As house prices soared, many property owners and the Government made a killing. Now those who missed out then face a double whammy. Matt Wade reports.

THE casualty list from Sydney's property boom is growing. First, a generation of first-home seekers found itself priced out of the market. Then, as house prices finally sagged, thousands of overstretched investors and owner-occupiers fell into trouble.

And now, even vulnerable people who had nothing to do with the fluctuations of property prices could be hurt. As the State Government struggles to repair the holes in the budget caused by stagnant property revenue, the aftermath of the boom could be painful for bystanders like the old, the sick, the disabled and the poor. The suffering would occur if the Government were forced to cut services and lift charges for these groups as it covers the shortfall in property taxes.

How did it get to this?

Housing booms, and the slumps that follow, take a long time to play out. Sydney has now been in the grip of one of these cycles for more than a decade. The city's latest - and greatest - house price boom began in the mid-1990s, gathered pace after the 2000 Olympics and reached its zenith in mid-2003 when prices were rising at more than 20 per cent a year.

But, inevitably, the bubble deflated. So far, the downturn has been relatively modest and has not pushed the national economy into recession. For that we can probably thank another well-timed boom: the surge in prices for Australian minerals, fuelled by the Chinese demand. Even so, the economic fallout from the house price boom is far from over.

An international survey published last month by an American public policy consultancy, Demographia, showed that despite recent price falls, Sydney was still the seventh-most expensive property market in the world. It takes 8.5 times the median Sydney income to purchase the median Sydney house, compared with 7.9 in New York, 6.9 in London and 6.4 in Melbourne. In Atlanta, it was just 2.8.
The report's authors say a ratio over 3.0 is unaffordable, and rate Sydney in the "severely unaffordable" category.

The median Sydney house price, calculated by Australian Property Monitors, was $520,000 in the September quarter - a daunting figure, in particular for first home owners or those moving from interstate.
At the peak of the boom the proportion of first-time buyers slumped to less than one in 10 and they are still relatively scarce.

It was the opposite for investors when prices were going up: they accounted for around half of all home loans - an unprecedented proportion.

But a blowout in the number of mortgage defaults last year suggests some of them were unwise. There was a record 4873 cases on the NSW Supreme Court's Possessions List in 2005 - a 59 per cent rise on 2004, and more than double the number in 2003. Housing investor defaults were probably a factor in this surge in legal action against borrowers, some industry analysts say.
But Katherine Lane, a solicitor at the Consumer Credit Legal Centre - which gives free legal advice to borrowers in crisis - says the number of owner-occupiers being forced to sell their homes is growing.
"Investors are part of this, but in my experience from advising people here at the centre, it's mums and dads as well," Lane says. "The cost to these families is horrendous - there is great financial loss, there is stress, there is the embarrassment of losing their house and then they have to move out of their community."

However, first-time buyers and highly geared property investors are not the only ones being haunted by Sydney's property bubble. Gary Moore, the director of the NSW Council of Social Service, is worried that those who had nothing to do with the boom might pay a price as property revenue growth stalls and the NSW Government is forced to wield the axe.

"It's terrible irony," he says. "The low- and modest-income earners who were not able to build up the value of their assets through the housing boom, and who have not been able to reap the benefits of more than a decade of growth, are the ones who will experience the pain of cuts."

These fears deepened last week when the influential business group, Australian Business Limited, released its blueprint to overhaul the state's finances and revive the NSW economy. It proposed halving the Sydney Water pensioner discount, lifting public housing rents, scrapping the $50-a-child back-to-school allowance and reducing the cost of disability services. Under its proposal, students would also pay an $80 annual levy for school travel passes.

The reason for the group's sweeping proposals is the state's deteriorating budget, which is forecast to plunge $500 million into deficit next financial year.

An important cause of these budget woes is the rise and fall of Sydney property. During the boom, rivers of stamp duty gold flooded the state coffers. This allowed NSW to significantly reduce state debt without eye-watering budget cuts. It also meant the rising costs of delivering such basic services as health, education and police could be covered without too much political pain.

But things have changed. The property slump has subdued spending and construction activity and left the state economy lagging the rest of Australia. Last financial year was the worst for NSW since the 1990-91 recession. Its economy grew just 1.1 per cent in 2004-05, the worst performance of any state.

Unemployment last year hit 5.5 per cent, compared to the national average of 5.1 per cent; employment growth in NSW is much lower than the national rate. The state's share of the Australian economy is also shrinking, down from 36 per cent in 2000 to 34.3 per cent in 2004-05 - the lowest proportion since the Bureau of Statistics started keeping state ratios in 1989-90.

The soft NSW economy has taken a toll on state income, especially revenue derived from the property market. Stamp duty, which peaked at nearly $3.7 billion in 2002-03, has dropped by $500 million.
But while revenue is under pressure, the cost of delivering services continues to rise. As a result, the state's budget position has become progressively worse over the past three years. Since 2002-03, state budget expenditure has ballooned from $34.3 billion to a projected $40.6 billion this financial year, a rise of 18.4 per cent. Australian Business Limited says the NSW Treasury has underestimated expenditure by an average of 17 per cent since 2002-03.

When Morris Iemma became Premier, he announced a special budget audit to deal with the state's financial challenges. The Finance Minister, Michael Costa, has conducted an audit which is about to be considered by cabinet and Iemma will soon unveil an economic statement addressing long-term budget problems.

Australian Business Limited's plan to fix the state's finances, Kickstart NSW, identified more than 30 measures worth $3.5 billion to restore the budget surplus and cut business tax. This includes slashing expenditure by $442 million and lifting revenue by $220 million by 2008-09. It also identified almost $770 million in savings from efficiency gains and asset sales across several departments by 2008-09. It also proposes cutting payroll tax in NSW from 6 per cent to 5.25 per cent by 2008-09 to help stimulate economic activity.

Gary Moore condemned Kickstart NSW as a "savage kick in the guts to low- and middle-income earners." There is a limit to how many efficiency gains that can be made before services suffer, he says.
"Eventually the hollow logs just don't exist any more, and that means pain for consumers of Government services in some way or other."

Iemma says his Government will consider Australian Business Limited's proposal, but notes one of the features of the submission is "that everybody suffers except them". With an election a little over a year away, Iemma's economic statement will be tailored to suit the Government's political needs. The focus is likely to be on internal savings rather than politically damaging program cuts. But, as the social service council says, efficiency gains can result in inferior services for those in need.
Of course, if state revenue remains soft for longer than expected, whoever wins the next state election, due in March next year, might be forced to introduce measures that hit low-income families and other vulnerable groups.

Sydney's property boom is still echoing - but it doesn't sound good for some unexpected victims.
You know you're a property boom victim if you're a …
1. FIRST TIMER

Thousands from Generations X and Y have given up hope of owning property in the world's seventh most expensive city. The prospect of borrowing half a million dollars for a gloomy terrace in Dulwich Hill was too much. This group rent or continue to live at home.

2. DEFAULTER
Being locked out is better than being on the Supreme Court's Possession List, reserved for that select group who have defaulted on their mortgage. Consumer advocates say there is a growing number of owner-occupiers seeking help about repayment problems.

3. UNDERWATER INVESTOR
Some gung-ho investors who joined the stampede as the property market peaked are under water to the tune of 10-15 per cent. They face hopeless rental yields and years of paltry capital gains. Those who invested in a Sydney property in mid-2003 might have to wait until 2012 before they see their investment back at the purchase value. A record number of court cases against mortgage defaulters last year suggests many got in too deep.

4. POOR AND VULNERABLE
These are the innocent bystanders. Even though they stood by and watched as the property market rose and fell, welfare groups are concerned low-income and disadvantaged groups could be hurt as the soft property market puts the squeeze on State Government coffers. A budget deficit and rising costs have put pressure on the Government to reduce spending. Business groups have proposed measures that could increase costs and reduce services for vulnerable groups.