High End Property Market Suffering in SA

Shock Drop for High-End House Prices

An article in Business Day has drawn attention to a shock prediction for high-end house price decline. A leading property expert says that house prices could fall as much as 40% by year-end, especially at the top end of the market.

A scenario of rising interest rates and high inflation has intensified pressure on the residential property sector since the start of 2008. A major player in real estate, Lew Geffen, chairman of Lew Geffen Sotheby’s International said that the predicted 40% drop meant the residential market was essentially going to “roll back two years”. He warned that the “prices of two years ago will be the prices at year end”.

Geffen indicated that his view was brought on by the fact that banks are now only offering mortgages where clients put in 5%-25% equity. An official communication from ABSA to his group stated that the bank would provide 100% home loans only for properties valued up to R800 000. For properties valued from R800 000 to R2,7m, the bank was granting 95% loans and for those above R2,7m up to R4m, it was providing 90% loans.

“This means the higher the price of property, the more equity the prospective home owner has to put in. This indicates that the banks see attrition in the market in the bracket valued from R3m upwards and less attrition in the lower-priced segments,” explained Geffen.

He adds that the drop would be coming off a high base, as there was a price increase of 35% between 2006 and 2007, with a further increase of 15%-20% in 2007-2008. Geffen stressed that the property market is tough and homeowners are coming under increased pressure.

In order to get a R2m bond today, the person would have to earn R87 000 a month and still have to put in equity. Buyers who overcapitalized themselves last year and could not afford bond repayments would now have to downgrade and buy cheaper homes.

A memorandum sent out by Geffen to his staff about “recessionary strategies” in the residential property market indicated that there were 60% fewer buyers in the market than at the same time last year, with poor attendance being experienced at show houses. Sales occurred only when the agent used “aggressive parameters” and convinced the seller to drop the price 40%.

Property economist Erwin Rode of Rode & Associates said that on average prices could decline by up to 10%. “The higher you go up the price scale, the more it could be,” he said. “But one mustn’t confuse a sharp drop in the number of transactions with a decline in prices. The two are not highly correlated. The two are weakly correlated. It is important not to overreact”.

David Green, MD of Pace Property Group, said that it was important to “segment the market” and the assumption was that the lower end of the residential market would be less affected by value depreciation than the middle section of the market.

Green indicated that the market, particularly for homes worth more than R2m would be the “most vulnerable”, largely as a result of high gearing levels taken by the buyers. He said that this applied particularly to those purchasers who had acquired property in the past 2 years.

The information in this article is courtesy of Nick Wilson (“South Africa: High-End House Prices Face Shock 40 Percent Drop”, Business Day, 5 June 2008).

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