Aussies Are Having a Hard Time Selling Their Property

This from News.com.au:

When 229 Denison Street in Newtown in Sydney’s inner west hit the market recently, the owners were confident it would fetch around $1.6 million.

After all, a similar house right next door had sold for $1.58 million less than a year before — so when they received an offer for $1.55 million last month, they turned it down.

But it was a move that would end up costing them a whopping $85,000, with the four-bedroom home eventually selling for just $1,465,000.

It was a similar story when 70/252 Willoughby Road, Naremburn sold last week for $665,000.

The price guide for the one-bedroom apartment had been between $700,000 and $750,000 — and the owners also rejected a higher offer than the property ended up selling for earlier in the campaign.

The buying frenzy is gone. Owners are expecting to sell at last year´s prices, yet prices have dropped since.

Prices and clearance rates are plummeting in Sydney and Melbourne.

For one, access to finance isn´t as easy to get.

For another, buyers may hold off on buying to see if property prices keep dropping.

Will the downtrend continue for Aussie housing?

Will the downtrend continue? And, when will the prices level off? We received mail from one of our readers exactly on this topic recently.  This is what he had to say.

Whilst I read your emails carefully and do value the content therein I would like to refer to your comments that housing prices could drop as much as 50% as stated by Harry Dent (whose writings I respect). While varying economic and Government influences overall can affect housing prices, and I guess one would suggest such changes as A) reduction of Chinese money permitted into the country. B) restricted lending by banks. C) Down the track interest rate rises. D) Levelling of an overheated market, one could go on, however it is a fact that building materials such as bricks ,cement ,timber, gyprock etc. is still rising. Also brick layers are now charging $1.30 to $1.40 to lay one brick. My question here is as the build cost is increasing which naturally increases the sale price of a new home, where does the correction of overpriced homes level out .Taking in my basic comments above I find it very difficult to grasp Harry Dent’s and your reasoning in suggesting a 50% drop/correction . Maybe a 10% to 18% drop. If we had a 50% drop the banks would have a lot of unwanted stock on hand not to mention the untenable position of the borrower. In any case I would appreciate your comments.

Will the downtrend continue? Can it really drop to 50%? Well, ultimately, it all boils down to supply and demand.

As long as demand keeps falling and supply increasing, we will keep seeing price falls. The correction will level out when supply meets demand.

Yet, as the rate property has gone up in recent years in Sydney and Melbourne, it could very well have a lot more room to go down.

The main reason for my thinking is that property prices have been increasing at a much faster rate than salaries. That´s why people have had to rely on credit to get into property.

Yet cut lending, and demand falls.

The RBA is already keeping an eye on credit cuts. As they noted on their recent meeting minutes:

Members observed that while the regulators had already overseen a tightening of lending standards, and a degree of tightening of lending standards had been implemented by banks in anticipation of the Commission’s findings, it was possible that banks could tighten lending conditions further given the issues raised in the report. Members noted that it would be important to monitor the future supply of credit to ensure that economic activity continued to be appropriately supported.

The problem is, it is all a vicious circle.

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What do falling house prices mean for Australians?

Falling prices mean that property owners — especially those that bought at the tail end — will see their equity fall into negative. That is, they owe more than what their property is worth. This will affect their ability to refinance and their consumer spending.

Recent research from Roy Morgan shows that the number of mortgage holders with little or no equity has increased from 8% to 8.9% in the last 12 months. It is true that much of the increase was in Western Australia, but we could see increases in this number if Sydney and Melbourne prices keep falling.

And yes, that is correct. If property prices were to fall by 50%, banks would be left with a lot of stock.

Unfortunately, Spain gives us a great case study for this.

After the property bubble of 2002–2007, property values fell by about 45%.

The end of the bubble led to a slowdown in construction and consumer spending.

Property developers went bankrupt. The country was left with large amounts of unfinished or abandoned developments.

Unemployment also shot up, which led to a wave of mortgage defaults.

Banks were left with a large stock of repossessed homes. Banks held on to these empty properties hoping to ride the crisis out. But, it lasted longer than expected…

To clean up their balance sheets, banks created a ´bad bank´, the Sareb. Sareb bought toxic properties from the banks.

Banks also set up their own real estate companies to get rid of their stock where they provided discounts and the credit needed to buy.

But even at massive discounts they are still having a hard time selling.

Banks holding a lot of empty stock brings its own set of problems.

For one, banks have left properties untouched for years, not even paying body corporate fees.

Empty properties, and high unemployment, has also led to an increase in illegal occupations.

According to data from the Spanish General Estate Prosecutor, courtesy of ABC, between 2014 and 2015 illegal occupations increased by 92%.

Banks describe these homes in their ads as homes in ‘special situations’.

What they mean by property in ‘special situations’ is that they are usually occupied by squatters.

What’s so special about a property in ‘special situation’?

Well, for starters, you can’t inspect it. And you can’t get a mortgage to buy it, either. If you want to purchase it you need to pay cash. The new owner will also have to take care of the costs of vacating the property.

That’s why they are usually massively discounted.

And, all these events are now creating room for a different bubble…a rental bubble.

I wrote about this recently in Markets & Money. You can read it here.

As always, it is great hear from you. Remember, you can always reach me at cs@portphillippublishing.com.au.

Best,

Selva Freigedo,
Editor, Markets & Money

PS: If you want to protect your family wealth, you need to know why this financial expert is predicting economic collapse. Find out more here.


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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