What can tip Australia into a downward property price spiral?

June 30th, 2007

Share |

Back in our previous article, Can Australia?s deflating property bubble deflate even further?, we said that:

How will a further house price deflation work out on the ground? It will start with mortgage repayment delinquencies, which will result in increased foreclosures. This will lead to lending institutions repossessing homes and having to urgently sell them to the market to recover losses incurred by bad mortgage debts. As we all know, such importunate sale rarely fetch a good price for the seller. When that happens, through the principle of imputed valuation (see Spectre of deflation on the concept of ?imputed valuation?), a minority of house sale will lead to a downward revaluation on the rest of the housing stocks. If the downward movement is strong enough, it may trigger a race among these sellers to get rid of their houses?a feedback effect.

Today, we read a report in the Sydney Morning Herald: Surge in families forced to sell their homes:

Because so many mortgagee auctions were in a weak market, they are probably putting downward pressure on prices. Mr Dhillon said he sold a house in Macquarie Fields for $287,750 last year, but a similar home in the same street sold at a mortgagee auction for $220,000 last month.

With the Australian debt levels so high, a recession (with an accompanied increase in unemployment) will result in more distress property sales and further downward pressure on property prices. In such a scenario, what is happening right now in Western and South-Western Sydney can be extended to the rest of Australia.