Money and Markets

Here's how much less your house may be worth by the end of 2020

Business Insider SA
  • House prices are expected to fall by at least 5% this year - while some high-end properties may lose much more of their value.
  • The coronavirus crisis is expected to push more houses on the market, just as demand dwindles.
  • But as interest rates slump, prices could start to recover as early as next year.
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The previously lukewarm South African residential property market will be badly hit by the coronavirus crisis.

Widespread job losses and income uncertainty do not bode well for demand, while the supply of properties for sale is expected to rocket as households can’t afford their mortgage payments anymore.

Not even steep interest rate cuts – the prime rate has now been lowered from 10% at the start of the year to 7.25% as of Thursday – will save the property market.

If the SA economy shrinks by 6% this year – the Reserve Bank is currently predicting a 7% contraction - the property research group Lightstone expects that average house prices will decline by 8.8%. In a worse-case scenario, where the economy contracts by 10% (as some economists think is more realistic) and the central bank starts to reverse its recent rate cuts as inflation heats up - house prices could lose 14.5% of their value.

FNB expects a more moderate house price decline of around 5% - still a large decline compared to the last big slump of “only” 1.5% in 2009

During South Africa’s worst previous recessions after World War II, residential property prices fell by up to 10%. So it is quite possible that home owners who have recently bought houses with 100% mortgage bonds will by now experience negative equity (the market value of the house is lower than the outstanding mortgage bond), says Erwin Rode, MD of Rode & Associations, one of South Africa's largest property valuation firms.

“After the previous steep recessions, the market typically began to recover quite swiftly after reaching its nadir.”

But the current recession may be deeper and longer than any previously experienced in South Africa because the virus compounded the already existing problems in the local economy, plus the world economy is now in the doldrums and we have a very open economy, he adds.

An additional problem is that very few property transactions are taking place, and on top of that the deeds offices were closed for the larger part of lockdown.  Estate agents will only be allowed to function fully under Level 2.  

READ | SA estate agents are holding online 'watch parties' to show houses

“So, we do not know what is happening price-wise, except that we know from anecdotal evidence that the number of transactions fell off a cliff,” says Rode.

There will be a big difference between how different kind of properties hold on to their value, experts say .

Higher-end and luxury properties will be worst affected, with Lightstone predicting a slump in luxury property prices of almost 20% under its worse-case scenario.

House price predictions under three scenarios. Source: Lighstone

“This is partly due to pre-existing supply-demand imbalances (excess supply) and depressed sentiment. In contrast, we expect a relative resilience in the affordable market, partly due to a structural supply deficit (i.e., demand is higher than the available stock),” says Lightstone’s analytics director Paul-Roux de Kock

READ | SA house prices are taking so much strain you can get up to R10m off posh homes right now

Demand for cheaper properties will also be bolstered by the middle segments “buying down”, which is common in such weak economic environments. FNB’s Siphamandla Mkhwanazi, FNB Property Economist

He expects that house prices should rebound next year thanks to historically low interest rates, a decline in house prices and lower transfer duties (particularly in the middle-priced segment).

Until then, prospective homesellers will have to be realistic about what their properties are worth.

 “As the lockdown regulations are gradually lifted, we are already seeing an increase in requests for valuations from homeowners looking at selling for a variety of reasons. Being currently a buyers’ market, correctly pricing a property for sale is key, especially as more stock becomes available to choose from,” said chief executive of the Pam Golding Property group Dr Andrew Golding, warning that now is the time to ensure that homes are correctly priced.

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