half a mil and picked up something in a better street. And then spent $350k on renovations.

    • Love it, SoMPLSBoy, and all the responses. Send your story to one of the newspapers and let the mainstream read it.

    • Andrew William

      I rent in St Ives and have not a hope of buying at the moment, and I am glad this is the case. SoMPLSBoy is absolutely spot on – I see these people every day and not only are they leveraged to the hilt on the house, because it is St Ives, they have to have the new SUV to go with it. Acquaintances here constantly berate me for missing out on buying a house – as SoMPLSBoy says when I point out the bubble is now so stretched it could well do a Mr Creosote at any moment – I am excluded from conversation because I am not in the ‘club’.

      Something else that needs to be borne in mind is the divorce rate. As the financial pressure builds, so marriages will fail, as they did in 2007-2009 (hence my being a renter now in St Ives!). This suburb has one of the highest divorce rates in the country because people over pay, over spend and over stay. And still the real estate agents and media spruik the market.

      Excellent submission SoMPLSBoy, I know the people you describe.

  13. + 1 million in debt.

    Well done LD…another of the few who sees it and calls it how it is. The Dark Side is growing stronger….

  14. As Dr Elisabeth Kübler-Ross noted in 1969, the five phases of grieving for loss are: (i) denial and isolation; (ii) anger; (iii) bargaining; (iv) depression; and (v) acceptance.

    As paulF notes above, there has certainly been a shift in perceptions about house prices and also a shift from a myopic focus on governmental cost cutting to a broader focus of foregone revenues (Super, NG, CGT discounts, fuel rebates etc).

    For me, the issue of house prices, particularly in Sydney and Melbourne, are somewhere between Kübler-Ross’ (iii) bargaining and (iv) depression.

    The final stage, (v) acceptance, will unfortunately be attained when the house-of-cards collapses and we (by Royal Commission) will be forced to “accept” that the political, banking and regulator class has manifestly failed us all.

    • Mining BoganMEMBER

      Going by the responses I get to my well thought out and cleverly articulated outlook on where all this is going, I would suggest that it’s still somewhere between denial and anger.

      Bargaining won’t begin until the reality starts to hurt.

  15. Yes it’s a big mess.

    “On the back of a collapsing mining sector, we can thank the RBA, APRA, ASIC and the political elite in Canberra for creating a flawed household wealth-creation strategy that shares all the hallmarks of a predictable economic disaster”

    Just on the RBA. Part of the problem is that I don’t they expected housing to go beserk when they started this cutting cycle at the end of 2011. They definitely wanted to boost construction, but setting off this huge bubble wasn’t expected I think. Glen Stevens has a pretty textbook economics view of the world. I think he assumed households would be rational and would be more prudent in the context of an ending mining boom and weak household incomes going forward. If one thing has been learn’t it should be this: Households are not rational actors. Fundamentals have gone out the window, investors are trading on nothing more than expected capital gains. the market is trading on 60 times earnings; it is far worse than the US market before sub-prime, it is even worse than the Nasdaq bubble. In the future it might help to appoint a CB governor with a background in behavioral finance.

    • A ‘rational’ response to cutting rates would be massive growth in lending for property. If Stevens didn’t expect that he’s stupidly naive.

      But of course, he is not. He knows exactly what he is doing. Its intended.

      Because, you see, the jig is up, and this is all that’s left for Straya.

      Higher house prices or bust.

      Were going to have both.

      • That would be true in 2005 when household incomes were growing at about 7%. It shouldn’t be true today. It doesn’t matter though investors have a binary low rates = higher future house prices mindset

    • Stevens believes in the trickle down effect and prising prices unleashing the confidence fairies.

      He doesn’t give a s*** about anyone caught in a property trap as they are collateral damage in his quest for “growth”

      This Interview with Dr William White, former Head of the Monetary and Economic Department at the BIS pretty much nails the situation in one…

  16. Not wishing to be pedantic but it doesn’t cost 65-70% of income to service the debt. I think he is meaning to service principal and interest. Unless he is paying a lot more interest than I think.


    “Soaring property prices are prompting struggling mortgage holders to sell up rather than face financial strife, ratings agency Moody’s says.

    As house prices rose 7.6 per cent nationally in 2014, mortgage delinquency rates fell to their lowest level in eight years, a Moody’s report shows.

    This rate refers to the proportion in dollar terms of loans more than 30 days in arrears.

    “A borrower in stress has a better option to cure those delinquencies if they choose to sell the property,” Moody’s assistant vice president Alena Chen said on Thursday.

    (Whereas) if the housing market is not doing as well, they may not necessarily think it’s a viable option to sell.”

  18. Make no mistake, this is Glenn’s giant speculative mal-investment bubble.

    He was warned not to cut without protection. He chose to cut anyway. The bubble inflated.

    He was warned again. He chose to cut again. The bubble inflated further.

    History will judge him and his cheerleaders harshly.

  19. Three things:
    1. Chinese buyers are now able to pay about 2% more in AUD for the same number of CNY compared to 12 months ago
    2. With the reduced interest rates someone who could afford a $500,000 mortgage 12 or 18 months ago can now afford a $600,000 mortgage for the same repayment over 25 years.
    3. With reduced interst rates and yields on other investments, the capitalisation multiple of income from houses to determine price has increased over the last 12 months as a result of the search for yield and at the same time, net rents have probably risen 3% too.

    This is the new normal for interest rates, Australia just took longer getting there because of the effects of one of the greatest resource and related infrastructure booms in our history.

    While there may be an oversupply in some sectors/areas and some areas/cities have/will feel the effects of the capex cliff and car industry shutdown, most of the country will not.

    For about 5 years MB contributors and readers have been concerned about bubble and a correction.

    While MB has made some great calls on the capex cliff, it has already been 5 years wrong on house directions.

    All that “Don’t buy now” would have cost a lot of people a lot of increase in net worth.

    My view is that there is probably more to come over the next 12 years other than in resource or car related areas as interst rates and the currency fall further as overall unemployment rises slowly (but more quickly in resource/car industry areas).

    • Absolutely right in my opinion. It’s a fairly simple equation; cost of owning a house goes down (interest payments), price of house goes up and yet no one seems to get it. The value of money fluctuates with interest being the price.

      With at least 50 to 100 bps of cuts to come those that perennially are looking for a housing bust will probably be disappointed again.

      • yes, but there’s more to it.

        only about 15%-20% of the increase in real house prices since before the 2003 boom, can be explained rationally by the decline in interest rates.

        the rest is down to what the LD article is saying – the inclination and ability of punters to load up on debt, from the facilitators in the banking and broking industry, aided by all levels of government and the media.

        ..and also I agree, this boom probably has a bit more to run – in the short term at least

      • @flyingfox
        The payment is full amortisation over 25 years. The traditional Australian home loan rate.
        @ flawse
        Yes my typo, US, and Chinese can pay 20% more not 2%
        @flying fox
        Keen was wrong because he didn’t anticipate what hre governemtn reactions to the GFC would be. He was only right ceterus paribus (all other thing remaing unchanged). Economics is dynamic, there is reaction to everything, particularly disaster and crisis (and I admire Keen’s work).
        Peolle who bought with 80% borrowed, 20% saved or borrowed from family had approx $100k equity. That equity has double to $200k if the house has gone up $100k as in my realistic example, (less fees, duties etc, Those who bought 5 years ago when the Don’t Buy Now was really strong are over$100k up net of all those fees etc, 100% return net in 5 years, plus they didn’t pay rent for 5 years, probably worth another 10%, net of maintenance.
        You are speculating a fall and what happens when it does. I am using now compared to 2 years ago and it has actually happened. I can speculate too: Assume the prices go up another $100k in the next year, the purchaser 3 years before then using a $100k deposit would have doubled their money in 3 years net of all expenses. But the person who paid $1800pm rent and saved $1800pm would only have saved only $64k and be looking forward to a lifetime of renting.

    • While MB has made some great calls on the capex cliff, it has already been 5 years wrong on house directions.

      No, Steve Keen was right on his call. All that happened was two big spending sprees. One by the Rudd Government and the other by the Chinese government.

      My view is that there is probably more to come over the next 12 years other than in resource or car related areas as interst rates and the currency fall further as overall unemployment rises slowly (but more quickly in resource/car industry areas).

      I think if you do the math, unemployment isn’t a problem either. We are at the stage where we need sustained wage growth to inflate the debt. That in and of itself can bring this down but perhaps more slowly.

    • “This is the new normal for interest rates, Australia just took longer getting there because of the effects of one of the greatest resource and related infrastructure booms in our history.”
      That is very true but at the same time the world is getting out of this normal and going back raising rates(Fed later this year or next year i guess). This will leave the RBA in a position were it might have to start pushing rates up or at least keep them stable for a while

    • moderate mouse

      The very nature of a bubble is that it might work beautifully for some in the short term but is doomed in the long run….timing is everything. We are already into extra time in this game so fingers will be burnt.

      • The very nature of a bubble is actually that everyone is sucked in first. Including you. Reading the above we are obviously a long long way away from that. Markets don’t turn down at the peak of doom and gloom. It’s the other way round.

      • moderate mouse

        @ God

        You think we’re at peak doom and gloom? LOL. You’ve got a lot to learn, your holiness.

      • @God – its only just started – the real hurt is in 2017 – if we make it that far

    • @ Explorer
      “All that “Don’t buy now” would have cost a lot of people a lot of increase in net worth.”

      No it didn’t cost them anything.

      For one, I’m not sure how many people are in the DBN camp. Probably less than you think.

      If they saved, they maintained/improved their net worth.

      If they bought, they have capitulated and turned real wealth (savings) into a risk exposed asset with illusory paper gains in the short term.

      • @Explorer Go you beauty go Don’t Buy Now team!!! Not everyone has the ability to manage high risk flipping strategies in expensive Sydney real estate. Even flipping is timely and there is a long trail of money changing hands, perhaps exposing tax obligations or other….

        @Aaron “if they saved, they maintained/improved their net worth” Yes! When the real downturn begins as it already has except in a few fashionable suburbs of Sydney, cash will be king…and I mean real cash! Prudent and astute investors know liquidity is king and the ability to raise liquidity in an instant or close to it to seize on an opportunity….investment finance 101. One more point that finance schooling teaches an investor, reduce agent fees (middle man transaction costs) or do away with them all together….realestate is now a parasite and full of parasite agents.

      • Don’t Buy Now! has not cost me anything.
        I have been able to send two girls to Balwyn High, added substantially to my share portfolio, can flip the bird at the boss when I am late for work and if the sink backs up, the agent is a phone call away.
        Home ownership is a poisoned chalice at these prices. Interest only loans are popular because people can’t repay the principal.

        And thank you SoMPLEsboy for your searing hypothetical. Why devote a life-time’s cashflow to a comsumption asset?

    • @Explorer come on now we all know you have read the previous blogs, Australia’s TBTF four banks and their affiliates have been funding this thing on the back of foreign borrowings.

      We are not the masters of our own banking destiny in Australia……

      Question: “What does a bank do when the cost of borrowings (and accompanying FX hedges) it purchases on the international money market goes up exponentially or ceases altogether….just like it did in 2007-08? It bloody well passes on the costs to it’s customers. How you may say? Their are only 2 levers to pull 1. Interest rate rises to manage the red on the balance sheet 2. transaction costs

      Otherwise the shareholders are not happy and start to revolt when they do not get their dividends and the share price tanks.

      Would love to hear your perspective on this question.

    • “While MB has made some great calls on the capex cliff, it has already been 5 years wrong on house directions.All that “Don’t buy now” would have cost a lot of people a lot of increase in net worth.”

      But net “paper” worth is just that, a paper value. If you purchased a $500,000 property 5 years ago and gained 10% compound value you would now have $805,000 valued property. I 60 months @ 6% interest over 30 years you would have paid off about $81,000 leaving you owing $419,000 assuming 10% deposit of $50,000. If prices correct and drop 50% your property is now worth about $400,000 and you are underwater with your mortgage by $19,000 Stamp duty costs at Another $19,000. You are now $48,000 out of pocket. If you had rented over the same time and saved money you would be in front with a deposit to buy a house with the inevitable plunge occurs.

    • Yep, there will be a bit more to come in Sydney and Melbourne and maybe then quite a few years of little change, like Sydney did last time. Small correction possible.

      • With respect, Pete – IMHO, for the Aussie punter and our economy, it really all comes down to employment/unemployment.

        If UE keeps creeping up, and gets above 7% (both a mechanistic and psychological milestone, IMO) the deflationary tide will be very, very difficult for house prices to resist, no matter the amount of foreign buyers, boomer speculators and govt juicing…

        It’s all about UE now, IMO…

  20. Ok…lets talk timeframes…… the 1.9 trillion dollar question. Stab in the dark type stuff really but 15 months would be my guess. Any takers

  21. Awwww! Cheer up guys! I just got back from Hong Kong and you have to say we got it really good here!

    Their government just increased their mandatory minimum LVR to 40%. Can’t afford one there? Don’t worry! Li Ka-shing, the richest person in Hong Kong, had offered the first 100 buyers to buy one of his brand new apartment in Hung Hom with a mere 10% deposit only! That’s right! You only need 10% deposit and the rest can be borrowed from him at the same low mortgage interest rate!

    How much one of those apartment would cost you? It’s a bargaining price of just HKD $8.8 million ( ) for….wait for it….a living space of a massive 40 square meters! That’s right! That’s approximately AUD $36,000 per sqm!

    A bubble you say? Nah. I was told by virtually everyone there that property prices can never drop because the governments are in bed with the developers and they will guarantee to prevent it. Interest rate will always remain low, not enough supply, rich mainland chinese, blah, blah blah.

    It doesn’t matter though. Of the 100 apartments offered with 10% deposit only, all of them were sold out within 90 minutes.

    • I really need to maintain a list of aptronyms.

      “Ka-shing” Ka-ching! The sound of money. Or Kash-In.

    • “Nah. I was told by virtually everyone there that property prices can never drop because the governments are in bed with the developers and they will guarantee to prevent it. ”

      Which is kind of funny on its own given that HK prices have twice dropped by 50-60% in the last thirty years.

      Are people really that stupid?

      “Between 1980 and now we had two instances where property prices fell by 50-60%. In 1980, property prices topped out and bottomed four years later. That bust saw a 50% reduction in prices. Then, in 1997, prices peaked and they fell by 65% over a period of 4 or 5 years.”

  22. Bring on the rise of the Aussie entrepreneur again. We need more Dick Smith types, actually producing stuff of value and creating jobs.

    No more of this “I’ve got an investment property mate” rubbish.

    • Alot of people would love to start a business employing Aussies but those commercial property speculators like Flying Fox are holding them out of their dream, no intention of running their own business from the premise, demanding 8% per year no less.

      Forcing young Aussies to set up their burger/ taco bars in converted caravans, set up their pop up bars in the dead of night. All so they don’t have to sign up for a life of debt demanded by these heartless bloodsuckers.

      Gee this finger pointing is fun, and surprisingly easy!.

      p.s what if the SHTF moment ( globally) doesn’t come until 2030?

  23. Awesome work and congrats on MSM publishing it. Any ideas for savers to best protect their savings when TSHTF?

  24. Why so many articles recently on property bubbles and the danger of debt lately? Somethings a foot.

    • Yes, I noticed this as well. SMH recently is becoming a bit more vocal on issues of RE bubble and negative gearing. I’m sure they don’t have the first home buyers best interest at heart. It’s possible that there are some elements in the RE industry that are realizing that this could turn very ugly and as a result many of them will lose big (especially the ones with 5+ investment properties and are leveraged to their eyeballs). They might be hoping for a soft landing, price stagnation, etc.. as opposed to a complete collapse. Maybe they want the frenzy to cool a bit because it’s getting too hot to handle. What they don”t know is that this train has left the station and there’s no stopping to this and the only natural result is a major reset and yes, they will feel the pain.

  25. “…Based on median multiples, new home buyers in Sydney will spend the better part of 6.54 years savings (using 30 per cent of their income) for a 20 per cent deposit to buy a median-priced home.

    When it comes to servicing the first 12 months of a 25-year/80 per cent LVR mortgage, it will cost roughly 65 per cent to 70 per cent of household income to service that debt at current record-low mortgage rates. Melbourne is not too far behind….”

    It gets worse. All those wise-guy boomers who like to claim they had to sacrifice so much income to meet high interest rates in the 1980’s, had the luck that high inflation and wage rounds were shrinking their mortgage principal in real terms, even as the nominal house value went up anyway with the inflation, AND the interest rates fell in time.

    Few boomers were not home and hosed after ten years, debt-free or nearly, looking to upsize/upgrade etc. But as Senator Elizabeth Warren in the USA (touted as a potential Presidential candidate) pointed out in the presentations that made her a celebrity and got her elected; high house prices even with a low interest rate leave the household struggling with a relatively high proportion of income devoted to repayments for many more years. In fact the typical boomer might have only had to sacrifice 20% of a decade’s income to go debt-free; the current generation will sacrifice FORTY PERCENT of their next TWENTY-FIVE YEARS income.

    In the example above of 65 to 70 percent of the first year’s income, it will likely still be above 60% in five years. And above 50% in ten years. And so on. Elizabeth Warren’s presentations were entitled “The Coming Collapse of the Middle Class” for obvious reasons. Everyone, well most people, suffer some sort of misfortune every so often. Job loss, accident, illness etc. The current mortgage slave generation will be at risk of bankruptcy as the result of ordinary bad luck for many times as long as their parents.

    And if interest rates rise at any time the principal is still largely extant? Pfffffft. The charlatanism, ignorance and inconsideration of a whole generation of elders on this subject has me livid.

    • Heh… People have talked themselves into the idea that interest rates are going to say low. Sounds like ‘new paradigm’ talk to me. They think that will save their precious house prices.

      Sure, rates will stay low for a while. Thus causing massive capital misallocation. Which will inevitably result in lower real incomes and eventually capital will leave the country. At that point, the arse will fall out of the AUD and government will face a choice between increasing rates and the AUD becoming the Pacific Peso.

      We’ve seen a number of other resource economies hiking rates recently… don’t think it can’t happen in Oz.

      In the meantime, I’m stocking up on popcorn. People suddenly noticing decades worth of pigeons coming home to roost is comedy gold! Oh, the recriminations that will fly. The hollering of ‘whooocooooodanoooode’. The desperate attempts to get government to nick what wealth remains in the hands of the prudent and give it to the profligate. Beautiful!

      • Agree 100% with your reading of it. Yes, the capital misallocation and the hiking of non-productive costs to the productive sector, has to be like the means of weakening the skin of the bubble even as the skin is stretched ever tighter.

      • Good one LD, I suspect we have a similar strategy of sitting out this dance and waiting till the parties over. I believe that many home purchase decisions made in haste today will be regretted in the long run, unfortunately as you say, the Pollies will keep this party going as long as possible and will have absolutely no qualms about slaughtering the prudent savers to feed the imprudent “investors”. Rule number one in such situations is to keep your powder dry and way out of their reach.

  26. so are house prices going to rise or fall in the next 2-3 years ? im confused ,,, had i brought a 500k property in melbourne 3 years ago i would be 300k richer now if i sold (this is true some1 had brought a property that i wanted 3 years ago and sold it recently for that profit) …. ive been hearing about this buble burst back then and still going on .