Aussie Property Prices: The Marginal Idiot Rules

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There’s a dirty secret about property prices…

And I’ll share it with you today.

But first, I want to show you a worrying trend in mortgage arrears. It’ll have some bearing on what we discuss after…

Some property owners are feeling the pinch already

If you’re a property owner or investor, this graph might disturb you.

It shows the rise in home loan arrears over time for ANZ bank’s mortgage holder’s bank as released last week.

In the top chart, you can see that both the 30-plus days late and the 90-plus days late figures have risen steeply recently.

Money Morning

Source: ANZ
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The bottom chart breaks up the 90-plus days late, state by state.

This trend is rising in every state, though the states of Victoria and NSW will have a bigger effect on the national total.

Anyway, the clear trend is that there are a bunch of people struggling to pay their mortgages. And that figure is rising.

But the Reserve Bank’s head of stability, Jonathan Kearns says he’s not worried yet:

Arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.

If you look at Australia’s history, you can see that total 90-plus day arrears were around double the current levels in the last recession in the early 1990s.

Money Morning

Source: RBA
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So, what does this mean for property prices?

Who sets the price of houses in your street?

As an investment market, property is a unique area.

For most, a property is just a place to live. Or maybe a long-term investment for their retirement.

As such, the vast majority of home owners are what you’d call long-term holders.

So, while they may watch the value of property prices in their area with interest (you’ve seen them out at auctions), they’re unlikely to sell without a clear reason.

This is where the ‘marginal idiot’ comes in.

It’s a relatively small amount of buyers and sellers that actually drive the market for everyone else.

Which leads to the perhaps frightening conclusion…

In no other market can a single bad decision by one person have an outsized effect on every other person in that market. You don’t see that often in shares, for example. If you buy too high or sell too low, the market will usually soon punish you for it.

But with property, a bad decision at the margin can change the perception of reality for everyone else. George Soros calls this ‘reflexivity’.

Now to be clear, anyone can be the marginal ‘idiot’. You, me, anyone…I’m not saying this in a derogatory way.

The point is this…

It’s the person who is forced to sell, or the person who bids far too high for a property to ‘get into the market’ that sets the prices for everyone else!

I repeat, I’m not calling all such people idiots, necessarily.

After all, if you lose your job, or something happens which makes your financial situation untenable, there’s not a lot you can do about it.

But — and this is a crucial fact — there will also be people struggling with mortgages because they made bad decisions, too.

They didn’t make contingency plans, they got into too much debt or they were sold an ‘off the plan’ dream by a convincing salesperson.

I repeat, it’s these people who set the price of property for everyone else. This effect works in both directions, up and down.

For example, if someone in your house sells their property for $1 million (and its similar to yours), you now think your property is worth $1 million. You’re anchored to this level and won’t sell below (if you don’t have to).

Which is why the graphs at the start are important. It shows that the number of forced sellers is increasing.

But it’s not the only factor to watch right now…

Push and pull

Now, I’m not going to jump in with some ridiculous claim of how far property prices might fall.

That could happen, and probably will happen if we get a global recession which hits jobs.

But never forget there’s forces working very hard to stop that from happening.

It’s clear the government are ready to throw the kitchen sink to keep property prices up.

And they have some ammo up their sleeve.

If the economy falters, the government stands ready with a $100 billion infrastructure plan, which can be fast-tracked if necessary, too.

This will help jobs and in theory reduce stress on that arrears figure.

And on the demand side, there are some strong catalysts building…

Interest rates are falling — and likely to fall further. This might help some of these struggling mortgage holders get out of arrears or be able to reduce their monthly payments.

But it’ll also allow new borrowers to borrow more.

On that note, Westpac just won a case against the regulator ASIC, which now allows them to use minimum expenses in a loan application rather than actual expenses.

This means the marginal buyer can now borrow more.

Meanwhile, record low interest rates (and negative yielding bonds) might create the conditions for a new wave of FOMO buyers to drive up prices once more.

In Denmark, we’ve already got the situation where one bank is even offering 10-year mortgages where you don’t have to pay it all back!

The interest rate is -0.5% (yes that a minus sign), so if you bought a $1 million house, you’d only need to pay back $995,000. That’s not only no interest, it’s less principle, too.

Could that come here?

Whatever happens, it’ll be the battle at the margins, between those desperate to buy versus those that need to sell, which will determine the fate of your property’s value…

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Gold alert! Another asset to watch closely right now is gold. As the economy starts to stutter, gold prices have been rising strongly. My colleague Greg Canavan has put together a guide to help you decide whether gold has a place in your portfolio this year. Click here to claim your free report.

About Ryan Dinse

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately…

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