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Real Estate Industry

August 23rd 2006

PROPERTY'S PAINFUL TRUTH

Sydney first, others will be next.


by Neil Jenman

A story on page 3 of Monday's Sydney Morning Herald (August 21, 2006) has probably become the most talked-about property article of the year.

Suddenly, the painful truth of Sydney's property market can no longer be denied, covered-up or buried under self-serving industry spin.

All the recent real estate cliché words– such as 'soft landing', 'correction', 'adjustment', 'plateauing,' have been swamped, tsunami-style, with one truthful word – CRASH.

The first two words in the Herald headline were 'Housing Crash'. And the first paragraph proved this was no media beat-up. A home in Sydney's western suburbs which had been bought at the peak of the boom in 2003 for $450,000 had been re-sold for $260,000 – a 42 per cent price fall.

The owners, who had been unable to keep up the payments on their mortgage of $405,000, saw it sold by the mortgagee for $260,000.

Another painful truth is now becoming evident in the property market – negative equity (where the amount of the loan exceeds the amount of the value), in this case $145,000.

This one sale is not an isolated case. Of 16 sales checked by the Herald, more than half had sold for less than their previous sale prices.

Another property which sold for $257,000 in 2003 was re-sold for $156,500.

So why do the "official figures" not show these drastic price falls? Well, two reasons – first, as everyone in-the-know knows the real estate industry distorts and twists its sales results.

As finance journalist, Michael Pascoe, wrote in crikey.com.au last week, "A Sydney Century 21 real estate agent has broken one of the golden rules of his profession: never admit there's anything wrong with the market as it's always a good time to buy." The agent had confessed that "there's absolutely nothing happening out there".

Such honest comments are not welcome among the real estate crowd.

The second reason that the "official figures" do not show the true decline in property prices is because the affordability crisis has forced so many first-home buyers out of the market. Consequently, with fewer lower priced homes selling the overall figures are distorted. The prices appear higher.

Also, many sellers who cannot achieve the price they want simply withdraw their homes for sale. Just because they refuse to sell it doesn't mean their homes have not dropped in price.

For example, in another western Sydney suburb an investor who was told back in 2003 that he could sell his property for "around $320,000" was told last month that he "may get $200,000". He decided not to sell. Such price falls do not show up in the official figures.

And the price falls are not confined to the western suburbs of Sydney.

Yesterday, an agent from the inner-city suburb of Balmain said, "I would go so far as to say that the market is dropping weekly at the moment."

In Sydney, the spin-doctors are finally silenced. Many agents who urged people to keep on borrowing and buying, borrowing more and then buying more are now handling the distressed and mortgagee sales. Spin or no spin, some agents never lose.

Meanwhile, in other parts of Australia, the spruikers (agents, property experts, investment advisers or whatever they call themselves) are telling buyers that the Sydney market is different and that their area is not going to be affected by a downturn. Don't believe them.

Haven't you ever noticed that the people urging you to buy real estate are the people who are selling it?

Just remember: the property boom began in Sydney and then spread across the nation.

The same will apply with the property crash.


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Further reading:

Herald article on the Sydney 'Housing Crash'

Apples with Apples
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