Preparing for a Possible Property Plunge

That would clearly be great news for those struggling to buy their first home.

Amongst those who are already homeowners, the "wealth effect" - which makes you feel richer when house prices soar and so you spend more - would diminish. But that's no bad thing.

If your house price has doubled, so has the next one you buy, so you are not really any better off. Shopping sprees inspired by the wealth effect can be bad for your financial health.

Beyond that, the vast majority of current homeowners - and also many landlords - could just sit out a plunge in house prices, or else sell and buy in the same market and suffer no loss.

However, there are two groups that worry me:

· People who buy a new home before selling their old one.

If you did that in the buoyant market of the last few years, it probably didn't matter much. These days, though, you might not find a buyer quickly.

If you are paying high-interest bridging finance to cover the costs of two properties, you could well become desperate to sell. And desperate home sellers often end up selling for many thousands of dollars less than they hoped to receive.

To avoid this situation, try not to even look at houses to buy before you've sold yours. If you can't resist looking and you fall in love with a place, make an offer on it subject to selling your old place for at least a certain price.

· Landlords whose rental income doesn't cover their mortgage and other expenses - particularly if their property is heavily mortgaged.

If this is you, now is the time to work through a worst case scenario.

What would happen if your other sources of income dried up? Perhaps you lost your job and couldn't get another that paid so well, or you had an accident or became too ill to work.

Or what if your tenants left and you couldn't replace them for several weeks?

On the expense side, what if the tenants wrecked the place, or you suddenly needed to replace a leaky roof, or the wiring or plumbing? Or your rates or insurance rose much more than expected?

What if several of these things happened at once?

I know this is all hugely pessimistic. But every landlord has bad years. And if you simply can't make ends meet and you're forced to sell the property when prices have fallen, you could be in for a nightmare.

Heavily mortgaged landlords in such situations sometimes receive less for their property than the mortgage. They wind up with no asset and a debt to the bank. It's no laughing matter.

To avoid such a predicament , take action now. If you own several rental properties, you might want to sell one before you are under any pressure, so you can hold out for a good price.

To speed things up, you could put two or even three properties on the market and accept the first good offer on any one of them.

Having one less property will cut your total cash outlay. And you can use the proceeds of the sale to reduce the mortgages on your other properties.

If you own only one rental, consider trading down to a cheaper one. That should reduce your cash outlay, and strengthen your position as your equity will make up a higher proportion of the property value.