How A Mining Crash Could Save The Property Bubble

The whole of Australia now knows property prices are falling. We've got the perfect solution. A mining crash will save us all. Or maybe not…

a woman

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All of a sudden, the doom and gloom is all pervading. The S&P/ASX 200, now trading around 4600, is down 6% in the past month, and off 2.5% year to date.

It's not much fun watching the market fall. It's even less fun if your individual shares are falling even more.

Take the banks, for example. They've been getting hammered recently amid speculation foreign investors have increased their short positions in our lenders. "Shorters" bet on share prices falling, the dirty rotten scoundrels.

In the past month, Westpac (ASX: WBC) have lead the Big 4 lower, losing a whopping 14%. In the same period, ANZ (ASX: ANZ) have lost close to 10%, Commonwealth Bank (ASX: CBA) close to 6% but National Australia Bank (ASX: NAB) have fallen a mere 2%.

Maybe the NAB's "break up" advertising campaign is working, at the expense of the other banks? Or perhaps, more likely, is it that Westpac and Commonwealth are more leveraged to falling domestic house prices? Answers on the back of a pay-in slip…

Who'd Buy Property Now?
Speaking of house prices, followers of Motley Fool will long know we've been bearish on the Australian property market. Well, now everyone knows it.

Housing approvals have collapsed to a 10-year low, falling 12% between December and March. Loans to homebuyers fell by 1.5% in March, the 3rd consecutive monthly decline this year. Auction clearance rates have slumped to around 50% leading to sharply rising numbers of properties on the market.

With prices falling, who'd be a buyer of property now? I know one thing…I'd hate to be trying to sell in this market.

Whatever happened to "the good old days" when everything, including property, and shares, just went up?

A Life Of Leverage
This might be old news, but for the past decade or so, we've collectively been living a life of leverage.

Easy credit led to rising asset prices. The more you can borrow, the more you can spend. Why buy that $500,000 house when the bank will give you a big enough loan to buy the $700,000 version? And in any case, with property prices always going up, you could always downsize if the financial going got a little tough, couldn't you?

Hmmm…not anymore.

Still, although we think Aussie house prices are in the bubblicious (copyright: Tom Gardner) category, we're not predicting a full blown collapse. Just an orderly retreat, like we're having right now.

State and federal governments will do everything in their power to stop house prices collapsing. They've already shown their colours, doubling the first home buyers grant as the GFC first made it to our shores.

As an aside, personally I'd prefer if my tax dollars were allocated in slightly more productive areas than propping up house prices. What would you prefer? Money invested in, say, the biotechnology sector to fund research into cancer, or putting it in the hands of first home buyers so they can buy an unaffordable house?

We've got governments ready to save house prices. And we've got the Reserve Bank of Australia (RBA) able to save house prices. Orderly retreat is thy name.

The Good Times
All the RBA have to do is slash interest rates back to 3% (where they were at the height of the GFC) and all those poor souls who bought an unaffordable house when the first home buyers grant was at its peak could again afford pay their mortgages and have a couple of quid left over to buy some beer and fags.

By this stage you may have spotted the problem. Yep, it's the mining boom. Whilst it carries on seemingly unabated, the only thing the RBA will be saving us from is rampant inflation. And the blunt way they do that is by raising interest rates.

Uh oh. Look out below for already beleaguered house prices…

To the non-mining sector, and that's just about the whole of the Australian population, it already feels like we're in a recession. And that's with unemployment at 4.9%.

What must it feel like living in Spain, with unemployment at 20%? Unfortunately for them, there's not a big export market in sun, bulls or Sangria.

Bring On The Mining Crash
What we really need is a mining crash. House prices would be saved, interest rates would tumble back down to 3%, and we'd all have some money left over each month to splurge on a new BMW, flat screen TV and iPad.

The downside? Instead of Gina Rinehart being worth $10 billion, she'd be back amongst the paupers with just a couple of billion. Even at that level, I reckon she'd still be able to afford to a new Toyota Corolla to buzz around Perth.

Then again, perhaps the pain of a mining crash might be more widely spread than just that. How big is the export market for Four'N Twenty pies and Simpson Desert sand?

Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in ANZ, Commonwealth Bank, National Australia Bank, Westpac and a Toyota Corolla. The Motley Fool has a crash-free disclosure policy.

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