Are current press reports sensationalising the real issues? 
What is the Reserve Bank thinking?

Sensationalist statements from the Press and others have been appearing, and will appear, concerning: world growth, US sub-prime issues, and Australian inflation and interest rates.  When making decisions, it is important to get a balanced view.
We believe that the most balanced view probably comes from the Reserve Bank.  The RBA is not trying to sell newspapers, it is independent of the government, and it has well over a hundred of the best economists in the country. 
We set out our views below, followed by some supporting comments from the RBA December Board Minutes.  The full record of the minutes can be found at:
http://www.rba.gov.au/MonetaryPolicy/RBABoardMinutes/2007/rba_board_min_04122007.html

CC view:  While inflation remains of concern, it is not spiralling out of control
RBA Quote:  "underlying inflation was forecast to rise above 3 per cent in the next two quarters and then to ease gradually, to around 3 per cent, over the ensuing quarters."

CC view:  While world growth appears to be slowing from very strong levels, it is unlikely to soon fall below medium-term trend
RBA Quote:   "Overall, global growth in the year ahead was thought likely to be closer to trend than suggested by forecasts available at the previous meeting."

CC view:  In particular, the growth of Australia's trading partners will still be at solid levels.
RBA Quote:  "National accounts data for the September quarter for most of Australia's major trading partners indicated that, weighted by their shares in Australia's merchandise exports, year-ended growth had continued to be about 5 per cent. While there had been little sign of a slowdown in the data thus far, forecasts from the IMF in October indicated that trading partner growth on this basis was likely to slow in 2008 to around 4½ per cent. The latest adverse developments in credit markets suggested that these forecasts would be revised down further."

CC view:  There is a temporary reduction in confidence within global financial markets.  This is understandable because financiers do not yet know how much their colleagues may (or may not) be exposed to losses arising from the US sub-prime events. 
For the limited number of organisations with heavy direct exposure to US property and/or debt securitised against residential property, we have seen a substantial negative impact. 
For other organisations, their cost of funding has risen because of the uncertainty. 
Once exposures clarify, the losses will be booked, credit ratings will be adjusted, and the market will revert to normal. 
In the meantime, Central Banks and other regulators will do what they need to do to maintain
the liquidity of the world financial system. 
The Australian system of funding residential mortgages is totally different to that of the US.  In Australia:
1. the share of sub-prime mortgages is very much lower, and
2. all sub-prime mortgages attract penalty rates of interest to account for the perceived risk (in contrast to the US low "honeymoon" rates)
3. the incidence of default on "Loc Doc" or "No Doc" loans is not significantly  higher than on "Full Doc" loans
Therefore, the overall affect on Australia is unlikely to be severe.
RBA Quote:  "As a result of the strains in global credit and money markets, over the month market interest rates had risen independently of official rates in many countries. The increases in Australia were less pronounced than elsewhere, and sound borrowers had ample access to finance."

CC view:  Pressure to increase RBA interest rates will be diminished if market interest rates rise from other sources
RBA Quote:  "This consideration pointed towards maintaining the existing cash rate for the time being, pending evaluation of financial market developments and new data at the next meeting.  The question to be addressed at that time would be whether the interest rates faced by borrowers as a result of the combination of policy action and market developments would exert sufficient restraint to contain inflation over the medium term."

CC view:  Market interest rate rises will not necessarily feed into rate rises for residential loans
RBA Quote:  "Short-term borrowing costs had still risen noticeably since the November meeting. To date, lenders had largely confined the pass-through of these increased costs to business borrowers, though household borrowers could, in time, face some additional increase as well."

CC Conclusion:  Recent events will not stop the rise in property prices now underway.  The underlying fundamentals of a strong Australian economy and excess demand for housing remain.  With a booming economy, it is natural to see pressure on underlying inflation, but Reserve Bank forecasts are that it will go above the 2-3% target band only briefly, and then settle down at the top of the band (where it is expected to be during a boom).  We see Sydney residential property as an area of strong growth, because until 2007 it had been flat for several years - Rismark report that areas close to Sydney's centre have shown growth of 18% over the last year, while outer areas have remained flat:  this is a classic sign of emerging increases in Sydney property prices. 
We also believe that selected areas of Melbourne and Adelaide represent good buying, as do certain house and land packages in areas of South East Queensland.