No one listens to blogs; I certainly don't, and for good reason - they are poorly written, unthinking drivel that has little or no impact on the world. This blog is no exception. So why then did I spent my precious time writing one?

I'm not going to say I told you so when it comes to the state of the Australian economy, I'll let others tell me I told them so. Here on my blog are the records of my predictions for the Australian economy, backtrack and read them if you wish. But to paraphrase I outlined why the housing boom was a bad thing. Though I originally predicted the major economic downturn would coincide with the decline in the commodities boom (in about two years) it seems that the oil price and those god forsaken tax cuts has sped up inflation and concurrently prolonged the boom, bringing forward the rate rises and prolonging the commodities boom/bubble.

Now that interest rates have risen twice since my last posting and will again by November (guaranteed) the Australian media has suddenly switched - no longer is a mortgage the new "get rich quick" scheme in a method by which "you can't lose!", it has become a way to blame banks for your own stupidity in allocating 28% of your income to paying off a twenty year debt.

As I have said before, almost every economic downturn is accompanied by a bursting real estate bubble, and for good reason

• It contains a huge amount of capital, so small percentage changes mean large changes in real economic terms
• It's very illiquid; hard to sell or buy quickly
• The market has few players, all with large amounts of capitalisation (money)

This means that you don't ever know how much a house is worth on the market, because as the saying goes "everything is worth what its purchaser will pay". So if aggregate house prices change you assume yours has as well, and so does everyone else which rallies the price higher. But there are small numbers of participants so a few people entering the market to buy will rally a price above what it's really worth while everyday people don't realise the price is higher than the value because the market is illiquid meaning prices don't reflect values and people don't understand the different between price and value. But this is nothing new, why the new post?

The impending recession is seemingly inevitable and I believe there are a few good reasons to fear it may be the worst we've seen in a long time:

1. OIL: The Oil price won't come down, we seem to have hit peak oil or will soon. If you don't believe this ask the experts, even market analysts in their ivory towers are starting to say we've hit peak oil. This will drive inflation, driving interest rates higher and increasing the price of everything. My recommendation - if you buy a car, buy diesel
2. LEVERAGE: By this I mean the amount of money the Australian voting public owes in all debt, sum total. This figure is 141% of GDP, as in 41% more than the country earns in a year. This is the reason why this recession will be worse than the 90's. During the famed 18% interest years the average percentage of income devoted to repaying a mortgage was 27%, as I write this it sits at an unhealthy 28% of income today. Why is this? shouldn't this be lower due to the lower rates of interest? No. People paying off a mortgage back when the rates were 18% were paying off a $150k loan max. now the average is twice that because people were misled by the media proclaiming that they can't lose money on property giving them the false confidence to take out a stupidly large loan leaving them OVER-LEVERAGED
3. REALITY OF REAL ESTATE PRICES: In reality people were misled into thinking that the price of property never goes down leading them to buy houses at inflated pices that they couldn't afford. As outlined above the character of the real estate market is one where it is impossible to know the value of a house by any method other than sheer speculation. This lends itself to rapid price inflation from the small number of participants wielding large sums of money in an illiquid market, but those same factors can work in the other direction. It happened in Japan, huge amounts of real estate were bought for amounts far exceeding their value following the crash the properties stayed undervalued for a long time as investors were weary of being burned. If this happens in a period of rapid inflation then defaulting mortgages may be foreclosed for less than the original value lent making a loss for the individual but more likely written off as a loss for the bank. The small number of participants in the market means that if one or two start to be sold for less than their value then all will start to be sold for less, meaning all foreclosures will result in losses for our financial institutions. Large losses in banks have dire consequences, a full blown run on banks can spell the end of many institutions and the only way they can come up with money is to sell off assets and withdraw funding from projects often at a loss and leaving many people out of jobs.
4. IR REFORMS: The way out of a stagnant economy is off the backs of middle class workers - they get money they get spending and then they get the economy moving. But in an era of high inflation this depends on the employees ability to negotiate higher pay to keep up with the inflation rate. Higher pay will guarantee more inflation, or at least its incessancy, but the reality is that without the ability to negotiate higher pay there will be many more mortgage defaults and significantly more losses for banks.

When these factors are pieced together the future seems to be spelled by one word STAGFLATION (stagnant economy plus rapid inflation). In real world terms, homebuyers' stupidity may make them homeless and destitue in the net decade.

This is still a minority opinion held by some economic analysts, but it is valid and plausible and I hope it's so very very wrong. But the factors seem to be moving in all the requisite directions.We'll see what the future holds.