Musical Chairs !

The OECD has given an unusually blunt warning that a lot of people are going to be seriously economically hurt when the housing price bubble comes to an end.  The logic of ever increasing house prices is unsustainable.  In Sydney they increased by a further 4.5% in the three months ending in February, making an increase of 18.4 %  for a full year.

What we are seeing in the housing market is reminiscent of that old children's party game - Musical chairs.   More children than chairs continue to circle while the music plays, and when it stops those unable to be seated are eliminated.  

We have vast numbers of potential first home buyers locked out of the housing market because they lack the deposit required by the banks to finance a mortgage and in many cases their earnings are insufficient to service the required monthly repayments.   Unfortunately, many have borrowed from parents to pad the deposit and are just keeping the mortgage payments current by sacrificing living standards.   Their finances are on a knife edge as a consequence.

They justify this entry into the market with the thought that if things get too tough they can place their new home back on the market and reap a handsome profit because of these ever rising prices. Some existing home owners have used the equity in their present dwelling to upgrade to a better suburb and increased their mortgage payments accordingly.

All those with mortgage payments above their comfort level are vulnerable to the inevitable increase in interest rates.  Interest rates run in cycles and at present we are at the absolute depth of the present cycle.  A tenuous upward movement has started by the American Fed and when increases take hold they may move with surprising rapidity.   The housing market may tank the first time a panic headline appears in the financial press.

We should be warned by what happened when the last recession broke back in 2008.   The people who rushed to put their property back on the market found that there were no longer buyers interested and asking prices collapsed.   Many found that their equity was " under water " - they owed more on their mortgage than the dwelling would bring on the market.   The banks were merciless - and foreclosed immediately payments went into arrears.

The survivors were the people with years of equity in mortgage reduction and who purchased way back in the inflation bubble, and those with earnings that could accommodate an increase in mortgage rates caused by higher interest rates.   The losers were the people with an unsustainable mortgage and a home that could not realise the expected asking price because of this downturn.   Like the children playing "Musical Chairs "- they found themselves stranded when the music stopped.

The message coming from the OECD is loud and clear.  An increase in interest rates is inevitable - and we have a recession again looming - and it is coming fast !   The wise will act accordingly, or they will share the fate of many who expect this entrancing price increase music to keep playing forever !