Price cuts – the hard truth

Private Property South Africa
Adrian Goslett

There is no argument that it is tough out there for those who want to sell their homes. Sales values and volumes have seen a decline in recent times which is attributed to various factors including stringent lending criteria, the impact of the global recession, the high amount of distressed properties coming on to the market, coupled with the fact that many consumers are playing it safe financially and being more frugal during challenging financial times.

This has resulted in a limited demand for property, which has further been impacted by the continued high levels of household debt in relation to disposable income. This has made purchasing a property more challenging than before as the days of easy credit, high levels of consumerism, and taking risks financially are gone. As a result, house prices have dropped. According to the First National Bank (FNB) House Price Index, year-on-year price increase is slowing once more, after a brief respite earlier in 2010. The index shows that in the 3rd quarter, the average house price increased by 7% on a year-on-year basis, down from 11.3% in the previous quarter. On a quarter-on-quarter basis, the overall average house price index declined by 1.5%. FNB expects an average price decline for 2011 as a whole, after an expected 6.4% increase in the 2010 average price over 2009’s average price. Similarly, Absa’s October house price indices reflected that the year-on-year price growth in the value of middle-segment homes for which Absa approved mortgage finance, slowed down significantly in recent months up to September. The average nominal value of small, medium and large houses increased by a weighted 2,9% y/y in September, after a revised growth rate of 5,4% y/y was recorded in August.

On a month-on-month basis the average nominal value of a home in the middle segment of the market is declining since May this year, bringing the average price to R1 012 200 in September – down by R42 700, or a cumulative 4%, after peaking at R1 054 900 in April. The ups and downs of property prices are strongly related to supply and demand, and when there is a good range of property stock, something has got to give: the price. But dropping a home's price bit by bit is the worst-case scenario for home sellers as this generally tends to weaken their position in a buyer's market. The usual prescription for a house that won’t sell is simple – cut the price. However, price cut after price cut is not necessarily the correct course of action. This is because most investors are aware that a series of price cuts is a clear indicator that the seller is desperate to get rid of the property, which is knowledge that empowers buyers to make lower offers and play the waiting game. If your home has been on the market for several weeks without an accepted offer, you should reassess your assumptions and rethink your strategy before it is too late. So what is the answer you may ask? Price your property correctly from the outset. This is something which has been proven time and again in the current market – homes that are well priced sell fast.

While it all sounds very logical, in reality it is the last thing that sellers want to hear. The majority of sellers still prefer to price their homes aggressively and see if buyers take the bait. Due to the current market conditions, the high-and-hope strategy is really ill-advised, as buyers know that they have the upper hand and are on the hunt for the best deal. So much so in fact, that many experienced real estate agents won’t accept listings that are overpriced. The sad truth however, is that most homeowners cling to outdated beliefs about the value of their homes. There is a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others. The bottom line is that lower asking prices and price reductions are a painful, yet unavoidable reality in the current market. On the up side of this however, sellers must remember that even though they might be selling at a reduced price, they will be able to purchase a home at a comparably reduced price as well.

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