The announcement by Statistics South Africa this week that the country is officially in recession, took many of us by surprise. So, what does it mean for the property market?
What is a recession
A technical recession occurs when a country undergoes two sustained periods of negative economic growth. Put simply, economic activity in the country is declining as a result of subdued demand.
Tough economic conditions affect business and consumer confidence, and confidence in the economy is vital for the property market.
What is the risk for homeowners
The biggest risk for homeowners during a recession is preventing negative equity – a scenario where the market value of a property falls below the outstanding amount of a mortgage secured on it.
The best way to do that is for homeowners to keep putting whatever spare cash they may have, as well as their non-emergency savings, into their home loan accounts, and for those who are buying property now to put down the biggest deposits they possibly can,” says Berry Everitt, CEO of the Chas Everitt International property group.
He explains that the rate of property price growth has already slowed down significantly in the wake of the ‘junk’ investment ratings SA received earlier this year, and the subsequent loss of confidence in the economy on the part of consumers, businesses and investors.
“This has now led us into recession and the real possibility that property values could start to fall, as they did during the recession in 2009, when the supply of homes on the market begins to exceed the demand. There are always fewer buyers than sellers when times are tough.
“And such a scenario can quickly lead, as we saw in the previous recession, to many property owners finding themselves in a negative equity position.”
Everitt says this may not be a problem for homeowners who are able to ride out the recession and wait for property prices to start rising again when the economy recovers and demand once again starts to exceed supply as part of the normal property cycle.
“But realistically, there is a much greater risk of job loss during a recession and the real problem with being in a negative equity position if that occurs and you are forced to sell your home is that you will not be able to sell it for the amount that you owe the bank.
“You will end up having to pay in the outstanding amount, at the time when you are least likely to be able to do that. You will also gain nothing from the sale of the property to put down as a deposit on another home – and could even end up having a debt judgment taken against you and losing your credit rating for several years if you are unable to pay what you owe.”
Will the Reserve Bank drop interest rates?
He also says that consumers should not count on the Reserve Bank being able to lower interest rates by any percentage significant enough to boost the economy out of recession at this stage. “This is what happened in 2009 and was also the response of many other central banks around the world, but this time around the Reserve Bank also has to try to keep rates high enough to retain and attract more investment into SA. It is a delicate balancing act.
“Consequently, homeowners should be doing whatever they can to help themselves – and if interest rates do come down at all, they should regard that as a bonus and keep paying the same instalment as they do now in order to further reduce the capital portion of their loan.”
Excellent purchasing opportunities for buyers with deposits
Meanwhile, he says, investors and home buyers who believe there are going to be some excellent purchasing opportunities in the next few months are right – but they will also need to guard against the potential for negative equity by putting down significant deposits so that they immediately have a large stake in their properties.
“In addition, they are going to find themselves in a strong position when it comes to negotiating price, and if that results in any savings on their monthly instalments, they should also put that extra money towards paying off their home loans. This may be difficult at first, but they will not be sorry because at the very least they will end up paying those loans off faster than they expected.”