House prices continue to dive as mortgage distress grows sharply

“South Africa is now joining an international landslide in this sector”

Home repossessions, insolvencies and distressed residential property sales jumped alarmingly in the last quarter of 2008, according to results released from the Alliance Group’s Distressed Asset Index.  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.

According to Alliance Group Chief Executive, Rael Levitt, the residential property market is now in the third quarter of a technical recession and the slide is now generalising into all parts of the market and has intensified since November last year. “Despite sunny optimism from many residential agencies, the reality of the housing market is that it is going through a startling downward correction,” explains Levitt.

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.

South African house price deflation is reflected in a recent jump in negative housing equity, which according to the Alliance Group, is now most probably at 1 in 15 South African homes that are FOR SALE are in negative equity. “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.”

According to Levitt the heart of the current global recession has been the collapse of housing prices. “South Africa is now joining an international landslide in this sector”. 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. According to the Distressed Asset Index, 80% of bondholders who are in severe mortgage stress will most likely have to sell or lose their homes either voluntarily or forcibly. Severe mortgage stress catapulted from 8,000 in the second quarter of 2008 to over 35,000 in the last quarter.

Levitt explains: “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, and, according  to Levitt, one merely need to look at 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 R1million – R3million 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 R10million 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.”