The Australian property market ended 2011 on the ground in a foetal position after a serious assault by Harsh Reality.

Symptoms include:

• A year’s supply of unsold houses on the market
• Low and falling building applications
• Low and falling finance approvals
• Failing auctions nationwide
• First home buyer indifference
• Universal consumer deleveraging

This year will see a major downward re-pricing of Australian real estate. Further, the rate at which it is falling will accelerate.

Negative gearers will abandon the unsound strategy of subsidising tenants to rent their properties, substantially increasing the volume of stock available for sale.

For twenty years, betting on property price rises was a winning strategy. Gains were multiplied by gearing – the bigger the leverage, the bigger the profit. The instinct to home ownership has been sorely abused. Price falls will erase the investment dream of an entire generation.

Risk of government intervention with a First Home Vendors’ Boost remains only moderate. Such an initiative would fail: price falls will continue as few FHB’s take it up. Those encouraged to buy with a small deposit would quickly enter negative equity and be trapped with high repayments in unsaleable homes. This cohort would become lifelong enemies of any political party responsible for such an outrage.

Steady quarter per cent interest rate cuts that trail price moves cannot spark investor interest. The RBA has learned its lesson.

Prosper called the bursting of the Great Australian Land Bubble in April 2011. We affirm our forecast that land prices will halve in real (adjusted for inflation) terms over five to six years.

The hardest hit in percentage terms will be prestige suburbs – Double Bay NSW, Toorak VIC, Peppermint Grove WA – where selling prices were driven hard by stellar demand and absolute land scarcity. Poor returns in the sharemarket and non-mining business crimped the pool of prestige home buyers.

Prosper has been encouraging potential homebuyers to stand aside from the market ahead of future price falls. We advocate buyers instead save an outsize deposit as an equity cushion and avoid exchanging renting a house for renting money via a mortgage. Anyone acting thus in the last year has substantially improved their personal financial position compared to those who took the plunge into home ownership.

2012 is merely one year in a five to six year correction. We speak of ‘bubbles’ which suggests overinflated prices are corrected with a ‘pop’. Reality is more insidious, more brutal. The process is more like a steady leak where profit and recovery hopes are dashed again and again, year after year, until mortgage repayments equal or better rents.

It can be argued the US housing market has recently crossed this rent/repayment divide, six years after their house prices turned. Yet the vast overhang of US properties in foreclosure suggests further price falls ahead.

Land prices inflating then falling causes enormous economic hardship to smallholders. If instead, we taxed land and untaxed wages and business, the boom would have been muted and the coming costs a mere fraction of what we will be obliged to endure.