Edward Karan proposed on September 19 real estate prices in Australia would fall 40 per cent over two years from the first quarter of 2008.

“It’s too late, the course is set, the market will crash, its like a runnaway train (sic),” he wrote on news.com.au

“Expect a 40 per cent drop in prices once the bubble is fully deflated, this taking approx 2 years in duration. Tipping point is Q1 2008. This will cause the Australian Economy to go into recession. Sorry for the bad news, but unfortunately there is no escaping it now.”

Yesterday the Australian sharemarket experienced its longest losing streak, falling for an eighth straight day after fears of a US recession continued to brew.

Mr Karan’s forecast sparked heated discussion on news forums around the country, while the controversial blogger _ occupation unknown _ gathered a following of supporters and critics.

He signed off on December 18, on what he believed was the cusp of the financial storm.

“Folks the tipping point has arrived. As such this will be my very final post…My warning has been heard, and today the decline in Australia’s largest asset bubble will slowly but surely start,” he wrote.

“To my supporters, a big thank you. To my opponents, you were warned. Goodluck and goodbye to all.”

“Ed Karan, sorry to hear you’re leaving these forums forever,” bemoaned Sam Brown of Golden Beach.

“I look forward to the next two years - will be interesting to see how your prediction pans out. I suspect you’re right. In fact I’ve just sold my house and moved into a nice little rented flat. I’ll buy again sometime after 2010.

“Meanwhile I’ll be saving $20k per year in addition the staggering profits from selling the house. If you’re right, I’ll owe you a beer!”

But, like all good bloggers, Ed has returned to the forums.

“Your jealous because I have a fan club on News.com,” he told one critic called “shadow” this week at globalhousepricecrash.com .

“Hey for the record, that was an accident, I was just trying to warn people about the Real Estate correction.”

The University of Canberra study has found banks are overcharging customers through bigger profits on mortgages, higher fees and lower savings rates compared to before the global financial crisis, News Ltd newspapers say.

The study says official statistics prove banks have been lying to the public about their financial health.

“They (Westpac, the Commonwealth, NAB and ANZ) have been crying poor throughout the global financial crisis and yet official data shows that they have been misleading, to put it mildly,” said Milind Sathye, professor of banking and finance at the University of Canberra.

The university has used statistics from the Australian Prudential Regulatory Authority (APRA) to monitor the banks’ financial well-being.

“This means our conclusions can be openly scrutinised,” Professor Sathye said. “The banks, on the other hand, make their arguments based on data that only they can see. And on that basis, they can argue almost anything.”

The most recent APRA data shows that, far from cutting back during the crisis, banks actually increased remuneration for management and staff from $14 billion to $16 billion a year - a healthy 14.2 per cent increase - all while millions of ordinary workers were suffering pay freezes or reduced hours.

Banks have also slashed the rates they pay to savers, sometimes by almost half.

Edward Chancellor, of US investment management firm GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.

Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value - a once in 40-year event. ”

If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably,” he told The Australian.

He said prices would have to fall by more than a third to reach fair value - although some of this fall would be cushioned by income growth.

He described Australia’s banking system as a “cartel” and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

He attributed Australia’s “luck” to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.

“My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom,” he said.

“Those are the facts and you can’t paper over them.

“In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.

“The problem is the bubble and that hasn’t gone away.”

A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.

“It’s the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse,” he said.

Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.

“We would see the Chinese demand for Australian commodities as being potentially vulnerable,” Mr Chancellor said.

He said he expected the negative news in Australia to come from “the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity” and a “terms of trade shock”.

Everyone referred to Australia as the lucky country, he said. “I think that’s pretty apt.”

However, “given the great growth in private sector credit and the vulnerability of the housing market, . . . Australia is not out of the woods. It hasn’t even entered the woods.”

So desperate are the property spruikers to keep the property lie going that they’ve embarked on new tactics. How long will it be until they fill the entire property section with just one story?

Why stop there. Why not the whole business section devoted to one property story spinning lies about the never ending advance of the Australian property market.

Apparently all that equals $525,000 for Melbourne. My foot it does!

But after Dobbin had stepped on the accelerator on Saturday with her “houses are $100,000 more than a year ago” article, yesterday she’s slammed on the breaks.

Because next year is going to be a much more stable year for property prices as “the nation’s top housing analysts have forecast modest residential price growth of about 5 or 6 per cent in 2010.”

That’s right, a stable year doesn’t mean prices flatlining or going down, it means they’ll go up - only not so much as before.

That makes us even more convinced the property slump is somewhere around the corner, ready to pounce.

And what settles the matter for us the quote from erstwhile property bear Steve Keen, “I’d expect a five per cent or so fall (in residential house prices), probably returning to somewhere between the current peak and the previous one in September 2008.”

5%! Goodness me, if we thought a 5% fall was the worst it would do we wouldn’t even bother sharpening our property-bubble-bursting-pencil in the mornings.

We feel as though we’re the only one left who believes property is set for a crash. Is it possible we’re wrong on this? Is it? Will that endangered species of “Property Bears” become extinct?

No of course not. Because the fact is we haven’t seen the worst of the property slump yet. Let’s get serious about this.

That’s a 14% fall. And that was during a time when the Australian property market was supposed to be resilient. But as we say, you should even take that number with a semi-trailer load of salt.

The government, banks, real estate spruikers, and the RBA did all that was in their power this year and last to stop the banks and property sector from collapsing.

Even all that effort, and putting taxpayers on the hook for billions of dollars couldn’t prevent the Melbourne housing market falling by 14% - if we believe the REIV numbers.

Just remember that despite the nonsense in the mainstream press, such as yesterday’s Australian Financial Review (AFR) feature, “Once bitten: how our banks dodged the crisis,” - ‘our’ banks didn’t dodge the crisis at all.

Or the follow on feature in today’s AFR, “As the financial world sailed blithely on, buoyed by the tide of money, Australia showed more caution.” Ha, ha, ha, ha, ha, etc…

As Kenneth Williams would say, “Stop messin’ about!”

This idea that Australia got through unscathed due to the bank problems in the 1980s is just not true. Although it hasn’t stopped Bob Joss from rolling out the claim again in yesterday’s AFR:

“I think one of the main reasons things went so right in Australia for the major banks is that they went so wrong in the 1980s and early 1990s.”

It’s all rubbish. Australia’s banks are no more cautious than the dodgy UK or US banks. This idea that overseas banks were leveraged up on collateralized debt obligations (CDOs) and other derivatives whereas Australia’s banks weren’t, may be true but it ignores what was underlying the CDOs - mortgages.

Buying a home to live in is the first step most Australians take into the property market. In addition to providing a place to live, we also buy because - when it comes time to downsize - we’re likely to make a sizable (and tax-free) capital gain.

But some of us don’t stop there. We follow up with further property purchases, choosing to invest in residential property rather than shares or other assets.

Why residential property? One reason is that we see it as a relatively safe investment when compared to the volatility of the share market. It offers long-term capital growth, rental income and useful tax deductions (through negative gearing).

But while it can provide handsome returns, residential property isn’t an investment panacea. Entry and ongoing maintenance costs can be high and your investment strategy needs to be carefully considered and well planned, with clear goals and an understanding of the risks and rewards.

Considering an investment in property?

Like any investment, you first need to decide upon your goals. Are you looking to maximise your capital gain, your rental income or both? How much are you willing to spend?

Some suburbs will deliver good capital growth but lower rental yields, while others will offer lower capital growth but better rental yields. Be clear about which will suit you and what you can afford.

Cash flow

An important consideration is your cash flow. Investment properties are normally cash flow negative - that is, you usually spend more on finance, maintenance and operating costs than you make back through rental income.

You should develop a gearing strategy (either positive, neutral or, most likely, negative) that takes into account taxation allowances for things like building, furniture and fixtures depreciation.

Before investing, it’s vital to prepare a budget that quantifies what your cash flow position will be, as you’ll be the one who has to meet any shortfalls. If in doubt, consult your accountant or property specialist.

Investment loans

When taking out a loan for your investment, it’s critical that the loan support your investment strategy.

For example, taking out a five year fixed loan but then selling after three years will create some hefty interest penalties. Similarly, if your loan doesn’t support lump sum or additional payments, you may not be able to pay it off as quickly as you’d like.

You should also check that your lender will accept your investment structure - that is, whether you’re buying in your own name, or through a company or trust.

What and where

The biggest decision to make is what to buy and where. Do you want to invest in the inner city, the suburbs, the outer suburbs or a regional area? Will you invest in a house, an apartment, or a flat? How close will your investment be to schools, transport and shops?

These factors will determine not only the cost of your investment, how much rent you’ll charge and the type of renters you’ll attract, but ultimately the profit and capital gain you’ll realise.

Be sure to research the market thoroughly before making your choice. Speak to estate agents, purchase property reports (especially those that detail high-yield and high-growth suburbs), and attend auctions to get a feel for price and rental returns.

Evaluate your potential investments from a renter’s point of view. Be wary of buying anywhere where rental vacancies are more than 3 per cent, as this can indicate poor rental demand.

How to decide

A quick way to compare different property types and different locations is to calculate an annual return. To do this, divide the annual rent by the property’s total cost. For example, the annual return on a property worth $350,000 with a rental of $27,000 per annum is 7.7 per cent (27,000/350,000).

A more comprehensive way to compare investment properties and their returns is to undertake a full cash-flow analysis - accounting for each property’s rental income, outgoings, taxation, capital gain and capital gains tax.

Managing risk

Buying property is a big commitment and you need to protect yourself against the threats to your investment - both before and after you buy.

Beforehand, make sure your research shows that you’re buying in an area that offers the right combination of rental demand and capital growth.

As a landlord, you’ll be responsible for repairs and maintenance, so spend that little bit extra on a professional structural survey and pest inspection to discover any faults in your potential investment before you have to pay for them.

After you’ve bought, protect your investment with insurance such as building, contents, loss or rent, theft by tenant and liability. Without adequate insurance, you could be wiped out if things go horribly wrong.

Remember that your mortgage has to be paid whether or not you have a tenant, so set aside at least three months’ outgoings just in case.

Finally, if you’re looking to develop a property portfolio, don’t put all your eggs in one basket. Diversify your risk by buying different types of properties in different places.

Summing up

While property investment can be a great way to build wealth through a familiar asset, there are no guarantees. Be sure to do your home work when choosing a property and be clear about your investment strategy and cash flow needs.

Above all, get the right home loan for the task at hand and take steps to minimise your exposure to risk. That way, you’ll be able to enjoy the highs of property investment while being better placed to ride out its lows.