Nick Wilson
5 June 2008
Johannesburg — THE decline in house prices could be worse than previously feared. A leading property expert says prices may fall as much as 40% from last year's highs by year's end, especially at the upper end of the market.
Rising interest rates and inflation have intensified pressure on the residential sector since the beginning of the year.
Real estate veteran Lew Geffen, chairman of Lew Geffen Sotheby's International Realty, said yesterday the expected 40% drop meant the residential market was going to "roll back two years".
"The prices of two years ago will be the prices at year-end," he warned.
Geffen said his view was borne out by the fact that banks were in most cases "only offering mortgages where the client puts in 5%-25% equity".
Geffen said that according to an official communication from Absa to his group, the bank was providing 100% home loans only for properties valued up to R800000.
For properties priced from R800000 to R2,7m, it was granting 95% loans, and for those between R2,7m and R4m, it was offering 90% loans.
Properties valued at more than R4m were granted 85% loans.
"This means the higher the price of the 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," said Geffen.
But the drop in prices would be off a high base.
"Don't forget there was a 35% increase in prices between 2006 and 2007 and a further 15%-20% in 2007-08."
Geffen said it was a tough property market and home owners were coming under pressure.
"In order to get a R2m bond today, the person would have to earn R87000 a month -- and have to put in equity."
Buyers who overcapitalised themselves last year and could not afford the bond repayments would have to downgrade and buy cheaper homes.
A memorandum Geffen wrote to his staff about "recessionary strategies" in the residential property market said there were 60% fewer buyers in the market than at this time last year, with poor attendance at show houses.
Sales happened only when the agent convinced the seller to use "aggressive parameters", as in dropping the asking price 40%, he said.
Geffen said he advised one seller to drop his asking price by 25% to secure a quick sale.
Property economist Erwin Rode, of Rode & Associates, said on average prices could contract 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," he said.
"The two are not highly correlated. The two are weakly correlated. It is important not to overreact," said Rode.
Pace Property Group MD David Green said 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 said the market, especially for those homes worth more than R2m, would be "most vulnerable", largely as a result of high gearing levels taken by the purchasers.
He said that this applied particularly to buyers who had acquired property in the past 24 months.
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