Times are tough all over

[Aliantha]

Originally Posted by tw

What has been ongoing in the Australian economy to cause such a dollar drop? Have commodity exports dropped off sharply? Was the government running massive deficits? What was ongoing four and more years ago to cause that dollar drop?

Similar things that were happening in the US economy. Citizens had enjoyed lower interest rates for a considerable period of time. The gov was running a surplus and giving out money all over the place. Our dollar was up around 98 cents US for almost 12 months shortly prior to this recent meltdown.

Basically everyone was spending money like it was going out of style (which ironically it has) which injected more and more money into the economy so of course it kept growing. Housing prices inflated as more and more people decided to get into the market, so the construction industry boomed about 10 yrs ago. Then all of a sudden, someone realized that inflation was getting out of control (this was about 3 yrs ago), so the reserve bank started putting up interest rates. They went up really only about 4% in the end over that period...maybe 5%, but it took the average mortgage rate up to nearly 9%. More in some cases. This of course put a huge amount of financial pressure on mortgagees who had in many cases taken out 100% loans in the last few years. So, people started trying to sell their big expensive houses.

At the begining of this year during the months of January and early February, people were selling within 2 days of putting their house on the market, and often getting more than the list price, but that was the last gasp as our economy reached the top of the hill. After that, there were too many houses on the market, and not enough buyers. People who had been thinking about buying started getting picky. They didn't want to pay the inflated prices created by our inflated economy so they started making crazy low offers, and mortgage holders in trouble had no recourse but to accept those offers.

Lower the median house price and your economy starts to slow.

Basically, the interest rate rises brought down inflation to a managable level, but they hurt the citizens who had high mortgages.

Anyone with half a brain to watch what was happening should have seen this coming. Some didn't though, so our dollar continues to fall as people continue to keep their wallets closed in order to try and hang onto what they have now.

Increased fuel costs during this period have also contributed. Not only to household budgets at the fuel pump, but the cost of groceries and most other utilities has risen considerably also.

That's a very simple explanation. Obviously government policy contributed to the problem also along with world markets and a healthy trading market for Australia.

[tw]

Originally Posted by Aliantha

Then all of a sudden, someone realized that inflation was getting out of control (this was about 3 yrs ago), so the reserve bank started putting up interest rates. They went up really only about 4% in the end over that period...maybe 5%, but it took the average mortgage rate up to nearly 9%. ... This of course put a huge amount of financial pressure on mortgagees who had in many cases taken out 100% loans in the last few years.

Increased central bank interest rates should have no affect on a mortgage even if the mortgage is 100%. However, with bean counter mentality, something new was created - rate adjustable mortgages. Nobody with basic financial knowledge would take out an ARM.

For your reasoning to be valid, ARMs must have been widespread in Australia. Otherwise higher central bank interest rates would have left mortgage payments low. One reason to own a house: inflation and the necessary higher central bank interest rates make life easier for the holder of a fixed mortgage. His mortgage payments remain unchanged and the house value increases. Just another reason why no informed home owner should even take out an ARM.