Wishful Thinking !

The news that Sydney house prices have ceased their ever upward trend and actually reversed has the economists whistling in the dark.  That phenomenon of prices doubling every ten years was simply unsustainable without a surge in inflation and a steady matching increase in wages and salaries - and that was not happening !

The pundits are bleating that this is only a " correction " and will not prove to be catastrophic but in August the median selling price in Sydney reached $ 909,914 and now that same home is only attracting bids of $ 895,342 - a ten percent drop which wipes  $ 90,000 off the value of individual homes.

The people who will be in trouble are the buyers who jumped into the market with a minimum deposit and a massive mortgage that they can barely afford,  feeling safe because if the pressure got too great they could slap the property back on the market - and make a profit.   In many cases, that minimum deposit was a gift or a loan from the  bank of  " Mum and Dad ".

What the market gurus are spouting is more wishful thinking because the outcome of this price drop is an unknown factor.  All it will take is a surge of " For Sale " signs on front lawns to create a price panic as buyers desert the market.   We would do well to remember what happened in the 2008 recession when the banks began enthusiastically to repossess after even small repayment arrears.

When the banks repossessed a home their lack of Real Estate  expertise became painfully apparent.  They made no attempt to maintain the properties and keep them attractive for buyers and many suburbs became a vista of unmown lawns and neglected gardens.  Despite an ongoing rental shortage, no attempt was made to claw back income by putting these properties on the rental market.

We were lucky in that drop in house prices was short lived, but it is the price of homes that has gone against the trend of most other market commodities   In 2012 the median house price in Sydney was  $ 520,000.   If prices retreated back to that level it would represent a decrease of close to 42 percent. That is unlikely, but the price of any item is entirely governed by what the buyers are prepared to pay

Most people will watch the house market change with trepidation.. It is a major factor in the retirement plans of many families.  They plan to sell a high priced city home to move to a lower priced retirement venue and a house price crash will wreck those plans.  Even those with property that is mortgage free will be seriously affected by such price instability.

At this stage, it is impossible to determine a precise cause for this price decline.  In recent weeks auction clearances have dropped and general sales volumes have eased.  Sellers who expected a quick sale eased their expectations  - and the rumour spread that prices were falling.  From there the rumour mill went into overdrive.

Just where this ends up is entirely in the lap of the Gods.    Whether it becomes a rout or a mere hiccup will depend on the evaluation put by individual minds and the action that follows. We would be wise to buckle our safety belts.  We may be heading for a rough ride !