House prices: dipping or diving

Auctioneer paints scary picture as home loan distress grows; estate agents, others say South African property market isn't "landslide" bad.

"South Africa is now joining an international landslide in this sector". That was the stark warning about the country's residential property market, issued by the Alliance Group's chief executive Rael Levitt this week after the release of his company's Distressed Asset Index results.

But estate agents have been issuing statements, suggesting we are not far from the bottom of the cycle. Who is right? Should you buy now?

House prices "diving" - the auctioneer's view

Home repossessions, insolvencies and distressed residential property sales "jumped alarmingly" in the last quarter of 2008, Levitt notes.

He says the residential property market is now in the third quarter of a technical recession. The index, which tracks various distressed asset classes, shows that the residential property market is in a deepening recession, house prices are continuing to fall and interest rates cuts are having a muted effect on mortgage arrears.

"Despite sunny optimism from many residential agencies, the reality of the housing market is that it is going through a startling downward correction," he says.

Levitt says housing price deflation is being fuelled by banks that are reassessing their exposure to the home loans market and being cautious in granting new mortgage loans.

"As bad debts spiral, banks are writing down their balance sheets and have made access to new home loan financing as tight as was last experienced in the early 1980s. There is little comfort to be taken from the current raft of available figures, with a shrinking economy, rising unemployment and falling house prices," says Levitt.

The Alliance Group believes negative housing equity - where your home is worth less than you owe on it - is now most probably at 1 in 15 South African homes.

"Those who are in mortgage arrears and are in the position where their outstanding finance is above their house's current market value and they are caught in a debt trap. Many people are sadly trapped in a home worth less than the loan they took out to pay for it," says Levitt.

The Alliance Group Distressed Asset Index tracks mortgage stress, which it has defined as mortgage holders who have been in arrears for two months or less. Mortgage stress has sharply increased from 75 000 in the third quarter of 2008 to 130 000 in the last quarter of the year.

"The rapid escalation of those in mortgage stress has picked up pace into 2009 despite interest rate cuts and we expect some very poor results in the first quarter of this year". More concerning, says Levitt, is severe mortgage stress where bondholders are over four months in arrears and likely to lose their homes. Severe mortgage stress catapulted from 8 000 in the second quarter of 2008 to over 35 000 in the last quarter.

Levitt says: "Despite a downward trend in interest rates, we are seeing severe mortgage stress continue to grow. Currently there are approximately 1 200 houses per month which are being sold forcibly through legal channels which include sales in execution, insolvency sales and banks' voluntary distressed sales channels.

"One of the positive indicators that the residential property market is still active is that buying activity of distressed houses has surged. Distressed auction floors across the country are burgeoning and there are hordes of opportunistic buyers looking to pick up properties at lower prices. In the last downturn banks couldn't give away distressed properties and had to keep them on their books as properties in possession. Now, there are multitudes of buyers who have access to financing and see the current period as a period of opportunity as unprecedented volumes of houses hit auction floors."

According to Levitt, the only factor that can alleviate severe mortgage stress will be aggressive interest rate cutting. "The Reserve bank will have to follow international central banks in applying far more severe rate cutting. What we have seen to date from their Monetary Policy Committee is too re-active and too slow. Financially distressed South African households are crying out for significant interest rate cuts and while the Reserve Bank concerns itself with targeting inflation, many families are simply interested in targeting to retain a roof over their heads".

Unfortunately interest rates cuts are having a limited effect on property values, says Levitt, who points to the UK and USA, where interest rates are heading towards zero yet house repossessions have remained at historic levels.

Internationally distressed housing markets have continued to grow and are fuelled by a collapse of household balance sheets and the inability to raise new financing. According to Levitt, over the last two decades, South Africans have become used to recessions but these have been alleviated by reductions in interest rates which have created credit-induced spending and caused house prices to grow.

"But this recession is different", says Levitt. "With a triple whammy of a deepening global recession, job losses and a constrained financial sector, this downturn is differentiated from previous forms which were largely interest rate-driven".

"Worryingly, the knock-on effect of a housing market in recession is the inevitable cutback in households which are rapidly cutting back on consumption and the demand for new housing". There has also been a sharp spike in company liquidations of residential property developments and allied services. "Many residential property developments are in real threat of hitting the wall and recently we have seen liquidations of well known property developers which cannot sustain themselves".

"Throughout most of last year, the sector of the residential market that was most affected were the single residential units, previously valued in the R1m - R3m category with particular problems in the secondary and leisure housing markets. By the last quarter of 2008 residential developments, development land and incomplete developments were the sectors which were experiencing most of the pain. In mid-2008 the upper end of the residential market and particularly the luxury market over R10mi was not affected by the downturn as wealthy buyers continued investing in affluent areas. Now there is no doubt that these markets are being affected and whilst there is still muted buyer demand, buyers are now dictating prices".

"House price deflation may start to bottom out in late in 2009, but unless we see significant rate cuts this year, distressed homeowners will lag the market by two quarters. However, continued contraction in credit availability, lower loan-to-value ratios and increases in funding costs for borrowers will continue to put downward pressure on values. What the credit boom gave, the crunch may take away."

House prices dipping - the estate agents' view

Mike Greeff, CEO of Greeff Properties, like many other estate agency bosses takes comfort from the latest figures from Absa Homeloans. He says these "indicate clearly that in 2008 house price growth slowed noticeably in all price categories and across most of South Africa - but the overall picture is nowhere near as bleak as many property watchers would have us think."

"Absa's prediction is a 2,5% nominal house price drop in 2009, but it should be noted that the Western Cape, with a 5,2% overall price rise, was in 2008 the outstanding performer in SA. Cape Town itself should see a 2,4% nominal price increase."

"It has to be remembered that from 2004 to 2006 prices rose roughly 30% per annum. Any purchase before this date is, therefore, still showing an exceptional capital gain and will probably see a doubling of his home's value by late 2010.

"With an anticipated drop of 3,5% by October 2009 now would, in my view, be a good time to get into residential property. The current period must be close to the imminent bottoming out of the market," he says.

Like Greeff, Laurie Wener of Pam Golding Properties says "it's not all doom and gloom". "It is undeniable that there has been a downward trend in the property market and a reduction in transaction volumes, resulting in downward pressure on prices," says that group's MD for the Western Cape metro region.

"Certain suburbs as well as specific types of homes are bucking the trend, and continuing to attract high levels of demand and even top prices. A handful of top-end properties which are iconic or individualistic in terms of design, position and finishes, sometimes defy market trends, as they can only be acquired at a price acceptable to the seller. These sellers are often prepared to wait for the right price, or especially for a cash buyer. This trend generally occurs in upmarket areas such as Clifton, Bantry Bay, Camps Bay, Upper Constantia and Bishopscourt. "

Figure were up for Wener's organisation for January, with more sales, more interest from potential buyers, and better attendance of show-houses. "There has also been significant improvement in the lower-priced segments which were initially hardest hit when the market started cooling, but are now picking up noticeably."

This is especially true, says Wener, of the lower-end price ranges in the Atlantic Seaboard and Southern Suburbs (up to R2m, and particularly in sectional title sales) and in the Northern Suburbs (residential sales up to R3m).

There is "no denying that some areas have been hard hit by the downturn, particularly where buyers typically have high mortgages relative to value.

Wener says in areas where there has been high investor activity over the past 18 months or so, like Cape Town's inner city, owners may now find it difficult to recover their costs in the current market. "Our advice to investors/owners would be that if it is at all financially feasible for them, they should try to hold onto their properties and rent them out until the market recovers, rather than sell now at a loss. The market will recover and they will see capital growth again."

Cash buyers remain at a significant advantage in the current market, adds Wener, as banks continue to tighten their lending conditions even further. "Whilst the latest reduction in interest rates announced on 5 February is a welcome step for home-owners," she says, "the ongoing conservative approach being taken by banks towards their loan criteria and reduced mortgage loan budgets will dilute its positive effects to some degree."

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