I suggest you read this before buying a house

realwildone

PROPERTY'S PAINFUL TRUTH
Sydney first, others will be next.

by Neil Jenman

A story on page 3 of Monday’s Sydney Morning Herald (August 21, 2006) has probably become the most talked-about property article of the year.

Suddenly, the painful truth of Sydney’s property market can no longer be denied, covered-up or buried under self-serving industry spin.

All the recent real estate cliché words– such as ‘soft landing’, ‘correction’, ‘adjustment’, ‘plateauing,’ have been swamped, tsunami-style, with one truthful word – CRASH.

The first two words in the Herald headline were ‘Housing Crash’. And the first paragraph proved this was no media beat-up. A home in Sydney’s western suburbs which had been bought at the peak of the boom in 2003 for $450,000 had been re-sold for $260,000 – a 42 per cent price fall.

The owners, who had been unable to keep up the payments on their mortgage of $405,000, saw it sold by the mortgagee for $260,000.

Another painful truth is now becoming evident in the property market – negative equity (where the amount of the loan exceeds the amount of the value), in this case $145,000.

This one sale is not an isolated case. Of 16 sales checked by the Herald, more than half had sold for less than their previous sale prices.

Another property which sold for $257,000 in 2003 was re-sold for $156,500.

So why do the “official figures” not show these drastic price falls? Well, two reasons – first, as everyone in-the-know knows the real estate industry distorts and twists its sales results.

As finance journalist, Michael Pascoe, wrote in crikey.com.au last week, “A Sydney Century 21 real estate agent has broken one of the golden rules of his profession: never admit there's anything wrong with the market as it's always a good time to buy.” The agent had confessed that “there’s absolutely nothing happening out there”.

Such honest comments are not welcome among the real estate crowd.

The second reason that the “official figures” do not show the true decline in property prices is because the affordability crisis has forced so many first-home buyers out of the market. Consequently, with fewer lower priced homes selling the overall figures are distorted. The prices appear higher.

Also, many sellers who cannot achieve the price they want simply withdraw their homes for sale. Just because they refuse to sell it doesn’t mean their homes have not dropped in price.

For example, in another western Sydney suburb an investor who was told back in 2003 that he could sell his property for “around $320,000” was told last month that he “may get $200,000”. He decided not to sell. Such price falls do not show up in the official figures.

And the price falls are not confined to the western suburbs of Sydney.

Yesterday, an agent from the inner-city suburb of Balmain said, “I would go so far as to say that the market is dropping weekly at the moment.”

In Sydney, the spin-doctors are finally silenced. Many agents who urged people to keep on borrowing and buying, borrowing more and then buying more are now handling the distressed and mortgagee sales. Spin or no spin, some agents never lose.

Meanwhile, in other parts of Australia, the spruikers (agents, property experts, investment advisers or whatever they call themselves) are telling buyers that the Sydney market is different and that their area is not going to be affected by a downturn. Don’t believe them.

Haven’t you ever noticed that the people urging you to buy real estate are the people who are selling it?

Just remember: the property boom began in Sydney and then spread across the nation.

The same will apply with the property crash.

It's just a matter of time before this comes back to haunt us all in the UK

Tassotti

Looks like a good time to buy in Sydney..now who has a crystal ball to predict the bottom of the market?

Xbigman

I recall from watching the Australian real estate shows last year that in australia all or most sales are at auction and this makes the market very volatile and properties very hard to price. Hence 30% price variations are almost normal.
Regards



X

Kaminari_2

Tass! I was thinking the same thing!

PoorDave

But how does the supply/demand in Oz compare to the UK?

And any comparison would be very general...

I have noticed (today) that in the village i work in, 2 houses that have been on the market for months have both sold, and another one is suddenly on the market. Be interested to see what the sold ones went for once the details can be obtained!

Anyone think the interest rate rise is only going to push things further up before they come down, as people are now expecting further rate rises, IMHO?

Negative equity is only a problem if/when you need to sell. Those of us in a house bought to live in shouldn't worry so much, perhaps

meanmachine_2

PoorDave wrote:

Anyone think the interest rate rise is only going to push things further up before they come down, as people are now expecting further rate rises, IMHO?

Come again?

How does that work? As a FTBer, I can now borrow less on an affordability mortgage, so that pushes prices up how?

Or do you mean that there'll be a rush to get mortgages, fearing higher borrowing costs in the future? I guess that's possible.

It does look like Sydney and parts of the US are going into a correction phase. Sadly we're unlikely to follow unless rates go above 5%.

Having said that, new build flats outside the capital are going to crash whatever happens, imo.

realwildone

New sign of US housing slowdown

Interest rate rises have stretched household budgets
Sales of existing US homes have fallen to their lowest level since the start of 2004, in a fresh sign that the once red-hot housing market is cooling down.
Sales of previously-owned homes were down 4% in July from a month before, a bigger fall than analysts had expected.

Successive interest rate rises have taken the heat out of the market, with sales of new homes also falling.

Federal Reserve chairman Ben Bernanke said recently he believed the market was headed for a "soft landing".

Budget pressures

The housing boom helped drive the US economy forward over the past few years.

But two years of interest rate rises - which have seen rates increase to 5.25% - have put growing pressure on household incomes.

A senior Fed official said on Tuesday that higher inflation was more of a risk than lower growth.

Economists interpreted the remarks as a signal that rates may yet rise further after a pause earlier this month.

The average price of homes sold last month rose 0.9% from a year ago to $230,000, according to figures from the National Association of Realtors, the smallest year-on-year increase since 1995.

New home sales fell 3% in June and experts believe sales could be down by about 10% for the year as a whole.

The US economy slowed significantly in the second quarter of the year, with output rising at an annualised rate of 2.5% compared with 5.6% in the previous quarter.

Or how about this from the US.

AND ANY FOOL WHO NOW SAYS ITS DIFFERENT HERE NEEDS TO GO TO THEIR FRONT DOOR AND WAIT FOR THE WHITE VAN.

As Martin has continuesly said, 'House prices are over valued and they WILL come down'

So if you are buying now, expect to go down with them

realwildone

I recall from watching the Australian real estate shows last year that in australia all or most sales are at auction and this makes the market very volatile and properties very hard to price. Hence 30% price variations are almost normal.
Regards

Please don't insult our intelligence by telling us 42% falls are normal in Oz

4% falls in the US in ONE month are normal too are they.

Get_Real_2

House prices will expand to fill the mortgage finance available, and the lenders are still dreaming up new ways to make the overvalued appear affordable.

I think the August 05 rate cut had a reviving effect on the market over the year to date. The recent rise will not make an immediate impact, but another rise before year end will change expectations and dampen the speculators enthusiasm.

Transaction volumes are already on the way down for 2006

ManAtHome

Get_Real wrote:

House prices will expand to fill the mortgage finance available, and the lenders are still dreaming up new ways to make the overvalued appear affordable.

One of the more sensible (and probably accurate) quotes.

BY the way, Kent Reliance have started advertising an "interest only for ever, pass it on to your great grand children" mortgage... Of course, they "will be vetting applicants closely" (or something).

F_T_Buyer

The problem is the lowest lenders can go is interest only. This who inter generational mortgages is just spin. No lender can make anyone take on someone elses debt. The mortgage is merly nominating someone who will take on the debt, but in 25 years (or whatever) alot will change.

An interest only mortgage is an infinity mortgage, unless you pay off the capital the debt never reduces. It's simple. If you can't afford the interest now, who cares what happens in the future.

The problem is the lenders have hit the affordability limit. The only other thing they could introduce is negative amortization (where you don't even pay the interest off, it just rolls up). But this means the banks make a loss (until you start repaying the debt), so I can't see it happening here like the US.

The only other issue is shared equity ownership, but the banks don't make money from owning bricks and mortar! Property IS dead money to a bank... lol