Recovering house market - the hurdles

If you’re a home owner these days, and almost 10 million South Africans are, the beleaguered housing market doesn’t generally fall into the realm of pleasant chit chat around the braai.The once booming residential industry has been bruised and bloodied from nearly every angle.

Home prices have plunged nationally over the past five years, thousands of South Africans have lost their homes to legal foreclosure, tens of thousands more are on the brink of losing their homes with underwater home loans, and others are seriously delinquent on their home loans.

“Things in the residential property market are bad, possibly the most difficult they've ever been in our tumultuous history, but there's likely to be more pain before there are any real gains for the sector, primarily because of the giant inventory of homes on the market and the certainty that more will be coming through the pipeline over the next few years”, says Auction Alliance CEO Rael Levitt.

Still, the South African economy is fairing better than many in the developed world. The local economy has absorbed local political instability at home, a post-world cup hangover, near financial meltdown in Europe, and chaos in North Africa and the Middle East. Although the economy is likely to slow in 2012, consumers are still spending, our developing nation remains under-housed and corporate balance sheets remain healthy, all of which are key ingredients for the housing market’s resurgence.

The remaining puzzle piece is time, and how much of it the housing market will need to recover. Here are some other hurdles the housing market needs to overcome before a rebound takes root:

1. Employment growth

After a bumpy several months, the employment outlook in South Africa is still not looking good. The unemployment rate in South Africa was last reported at 25% in the third quarter of 2011. Total employment in the formal sector declined by 21 000 jobs from the first to the second quarter of 2011. The national unemployment rate is still sky high and the pace of job growth needs to double before it translates into the broader economic growth required to bolster a housing recovery. Due to the bad economy, and resultant high unemployment rate, a growing number of young South Africans aged between 25 and 34, have not been entering the property market. These are the people that are forming households and buying their first homes.

2. The global economy

The situation in the housing market is closely aligned with what’s happening in the broader economy. During 2011, we were presented with a host of unprecedented challenges including uprisings in the Middle East and North Africa, the Eurozone debt crisis and a number of natural disasters. Although South African banks have up until now been relatively insulated from the global meltdown, we are not immune to the threat of the Eurozone contagion. As our country’s second largest trading partner, the consequences for us may be dire if the Eurozone faces defaults in Greece, Spain or Italy. This would cause financial markets to spiral, and plunge South Africa into a worse position than 2008. If that happens, or even if the Eurozone is mired in a milder debt crisis, the impact on the property market, which has already suffered three years of recession, may be hit when its down, which may cause further downward pressure on the housing market.

3. Banks and the debt counseling assisting distressed debtors

Our banks have come up with great recovery processes to assist defaulting debtors. Lenders have held back on foreclosures, slowing the pace and potentially increasing the backlog of distressed houses hitting the market. The longer it takes for the market to improve, the longer it will take to clear distressed debt and the longer it will take for housing prices and the broader housing market to recover. If the housing recovery does not happen in the next 24 months, many of the deals which have been structured to assist distressed debtors will be unwound and we will see distress accelerate. Many deals were structured with higher value exposures and this could cause greater distress at the top end of the market. Debt counseling, for lower value debtors, has also slowed down legal recovery processes and inevitable foreclosures.

4. Faster distressed sales processes

Getting homes that are in legal foreclosure to the market is key to exposing the country’s shadow inventory, which has been keeping prices depressed around the country. The longer this goes on, the longer the foreclosure inventory will perpetuate and the longer we'll be stuck in a rut. Slow court and judicial processes have slowed down the South African foreclosure process, lengthening the time it takes to get delinquent loans through the pipeline and on the market to be sold. However speeding up the foreclosure process is a double-edged sword. More foreclosures will further bloat the housing inventory, driving prices down even more.

5. Sellers need to get realistic

Generally, having overvalued properties sit around unsold is a dead weight on the housing market and it ultimately creates more downside potential because of the backlog. Sellers need to accept that the market has a dropped between 20% - 30, and they must either take their homes off the market or reduce prices and sell. Reducing inventory is key to unlocking a stagnant market. Clearing out the extensive unsold housing industry in South Africa is vital, especially with the influx of homes likely to enter the market if more distressed homes hit the market. However, reducing the supply of homes should help boost prices in the long run, and price appreciation is good for the housing market. There way to clear the excess inventory out there is to lower the price. The problem is, banks don't want to lower the price too much because they're very nervous about taking huge losses. But many of these losses are not real because sellers simply have inflated ideas of value.

6. Government’s involvement

Government in South Africa has been particularly quiet about the distressed housing market, leaving it to banks to sort out.  But government has an important role to play in facilitating a housing recovery. It would help a lot to have some government-sponsored financing of buyers, and it would help the housing market if they grew state housing subsidies. Whilst government assistance of distressed debtors has not been on the radar, assisting with distress would help stabilise neighbourhoods and home values. Government has assisted consumers through the Consumer Protection Act and tenants through the PIE Act, but these laws don’t fundamentally assist the housing market. In fact, in many ways they have impacted the market negatively by slowing down sales and making it difficult for investors to deal with non-payment of rentals.

Some relief can be expected from beleaguered home loan applicants when a R1 billion mortgage-backed insurance fund becomes operational in October 2012 in an effort to motivate the banks into approving more home loans, which the National Housing Finance Corporation (NHFC) chief executive, Samson Moraba confirmed in November this year.

7. Rental increases

Many buyers cannot afford to buy and do not have access to funding, which is converting them into tenants. In 2011, we have seen residential rentals rise as the supply of new houses slows and demand increases. The completion of the downward cycle comes when rentals increase to a point where it's more attractive to buy a home than to continue renting. In a low interest rate environment this can happen quite quickly. If affordability increases, when the job market recovers and the economy finds its footing, more tenants will turn into homeowners, which will reduce the supply of homes and help stabilise prices.

8. Banks opening the taps

Many market pundits have blamed the banks for constraining funding through conservative lending practices and low valuations. This is not true because banks in South Africa have been open for business – even if they have not been the aggressive lenders they were in the midst of the property boom. Banks have to play their role in rebuilding the market by opening up funding to new home buyers. Our banks are strong and they should be focusing on the interests of potential clients whilst balancing their commitments to shareholders. In many ways, the banks fuelled the property boom by opening up lending which ultimately proved to be riskier. Now they have the ability to fund in a sensible market, and they need to grow market share and thus grow the housing market.

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