What stopped the previous Sydney booms

There is an alternate view that government intervention actually caused the Great Depression:

"The relatively new Federal Reserve (the Fed) mismanaged the supply of money and credit before and after the crash in 1929, according to monetarists such as Milton Friedman and acknowledged by former Federal Reserve Chairman Ben Bernanke. Created in 1913, the Fed remained inactive throughout the first eight years of its existence. After the economy recovered from the 1920 to 1921 depression, the Fed allowed significant monetary expansion. Total money supply grew by $28 billion, a 61.8% increase between 1921 and 1928. Bank deposits increased by 51.1%, savings and loan shares rose by 224.3% and net life insurance policy reserves jumped 113.8%. All of this occurred after the Federal Reserve cut required reserves to 3% in 1917. Gains in gold reserves via the Treasury and Fed were only $1.16 billion.

By increasing the money supply and keeping interest rates low during the decade, the Fed instigated the rapid expansion that preceded the collapse – much of the surplus money supply growth fueled the stock market and real estate bubbles. After the bubbles burst and the market crashed, the Fed took the opposite course by cutting the money supply by nearly a third. This caused severe liquidity problems for many small banks and choked off hopes for a quick recovery.

As Bernanke noted in a November 2002 address, before the Fed existed, bank panics were normally resolved within weeks. Large private financial institutions would loan money to the strongest smaller institutions to maintain system integrity. In fact, the panic of 1907 offered a similar scenario: when panic selling sent the New York Stock Exchange spiraling downward and led to a bank run, investment banker J.P. Morgan stepped in to rally Wall Street denizens to move capital to banks lacking funds. Ironically, it was that panic that led the government to create the Federal Reserve to cut its reliance on individual financiers such as Morgan.

But the Fed failed to prop up the system with a cash injection between 1929 and 1932. Instead, it watched the money supply collapse and let literally thousands of banks fail (at the time, banking laws made it very difficult for institutions to grow and diversify enough to survive a massive withdrawal of deposits). The Fed's harsh reaction, while difficult to understand, may have occurred because it feared that bailing out careless banks would only encourage fiscal irresponsibility in the future. Some argue that the Fed created the conditions that caused the economy to overheat and then exacerbated an already dire economic situation."​

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So if there is an recession and the government implements contractionary monetary and fiscal policies, then we should be concerned.

 

Ahh....Milton Friedman and Anna Schwartz's work

A Monetary History of the United States - Wikipedia

What Perthguy failed to tell you was that Ben Bernanke is an Economic Neoliberal of the school of Milton Friedman.

Here he is giving a speech on Milton Friedman's 90th Birthday:

FRB Speech, Bernanke -- On Milton Friedman's ninetieth birthday -- November 8, 2002

As you can imagine when the GFC in 2008 rolled around it presented Ben Bernanke the perfect chance to try out Milton Friedman's alternative solution in an Economic Crisis. Instead of contracting the money supply they expanded it Anyway I wont bore you with too much Economic Theory and Historical stuff but after 10 years of Emergency Monetary Policy settings and QE/ZIRP/NIRP they are only just trying to Normalize Interest Rates.

Suffice to say the Next crisis wont be Caused so much by Central Banks tightening but really a Failure of Milton Friedman's theory of Neoliberalism to understand how markets really work and grasping an all to important part of Capitalism's inherent design flaw which is too much Debt leads to instabilty and therefore crisis. This Crisis is actually its saving grace as it unwinds excessive risk and over investment in unproductive assets. Hence Capitalism's propensity of "Boom and Bust" and Central Bankers mistaken obsession in preventing this aspect of the business cycle from taking place.

Ultimately we have only delayed the GFC not actually overcome it. The Business cycle will re assert itself and a New Economic Theory(old is new again)will miraculously appear to take its place. Its a shame Milton isn't around to explain his economic models failure.

 

So what are you expecting/thinking is going to happen?

 

A Crash. Most likely a stock market crash in the US will trigger it.

Once confidence is dashed it becomes a question of getting your money out before its gone.

Its funny, In the "Stocks to crash 80% and Real Estate up to 60% " a poster commented about the recent Decision of the RBA to not raise rates as being a sign of rates not rising. What that poster doesn't understand is the RBA doesn't control the Cost of all the banks Money nor the Where or from whom Banks can get it from to lend in the first place.
Our Banks source some where up to 30% of their funding from overseas markets.

Mortgage rates could rise without the RBA

What happens in International Funding Markets is beyond the control of the RBA. Our Govt had to Guarantee our banks as the spread widened on funding meaning our banks would have to pay much higher rates to secure funding.

Australian Government Guarantee Scheme: Questions & Answers about the Guarantee of Deposits

1. Why did the Australian Government introduce the Guarantee Scheme for Large Deposits and Wholesale Funding?
On 12 October 2008, the Australian Government announced temporary arrangements to enable the provision of a guarantee for the deposits and wholesale funding of Australian deposit-taking institutions.

In the lead up to this announcement, developments in international wholesale funding markets were restricting the ability of financial institutions both here and overseas to access funding, with potentially serious implications for liquidity and lending activity.

To address these pressures, the Government guarantee arrangements were designed to promote financial system stability in Australia, by supporting confidence and assisting authorised deposit-taking institutions (ADIs) – banks, building societies and credit unions - to continue to access funding at a time of considerable turbulence. They were also designed to ensure that Australian institutions are not placed at a disadvantage compared to their international competitors that could access similar government guarantees on their wholesale funding.

Once our Economy is perceived to be at Risk the cost to borrow money on overseas markets will rise dramatically for our Banks.

So essentially you will have Recessionary pressures exacerbated by the increasing cost of money.

 

It's all over @mickyyyy.

Australia’s economy is built on shaky foundations
WE’RE the lucky country but our luck is about to run out due to factors out of our control. Brace yourselves for a hard crash.

As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.

Unfortunately for Australia, that “lucky” free ride is just about to end.

A hard landing for China is a catastrophic landing for Australia, with horrific consequences to this country’s delusions of economic grandeur.

With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed avocado.

Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other.

A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, “upswings” last 13 years).

According to the Rider Levett Bucknall Crane Index, in the fourth quarter of 2017 between Sydney, Melbourne and Brisbane, there were now 586 cranes in operation, with a total of 685 across all capital cities, 80 per cent of which are focused on building apartments. There are 350 cranes in Sydney alone.

By comparison, there are currently 28 cranes in New York, 24 in San Francisco and 40 in Los Angeles.

According to UBS, around one third of these cranes in Australian cities are in postcodes with ‘restricted lending’, because the inhabitants have bad credit ratings.

This can only be described as completely “insane”.

But combined with our lack of future proof industries and exports, our economy is completely stuffed. And it’s only going to get worse unless we make a major transformation of the Australian economy.

We can’t rely on property to provide for our future. In 1880, Melbourne was the richest city in the world, until it had a property crash in 1891 when house prices halved causing Australia’s real GDP to crash by 10 per cent in 1892 and seven per cent the year after.

The depression caused by this crash was substantially deeper and more prolonged than the Great Depression of the 1930s. Macro Business points out that if you bought a house at the top of the market in 1890s, it took 70 years for you to break even again.

We have serious problems in this country. And I think they are about to become very serious. We are on the wrong trajectory.

Our whole economy is built on China buying our stuff

 

Problem is your not dealing with the problem , you are just trying to hide it .
Really low interest rates cause more problems than it solves, people that are up to their eyeballs in debt love really low interest rates
Its normally a good signal to a very weak domestic economy.
Once you have "caught a cold" its very easy to catch a secondary infection.
With a weak economy you only need a few other things to go wrong and things start to turn pear shaped.
Look what happened after the last big recession in the 90s , it set the country up for a prosperous period , but you had to clear the decks and get rid of a lot of bad debt.
No pain no gain.

 

That's how its supposed to work.

 

I don't think you have had your question answered. Here is my response.

In August 2017, ceda published "Housing Australia". It is a very interesting report and well worth a read.

Chapter 1 - Is the current period of price movement unusual? - is by Dr Nigel Stapledon. Dr Stapledon has a PhD in Economics from the University of New South Wales (UNSW) and a Bachelor of Economics with Honours from the University of Adelaide. Dr Stapledon's PhD Dissertation is Long term housing prices in Australia and some economic perspectives, which examines house prices back to 1880.

Stapleton writes:

In the period since the 1970s, there have been five major cycles in the Sydney market and a lesser number in the other markets

For the Sydney market, this latest cycle comes in second, just beating the rise in 1987–89 of 59 per cent and behind the 1996–2004 rise of 85 per cent.​

So, the current boom is not the biggest boom the Sydney market has seen, nor is it unprecedented. That is important to consider when asking the question: what caused the Sydney market to stop booming.

To date, the biggest Sydney market boom has been 1996–2004 at +85%. The current Sydney market boom is most comparable to the Sydney market 1996–2004 boom.

Stapleton argues:

In the Australian market, Sydney led the way with prices rising 85 per cent (in real terms) in the period 1996–2004. That boom ended due to a combination of the market overshooting and the lagged supply response that was putting downward pressure on rents in 2004, with prices declining nine per cent 2004–06.​

So what happened after 2004 in Sydney? With the Sydney market being overvalued, attention shifted to other cities:
Melbourne 1997–2008 increased by +141%
Brisbane 2001–2008, increased by +129%
Perth 1998–2007 increased by +173%
Adelaide 1997–2008 increased by +144%
Hobart 2002–2008 increased by +115%

That puts into perspective Sydney's biggest boom from 1996–2004 of +85%

What you really want to know then is why did the Sydney market fall 9% in value between 2004 and 2006?

I can't really answer that, but in researching my response to your question I did come across a very interesting speech by Luci Ellis, Head of Financial Stability Department, RBA.

"First, trend housing price growth will be slower in future than in the previous 30 years. We don't have a strong view about whether the ratio of prices to income should be mildly rising, falling or constant from here. We do not have a target for this variable. But we think it is very unlikely to return to its 1970s levels, or to rise rapidly once again. Nor would we want to see another boom like the one a decade ago." (emphasis mine)​

This I agree with. Imagine if you took prices now, then Melbourne boomed by 141%, Perth by 173%, Brisbane by 129% and Adelaide by 144%? It would be a disaster.

Stapledon's dissertation

https://www.unsworks.unsw.edu.au/pr...ab=default_tab&lang=en_US&docid=unsworks_1435

ceda Housing Australia August 2017

https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf

RBA speech

Housing and Mortgage Markets: The Long Run, the Short Run and the Uncertainty in Between | Speeches | RBA

 

Supply and Demand drives the prices and RBA tries their best to stimulate growth through interest rates. Currently we are seeing Sydney prices move backwards in various pockets and I believe some banks have raised rates to slow down activity.

What are your thoughts?

 

I agree

 

I suggest you read Stapledon's dissertation. Here is an extract relevant to your question:

"The thesis then takes several approaches to explaining the apparent shift in direction in the mid 20th century. The first approach examines house prices in terms of demand and supply variables. Urban theory says that demographic and income factors are critical. However, assessed over this long time span, these demand factors do not offer a satisfactory explanation. Additionally, it is found that there is no cointegrating relationship between prices and income. Rather, it appears that supply factors have probably been the pivotal influence in explaining the shift in direction, consistent with a growing literature which focuses on the role of regulation and other constraints on supply. In Australia’s case, government policies imposing capital contributions on the cost of land appear to be a major factor."​

It's well worth a read. http://unsworks.unsw.edu.au/fapi/datastream/unsworks:1435/SOURCE02?view=true

 

The supply and demand of credit was a major contributor to the last cycle.
Cycle ended primarily with APRA reducing supply of credit.

Yes other factors but this was the major factor in ending the boom.

I dont believe banks raised anything to slow down activity. There are other factors for this.

 

Thought id bring this back as it had some good reading points and compliment the Sydney 2020 mega boom

 

Crazy last weekend. I saw line of 30-50 ppl at some open homes in Sydney.

Even in Western Sydney where I invest mostly now its absolutely nuts!!!!