Unpacking residential property from a ‘distress in the market’ perspective
Whenever we attend a residential property presentation we’re bombarded with data from one of the big banks’ house price indices. These assessments usually conclude that house price inflation is headed in the right direction, and that the market turning point is not too far in the future. That’s why it was refreshing to attend the 2009 Rode & Associates property conference held in Johannesburg, 3 August 2009. Anthony Miller, managing director of Lightstone, tackled the residential housing market from a slightly different perspective by sharing data and statistics that deal with “distress in the market.”
A slightly different house price index
At the outset, Miller explained that Lightstone’s property indices were compiled slightly differently to those published by banks, real estate companies and mortgage originators. They apply the ‘repeat sales methodology’ by comparing the actual house price inflation between Property A and Property B, repeated for each property that registers two or more transactions in the target period. This information is then statistically aggregated across all transactions that meet the qualifying criteria to determine aggregate inflation over the period. Although the ‘repeat sales methodology’ presents challenges when working with small sample sets, Miller concluded that it presented a better view of what actual house prices are doing.
Lightstone estimates there are 5.25m properties registered at the Deeds office in South Africa. This total excludes government properties with more than one unit and flats that aren’t registered as sectional title units. Houses are concentrated in Gauteng, the Western Cape and KwaZulu-Natal and are mostly free-hold. The trend has shifted to sectional title units as central business districts are developed and people opt for estate living to meet security and lifestyle requirements.
The group’s property analysis is based on a geographic segment model across five so-called enumerator areas. Lightstone publishes data in the Affordable (houses valued at less than R250 000), Township (covering traditional pre-1994 defined townships such as Soweto), Mid Value (for houses valued from R250 000 to R750 000), High Value (between R750 000 and R1.5m), Luxury (from R1.5m to R3m) and Super Luxury (valued greater than R3m) categories. “We’re seeing fairly consistent growth across these different segments over the last four years,” said Miller. He noted that so-called ‘arms length’ market prices had held up very well, and that the latest indices suggested month-on-month inflation had started to turn positive. We could be nearing the “end of the tunnel” where house price growth is concerned.
Distressed property
How much ‘distress’ is in the market? The clearest evidence of pressure in the residential house price market is declining transaction volumes. There are a number of reasons for the decline, not least of which the reluctance of banks to extend finance to prospective homebuyers. Miller revealed that bank-financed residential property transfers were down from around 80% at the height of the house price boom (mid 2007) to just 52% in the first half of 2009. “The bonded segment has come down very substantially!” said Miller.
Data from the Deeds Office confirm this trend. “The volume of transfers has come down from 35 000 per month in 2004/5 to around 10 000 per month in 2009,” said Miller. As a result the total value of transfers has fallen from R20bn per month to just above R10bn today, despite high inflation! Lightstone estimates that the total value of residential transfers through the Deeds Office in 2009 will be approximately R150bn, R400bn in 2004. This trend is aggravated by the fact that the Affordable Market now accounts for 38% of transfers as opposed to 27% before. Clearly “the market is really tough for anyone who relies on volume business for survival!”
“If we want to stimulate the market and get volumes going again, then it’s the bonded component that has to reverse its trend,” said Miller. The distressed sales data offers further cause for concern. Miller revealed that banks would issue approximately 30 000 sales in execution notices in 2009. This total is in line with the worst year in history (in 2003) though the number is slightly flattered by deals being done by banks with rapid auctions and estate agents. He concluded that on an absolute basis the volume of forced exits is at levels we’ve never seen before. Why are banks so worried? Simply because “value is not value when you need it to be value!” said Miller. Foreclosed properties achieve, on average, 35% less than market value when banks go the ‘forced sale’ route.
Banks will have to get the ball rolling again
“Contrary to popular belief, market prices have held up fairly well,” said Miller. But the real concern is the slide in overall transfer volumes, particularly in the upper segments. “Distressed sales prices are between 30% and 50% below market value, an obvious problem for mortgage lenders, especially as sales in executions are on the rise,” said Miller. Banks will have to respond positively to stabilising prices, by softening their lending stance, before residential house prices improve further.
Editor’s thoughts: Miller’s revelations on the drop in transaction volumes (and values) as recorded in the Deeds Office paint a rather discouraging picture for those earning a living from residential house price sales. Were you surprised at the volume decline (from 30 000 per month to just 10 000) in residential transfers? Add your comments below, or send them to [email protected]
