Those unfortunate souls who default on their mortgages are unwittingly dragging their neighbours down too, with housing prices in these areas more likely to mortgagee fire-sales by as much as four times the average elsewhere.
For instance, of the 15 suburbs in Sydney with the highest number of mortgages that have been defaulted on, median houses have fallen 12 percent on average over the last four years. This is far higher than the 2.9 percent average decline in house prices across Sydney.
The likely reason for this is that a large number of mortgagee sales in a particular suburb can create a stigma for a particular neighbourhood. This in turn undermines the potential sale prices of other properties nearby, even though they may not necessarily be for sale because of mortgage stress. Buyers look at the prices of mortgagee sales and equate that ALL house prices should be of a similar value.
The subsequent effects of lower housing prices then further spread to neighbour’s property’s who maybe happy to stay put, but lower property prices limit their ability to use their property as equity for a personal loan or investment loan.
This situation further highlights the importance of investors doing their homework and of choosing neighbourhoods that DO NOT have a high number of repossessions.
On the flip side, however, if banks encourage people to purchase mortgagee repossessions, the demand for these properties will increase, pushing their value up and thus creating a somewhat more reasonable situation.