SA Homes May Now be Worth Less than the Bond

Negative Equity the Latest Risk

An article published on the Business Report website draws attention to the latest trend in the property market, where homeowners now face the risk of negative equity on their homes as house prices continue to drop.

Standard Bank’s median house price in June dropped by 11.3% year-on-year to R550 000, which only increases the possibility that some homeowners now owe more on their homes than they could sell them for. The moving average growth in median house prices over the last five months stands at minus 7.8%.

Standard Bank’s property economist, Sizwe Nxedlana has said that these negative numbers had been distorted somewhat by the surge in median house prices at the same time last year, ahead of the National Credit Act implementation.

This entire year, Standard Bank has recorded either flat or negative median house price growth. In January and February, the figures were at zero, with minus 5.2% registered in March, minus 8.6% in April and minus 13.2% recorded in May.

According to Nxedlana, declines of this magnitude and duration in the demand for property “are not inconsistent with national house price deflation”. He added that negative equity in mortgage bonds was now a possibility, particularly for those who bought houses at the peak of the property boom.

However, this would only become an issue if a sale of the property were to take place in the current climate. Homeowners might be better served to stay in the property and ride out the storm rather than sell it for a price that would be much lower than expected.

A senior property analyst at ABSA, Jacques du Toit said that a homeowner who obtained a 100% bond early this year and now wanted to sell the property might well be unable to sell it for a price that covered the bond. Essentially, the more recently a bond has been taken out, the higher the likelihood of this happening.

Another important contributing factor is the size of the mortgage bond as compared to the cost of the property. “Those who have not put down a deposit and [have] taken out a 100 percent bond are more at risk,” said du Toit.

It is also possible that some homeowners have “dipped into their bonds” and taken out some of the equity to finance or pay off other debts, but it would be impossible to determine to what extent this has occurred. The problem is that those who have done so will have accumulated more debt as a result.

Eventually, these homeowners would no longer be able to afford the bond repayments and would not have equity left in their bonds. Nxedlana maintains that the short-term outlook for the residential property market remains bleak.

The information in this article is courtesy of Roy Cokayne (“Homeowners risk negative equity as house prices drop”, Business Report, 2 July 2008).

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