On the Brink !

In that nursery rhyme, Chicken Little ran through the village hysterically shouting " The sky is falling " and this created a panic.  The news that Sydney house prices have fallen by a little over six percent right at the markets traditional seasonal bump is having a similar effect.   The sad news is that it seems to have a further retreat pending, and twelve percent is the estimate of the merchants of doom.

Unfortunately, the day by day way price expectations increased in recent years has been a " pricing bubble " that must inevitably burst.  It was simply the law of supply and demand, and with demand exceeding supply the price moved ever upward.  People paid unrealistic prices in the expectation that the market would move to cover their exposure.

The timing of this price retreat is terrible.  The banking Royal Commission has laid bare the greed and corruption endemic in Australian banking and much of this was reflected in the home finance market. In many cases the ability of home purchasers to adequately service their mortgage was ignored and new owners entered the market with a mortgage that came perilously close to the purchase price.  Often, what little served as owner equity was a gift or loan from family or friends.

Many rushed to get a foot on the Real Estate ladder at any cost.  There was the expectation that if repayments became difficult, the property could be returned to the market and even deliver a nice profit.  The important thing was to gain a foothold before the housing price passed beyond the reach of the average buyer.

We are probably about to see a repeat of the market meltdown that followed the 2008 global recession.  Many buyers will hesitate to commit on the expectation that prices will fall further.  The banks and finance industry will be quick to repossess when mortgages fall into arrears and a glut of bank owned properties reappearing on the market will further depress prices.   In 08 the banks made no attempt to stem the losses by offering such properties on the rental market or ensuring that they were maintained in a presentable condition.  Banks simply lacked the expertise to market what their finance activities had returned to their keeping.

Perhaps the only saving grace is that the Reserve Bank of Australia will certainly hesitate to increase the interest rate as has been predicted for some time.   There was the expectation that a rise was imminent and that is likely to be deferred to 2020 or longer.   A lot depends on movements on world interest and the tariff trade war between America and China is likely to put that on hold until the situation clarifies.

It looks inevitable that we are facing a housing price shakeout.  Most recent buyers may find the offering market below what they paid and even suffer a valuation below what they owe on their mortgage.   They would be wise to stick with this potential loss because - as happened in 2008 - the market will eventually recover and again start to rise and a home will be the most valuable asset achieved by the average person.

As Chicken Little discovered, the sky didn't fall and that rumour turned out to be a fallacy.  The security of living in a home you own - or are paying off - is still the anchor to your financial stability and expectation of a comfortable old age.   What we are seeing now is a price illusion that is returning to reality !