Money Morning –
Tuesday, 29th March 2011
By Kris Sayce
* Real Estate Industry Forecasts Major Price Falls
In today’s Money Morning: House prices to drop 5%… Valuers make real valuations… A lifetime of servitude… Statistics ARE lies… Black or White Swans…
Real Estate Industry Forecasts Major Price Falls
Your editor is still on Australian Small-Cap Investigator duties this morning. Click here to get the latest issue when it’s released.
“We anticipate a reduction in the median price from $601,500 in December last year to somewhere between 3-5% below that in March.” – Enzo Raimondo, CEO, Real Estate Institute of Victoria.
It seems it’s not just the so-called lunatic fringe saying the housing bubble has burst.
Yep, your editor has been called worse than a lunatic for saying house prices are over-valued. It’s a good job we’re thick-skinned and can handle it.
After all, we’re not afraid to point fingers at others. So it’s only fair we cop it on the chin when others attack us. And we’re happy to cop it because ultimately, we know we’re right.
Make no mistake, a 3-5% drop in the median house price is big. Especially if you’re mortgaged to the eyeballs. For some, when you take into account the fees associated with buying and selling, it can mean the difference between walking away break-even or walking away with a big loss.
And I mean big.
A 5% drop from $601,500 is a fall of $30,075.
That’s a lot of money to lose when you’ve been told house prices always go up.
But as I’ve written before, the median house price number is misleading. Because it only shows the value of houses that have sold. It doesn’t include all those poor souls who are unable to offload the burden of an oversized mortgage on an overpriced house.
Throughout Australia there are thousands of people who just can’t afford to sell.
Thanks to the spruikers and government handouts, these people have locked themselves into a lifetime of servitude to the banks.
Too scared to take a loss
Well, imagine you bought a house for almost no money down at the peak of the market in 2009. You put in a few grand of your own money, but most of the deposit came from the first home-buyer’s bribe.
Now you realise it was a mistake because you can’t afford the increase in interest costs, and you want to get out. Only you can’t. Because selling now means taking a loss on the property.
How can you lose when you didn’t put anything in? That’s not fair. But that’s what happens when you’re suckered in by bankers and spruikers.
Not only that, but because you’re in negative equity once you sell you’ll still owe the bank cash for the shortfall. Not forgetting the agent’s fees and removalists and coming up with a deposit for a rental property.
What are the alternatives? I mean, there certainly aren’t any savings to draw from because the mortgage is such a burden there isn’t any spare cash to save.
All the home owner can do is either resign themselves to living in debt-ridden poverty – in a big house – or try and get a personal loan from the bank to cover all the expenses. To be honest, that’s probably the best option.
But few will take it. They’ll prefer to wait until the value of housing has fallen even further and the negative equity is even larger. At that time, with higher interest rates, they’ll have no choice but to bail out.
FOR FULL REPORT http://www.moneymorning.com.au/
See our previous post for a frightening graphic history of house prices http://wp.me/pgE34-3f