I am sitting in a small cafe watching an ancient, wizened former Anzac soldier placing a flower in remembrance of his fallen comrades at the cenotaph in Martin Place in central Sydney. The man must be 90 at least, but he is standing erect, two bright medals on his chest. Who is he remembering, or what horrors is he hiding?

The monument full of poppies marks the thousands of Anzac soldiers who died in the two world wars. The Australian casualties in the First World War are truly shocking. Some 38 per cent of all men between the ages of 18 and 44 enlisted. More than 400,000 left for war and 58,000 died. In a dreadful twist of fate, accounts from Turkish snipers in Gallipoli attest to the fact that the Anzacs made easier targets than the average British and Irish soldiers because the milk-fed, rural Anzac soldiers were physically much bigger than the much smaller, less well nourished British soldiers. Twenty-five years later, 39,000 Aussie soldiers died in the Second World War. This man was one of the survivors.

As he stands alone, hundreds of Sydney commuters rush by, consumed by their own cares, as he is by his. The ancient veteran then leans against the monument, lost in his own thoughts. The Australia he fought for was a very different country from today’s Australia. Back then, it was a largely British – and Irish – country. Today, Sydney is a city which hosts – according to its lord mayor, with whom I shared a panel last Tuesday – people who speak 200 different languages. It is clearly an immigrant melting pot, and the initial Italian, Croatian, Serbian and Greek immigrants of the 1950s have been superseded by huge Asian migration in the past 20 years, underscoring yet again that Australia is part of the Asian world now. Over the years, the Irish have kept coming too. Some years, it has been only a trickle, and other years, like now, it is a deluge.

This multicultural Australia is again home to thousands of young Irish people and, last Monday night at a packed convention centre, I spoke to 400 of them. The event was organised by an Irish business network - the Lansdowne Club – which has seen its membership swell in the past three or four years.

One of the most telling parts of the discussion was when the moderator asked how many in the room were paying off mortgages in Ireland. More than 100 hands went up. This is an extraordinary state of affairs. Here we have people who have travelled to the other end of the world to find work and are still lumbered with ridiculous mortgages that they are still servicing. It attests to the fact that the moral hazard argument regarding debt deals is pathetically weak, as this shows people who have already left the country and are still maintaining their payments. Some went so far as to say that they were in Australia in order to be able to meet their payments at home. If anything reveals the craziness of punishing people for making the mistake of succumbing to the incessant financial propaganda spewed out by the
banks from 2000 on, surely it is this.

The conversation moved on to the issue of Australian property. The Aussie property market has been defying gravity for years now. In fact, you could have come to Australia at any stage over the past five years and be reasonably confident that the market was madly overheated, set for a collapse – and yet it hasn’t done so. But every person I spoke to, particularly the Irish ones, seemed to think a monumental crash is only months away.

We know that a property boom is never caused by supply and demand. Property booms and property bubbles are always and everywhere caused by too much credit, and we all know that the ugly handmaiden of credit in good times is called debt in bad times. Credit sounds good, debt doesn’t – but they are one and the same thing and, when a market reverses, credit morphs into debt instantaneously.

So why has Australia avoided a bust so far, particularly when the Aussie banks are so exposed? If you doubt this, consider this fact: at today’s share prices, the Australian banking system is valued at more than the entire banking system of the eurozone. Australia has a population of 22 million, compared to the eurozone’s population of 317 million. You might say ‘go figure’, but the crash hasn’t happened. Why?

Maybe one of the reasons is that the Aussies have that rare luxury of being one of that relatively small number of benighted countries – we also could have been one – to which the financial markets are prepared to lend in its own currency, which is floating. This means that, if the country has a wobble, the exchange rate falls dramatically, which cushions the blow and allows the country to recover without an over-dramatic collapse in local asset prices.

But the mechanism whereby a country with its own exchange rate overheats is not too different from one which does not have its own exchange rate, like Ireland. In Australia, the boom causes the current account to plunge into deficit, because Australian banks are borrowing abroad to lend into the overheating local markets. The locals want Aussie dollars so that the banks have to convert their borrowed US dollars into Aussie dollars, because you can only buy Aussie property with Aussie dollars. This causes the Aussie dollar to rise dramatically against the US dollar – as has been the case in the past few years.

In order to cool down the economy, the central bank raises interest rates, but this just attracts more money in, as the spread between Australian interest rates and US rates widens and the currency appreciates more. Gradually as this goes on, exports become more difficult and imports become cheaper, driving the trade deficit upwards. Also, as happened in Ireland, all this effervescence in the local economy makes investing in the local economy much more attractive than the hassle of competing on the international market. As for productivity, it begins to fall, as more and more cash and immigrants are sucked into the country to be deployed in the booming local economy.

As prices go ever higher, certain investors begin to take profits - and then prices fall. Then leveraged investors, who got into the boom late, panic and try to sell, leading to a flood of properties. This in Australia will be coincident with the currency falling. The fall in the currency will offset some of the falls in property, but not all. This is what is on the cards for Australia. As to when exactly, it’s impossible to tell, but it will happen – for sure mate.

The old Anzac shuffled off after a while, locked into his own world. I turned to last Wednesday’s Sydney Morning Herald. The main paper was 20 pages long. The business and sport supplement was another 20 pages but – wait for it – the property supplement last Wednesday was a whopping 136 pages of wall-to-wall, unashamed, top-shelf, property
porn. Now where have we all seen that before, and what did it signal?

David McWilliams new book, The Good Room, is out now

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