Homeowners risk negative equity as house prices drop
July 2, 2008
By Roy Cokayne
Pretoria - Standard Bank's median house price last month dropped by 11.3 percent year on year to R550 000 from R620 000 in June last year, increasing the possibility that some homeowners owe more on their homes than they could sell them for. Its five-month moving average growth rate in the median house price was minus 7.8 percent.
Sizwe Nxedlana, a Standard Bank property economist, said yesterday that these deep negative numbers had been distorted by the surge in median house prices last year because of uncertainty in the residential property market about the pending implementation of the National Credit Act.
The bank's median house price growth has been flat or negative this year.
It was at zero in January and February, minus 5.2 percent in March, minus 8.6 percent in April and minus 13.2 percent in May.
Declines of this magnitude and duration in the demand for property "are not inconsistent with national house price deflation", said Nxedlana.
The median price is the middle price for houses in Standard Bank's home loans portfolio. Half of all houses are more expensive and half are less expensive than the median price.
Nxedlana said negative equity in mortgage bonds was now a possibility, particularly for people who bought homes at the peak of the property boom.
However, he said, this would become an issue only once the sale of a property took place. Homeowners could choose instead to stay in the property rather than sell it for a price that was lower than they expected.
Jacques du Toit, a senior property analyst at Absa, said it was possible that a homeowner who had obtained a 100 percent bond early this year and now wanted to sell the house might be unable to sell it for a price that covered that debt.
The less time a homeowner held a mortgage bond, the greater was the probability that such a problem might arise, said Du Toit.
But the size of the mortgage bond compared with the cost of the property was also an important factor. "Those who have not put down a deposit and [have] taken out a 100 percent bond are more at risk."
Du Toit said it was also possible that some homeowners had "dipped into their bonds" and extracted some of the equity to finance or pay off their other debts, but it was not possible to determine to what extent this had happened.
Some homeowners had accumulated more debt as a result of this practice, he said.
But they could do this only up to a point, because eventually they would no longer be able to afford the repayments and would not have any equity left in their bonds, he said.
Nxedlana said the outlook for the residential property market remained bleak.
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