The warning bells have been ringing for some time. Anyone observing local retail strips over the past 12 months would have noticed a disturbing trend of increased closures and more sites lying fallow for ever longer periods of time.

Still, the official data tended to confounded this physical evidence – the mining boom and those stimulus packages that sustained us through the GFC would continue to make Australia the miracle economy – the only one in the developed world to avoid the harsh realities of the great leverage bust. Or so they said.

For the commentariat – political, media and economic – the force of that boom has blocked out hearing those damn tolling bells. Still, it would not be the first time that ‘the experts’ ignored the warning signs in pursuit of the peddling a glowing good news story that keeps them relevant.

But surely as night follows day, bit by bit the global economy is drawing us in.

This past week we have seen David Jones declare trading conditions the worst it has ever experienced – shock, horror, the wealthy matrons that patronage its marbled floored stores have withdrawn as well. This coming with steep plunges in recent weeks in a variety of confidence measures do not augur well for, well, everyone. Now it is not just the battlers who realise just how bleak things appear.

When viewing events overseas, especially in the US and Europe, one is entitled to start feeling fearful.  World Bank Chairman, Bob Zoellick, says the world is just ‘one shock away from a full-blown crisis.’

If there is one area in the Australian economy where one shock could be more than a crisis but a catastrophe it is the Australian housing market.

Marching on almost without a pause after the GFC hit, the Australian housing market is now flat lining. Houses for sale far exceed demand, auction clearing rates have plunged and average prices are at best steady but already there are some steep falls hitting the upper end of the market – just take a look at apartment prices on the Gold Coast and one can see where the problems are starting to emerge.

At its core is not so much the deleveraging of the world, making it harder to obtain credit and punt hard what little capital one has, but the declining belief by investors that capital gains are inevitable and thus investing in housing is a no brainer.

This culture of happy sentiment has many root causes and cheer leaders, most notably in our newspapers. Real estate ads are big revenue for newspapers and magazines. Nobody wants to know their palace is about to decline in value and nobody wants to be the guy who is saying it either. And let’s face it, what real estate agent has ever advised ‘this is not a good time to buy’, for when  prices are going up they say ‘ride the wave’ and if prices are falling, with a smile they tell you ‘there has been no better time to buy.’

Blind faith in inevitable capital gains is pretty much a religion that sustains all investors. But for punters in the share market that all ended after the GFC when loses of 40% or more, losses than even three years later have not been recovered, shook people to the core. So people stopped supporting floats and private capital raisings – because if the next punt also goes bad that may no longer be something that can be recovered on the waves of an ever surging ASX and all put down to experience.

It is perhaps pertinent to note that after topping out at over 6000, the ASX All Ordinaries has made a few failed attempts at going past 5,000 and now the market is down over 10% from that point and still 25% off its pre GFC highs – of three years ago.

As housing start data and demand for building products attest, now people are no longer believing that housing is the place to punt dough – whether in a new home, a holiday house or alterations. That comforting idea that one could sell at any time and be better off than before is evaporating, hence the decline in buyers and for those who looked for the quick capital gain funded by more borrowings, the pressure is growing to get out as quickly as possible. Don’t believe me? Then take a drive around Port Elliot and Middleton and see how many ‘For Sale’ signs are being posted.

But so long as no one is much forced to sell, maybe it is possible to see this period through and count the blessings later. Or maybe not.

Last week The Economist magazine published a table showing relative house valuations based on their historically accurate bench mark of the average house prices to rent ratio. For spooky numbers brace yourself. Even after 3-4 years of steep sub prime induced housing price corrections in the US, their house values are now just back in line with this bench mark method of valuation – that’s right –just back to where they ought to be but nowhere near being hopelessly undervalued as perhaps one might be wishing to suspect.

For Australia, The Economist says we are 50% over valued. Yes, 50%! Just ponder that for a moment and contemplate the impact on you and your family (lifestyle, schools, holidays, cars – you know all those important things) should your home plunge in value by 50%. Then, also, the investment property funded by negative gearing. Then factor in that shock Bob Zoellick was talking about – perhaps unemployment – and quickly some sleepless nights and drawn looks become very in vogue.

To be sure, no one knows when or how the correction will take place but given the Australian housing bubble started inflating a decade ago and the gloom now so pervasive has never been that bad since, one can bet with some certainty that when it ends it may all happen quickly.

Now that talk has started about a decline in interest rates, we may yet be able to avoid this inevitability for some while yet – lower rates make housing more affordable and a declining dollar may help spur local non mining jobs. True also that The Economist’s bench marks may be out of date, that the world has changed – though everyone who has ever told us that has always been quickly revealed as a charlatan (again think back just a few years to the geniuses who rode us headlong into the GFC.)

And, let’s not forget in Australia we have not had much in the way of fiscal shocks these past few years, with the GFC itself passing as an issue in just a few months. Hell, just look at unemployment still at generational lows to see how well off we have been compared with Europe and the US.

Well, here are a few shocks that may take the Australian housing market over the precipice.

• The US defaulting on its global debts after 2^nd August or not being able to keep paying its usual creditors.
• The Greek debt problem evolving into the inevitable default that may cause many a bank to fail with a spread of problems to other over leveraged countries.
• The continual ratcheting up of Chinese interest rates to cool down its economy causing a bust.

Then again, often the thing that makes all the difference is not much at all, it is but the last straw that breaks the camel’s back.  For that, perhaps, the announcements of the imminent and now definite carbon tax are all that will be needed.

These things can creep up on us and like the frog in the boiling water we can keep ignoring the signs in favour of a continued happy existence, until one day we explode. But as was well predicted at the time of the GFC (and by those who did see it coming not the overnight epiphanists), second waves of misery are going to be inevitable as the world deleverages.

This will be especially so when the same people in charge of the financial asylum in the 10-20 years prior to 2008 remain firmly entrenched and one possesses Labor governments, at State and Federal level, with the new paradigm of spend everything we have ever had and on anything that sounds good so it buggers up the conservatives when they get back into power

Sleep well.