Down but not out -just yet

The nightmare of entire suburbs plastered in “for sale” signs is not here, not yet anyway.

Although foreclosure figures in South Africa’s property market may have increased, they make up less than 1% of the more than two-million loans on book. But experts say that should the current economic climate prevail—with no interest rate relief for bond-holders in sight, and shrinking disposable household income—things could get worse.

Earlier this week the Alliance Group’s research showed that about 70 000 bond-holders are at least one month in arrears on their mortgage payments, although about 25 000 are in arrears of more than four months and under threat of foreclosure.

But Alliance Group chief executive Rael Levitt says this is from an extremely low base and in the grand scheme of things it is “actually negligible”, compared to the size of South Africa’s mortgage market.

In times of rising interest rates and shrinking growth, the rise of mortgage delinquency is “as sure as death and taxes”, says FNB home loans property strategist John Loos.

Loos says that given the increased size of the property market, which has grown ten-fold since 1998, an increase in the number of foreclosures is also likely.

What is of concern to Loos, however, is the growth of the household debt service ratio. This is the ratio of a household’s debt payments to its disposable income.

“This is a good indicator of household stress levels,” says Loos. He estimates that the ratio currently sits at 12%, levels that have not been seen since 1998.

Countries such as the US and the UK have seen their housing markets descend into freefall. More than 10 000 foreclosures a day take place in the US. In the UK about 10% of the housing market is in a negative equity position, in which the value of the mortgage on a house outstrips the actual value of the property.

According to Levitt only about 1,8% of South African homes are in danger of slipping into negative equity.

But the depth of the global market turmoil and the extent to which it will affect South Africa’s economy could be the larger problem.

“How bad the global recession is going to get is a big concern,” says Loos. There is the possibility that the local economy could follow the slide into recession and halt growth. Job losses become a real threat, he says.

“People’s income streams are much more of a concern for a home loans bank,” says Loos.

In research published earlier this month Absa Bank noted “in real terms, after adjustment for inflation, house prices were in September at levels last seen in January 2006”. It recorded, on average, a real house price growth decline of 10,2% year on year in August.

It attributed the slowdown to a number of factors including inflation, interest rate hikes and the slowing of real household income growth.

“There is real concern with macro-economic issues,” says Jacques du Toit, senior property analyst at Absa Bank. “Real disposable income growth is already under severe pressure. It could become difficult for households to service their debt if job losses take place.”

Busing to the best buys
The auction market, which disposes of many a repossessed home and property, is unfamiliar territory to most potential buyers.

With this in mind, Sandro Crosti, chief executive of PropList and Repolist, two real estate businesses, decided to create Repo Bus Tours, the first of its kind in South Africa.

The tours, taken on a luxury bus, operate across Johannesburg and take potential buyers to properties and auctions around the city. If the bus can’t get to the property, the auction can be held on the bus.

“We saw the flood of properties coming on to the market and we needed to create interest from the public. We also want to get as much as possible for sellers to ensure they can cover their debt,” he says.

The first tour ran last Saturday, but Crosti says the company is preparing for a roll-out in centres such as Durban and Cape Town, within the next three weeks.

It costs R200 to take a tour but people on the tour are “serious buyers”, he says, pointing out that the first tour saw all the properties auctioned off. Crosti believes that market conditions are not going to improve in the immediate future.

“We are dealing with the backlog. We see the effects only 18 months down the line and we still have 18 months of trauma in store.”

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