SA Property - Distressed Auctions Grow

Home repossessions, insolvencies and distressed residential property sales jumped alarmingly in the last quarter of 2008, according to results released from 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 our 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, now most probably at 1 in 15 South African homes. “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”. Our 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”.

Courtesy: Alliance Group

“Information courtesy of the Alliance Group Property Investor Guide, available at all Alliance Group offices nationwide. To find out more, call 0861 ALLIANCE, or visit to download an electronic version“

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