Attention grabbing headline isn’t it? Before you waste your time reading the article let me put you out of your misery. No-one knows. Not me and not the gaggle of economists who predicted price falls would be around 10%.

In-house, Nick and I have this as our only disagreement. He maintains house prices in Sydney will fall 40-50% and I reckon 20-25%. But we’re not economists so what would we know. 

The official number currently stands at 14%. The unofficial/anecdotal number is much worse than that. So, what’s the unofficial number? We speak with real estate agents who have lines of apartments for sale at 30-40% discount to what they were being marketed before building commenced. Buyers have withdrawn as funding has dried up. Developers are being pressured to sell to recover enough money to repay bank debt.

Now before you stop reading let me explain why we think the way we think.

When clients ask us to look at finding a home loan for them we ask them a number of questions and quickly determine their borrowing capacity and their ability to service the loan. These (along with an appropriate Loan to Valuation ratio) are the two main criteria in deciding whether or not a client will be eligible for a loan.

That exercise became more and more difficult in the last 12 months and certainly after bank executives appeared before the recent Royal Commission.

However, the RC is not the reason house prices are falling.

The simple reason house prices are falling is that people who live here simply can’t afford them anymore. Which is exactly what happened in the previous major cycle which ended around 1990/91 with the “recession we had to have”.

Economically speaking – if you look at official statistics – we shouldn’t be here. Interest rates are the lowest they’ve ever been, inflation is low with a 1 in front of it (probably too low) and unemployment has a 4 in front of it. In the recession of 90/91 all of those numbers were in double digits.

So, what’s changed?

Well, despite the fact our wages have shrunk our lifestyles haven’t. That doesn’t reconcile. The implication being that we’re borrowing to make up the shortfall to maintain our lifestyles. At very low interest rates that’s probably sustainable up to a point. But all that additional debt has to be repaid at some stage. With a shrinking pay packet that becomes harder and harder. Eventually home owners are forced to sell to repay their debt.

Further, the employment number is rubbish. It’s no longer a meaningful number. Whilst the statistician may define an hour of work per week as being employed the reality is somewhat different.

Whilst the media has focused on the millennials and baby boomers. There’s a generation wedged in the middle who has for decades carried the burden of looking after their elderly parents and housing their millennial children. That’s Generation X.

This is where the next recession – if it comes – will emanate. The piling on to this generation is unsustainable and not a single line in the media has been written about them.

This is the generation who may be forced to sell housing to ensure their kids also have a roof over their heads as well as ridding themselves of the accumulated debt emanating from looking after everyone for the last fifteen years.

So, the next time you read a headline about house prices. Keep in mind that nine short months ago those charged with predicting such things were all wrong.

Here’s one thing Nick and I agree on. House prices will continue to fall until people can afford to buy them again.

We’re not there yet.