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| Housing Bubble | |
The Australian Housing
market seems set to go the same way as the dot-com bubble at the end of last century How do we know this? Lets look at why people were not buying dot-com stocks on the
US NasDaq stock exchange.
- They weren't getting returns (the price-earnings (PE) ratios were in their hundreds on
most stocks);
- They weren't expecting great returns (everyone knew that in every niche
only one out of a hundred companies would survive).
So why were they buying? They were buying the stocks simply because the
price was going up - they were buying for capital growth. Clearly that pattern
can't continue forever. It's a bit like gambling and playing double-or-nothing
to recover your losses. Eventually the capital available is exhausted, and
things collapse. Normally housing markets consist of a mixture of home-buyers and investment
buyers. But rental prices have stayed pretty much the same, and prices have
gone through the roof. The PE ratios are higher, so buying a property to rent
out is a poor investment. Unless you are expecting capital growth, you don't
bother. As soon as capital runs low, the prices will level out, but as soon as
they level out there is no point in buying, so they will drop. It's the same pattern as the dot-com in 2000. When something is full of
hot-air, it eventually burps. It's best to stand well clear.
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