Are South Africans losing money on their property?

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House price deflation occurs when a home owner sells their property for less than they paid for it. This is more likely to happen in a struggling economy. So just how often does it happen?

FNB’s John Loos, used Deeds Office data of property registered by individuals under R10 million to analyse prices obtained for properties that were resold.

Loos determined that there has been a slight rise in the level of homes being sold below their purchase price but it is still moderate by historic standards.

A certain number of properties being sold for below the purchase price is not unusual and can occur in any economy. In an unstable economy like South Africa’s, house price deflation fluctuates widely according to property and economic cycles.

Property is a long-term investment and the bulk of properties are sold several years after the initial purchase, It follows that most homes will achieve some cumulative growth in value prior to being resold.
Therefore, the large majority, i.e. 87.7% of total properties as at January 2017, sold at above their previous purchase price:

  • 73.6% at110% or more than previous purchase price,
  • 8.6% at 105%-109% of previous purchase price
  • 5.5% at 100%- 104% of previous purchase price.

In comparison, 12.3% of properties sold for below their purchase price in January 2017.

  • 2.9% at 0%-5% below previous purchase price,
  • 9.4% at more than 5% below previous purchase price.

How does 12.3% compare to other periods?

House price deflation peaked at 23.5% of homes sold following the recession in 2008/9, and to 26.8% of homes sold in 1998 when interest rates shot up to 25.5%.

In contrast, when the property market was booming prior to 2008, just 2.3% of property was sold at deflated prices.

The current figure of 12.3% of homes being resold at deflated prices sits somewhere between historically strong and weak levels.

What are the recent trends?
The mild rise in homes being sold for below the purchase price is to be expected, given slow house price growth of around 1%. During periods of slowing house price growth, an increase in the percentage of homes being sold for under their purchase price is unsurprising.

The delayed effect of multiple interest rate hikes between 2014 and 2016 and a stagnant economy can be seen now in the rising level of house price deflation.

How does this affect the market?

“A rising trend in house price deflation is important for mortgage lenders and home owners alike, because it reflects a market in which it has recently become mildly more difficult to “trade out” of properties without making a loss. This can in some cases be troublesome when there is outstanding mortgage debt to be settled, especially when the seller is experiencing financial stress,” says Loos.

It’s also a reminder to home buyers that property prices don’t always go up. Researching the market and keeping up to date with property trends is more important than ever, in order to make a good property investment.

Author: John Loos, FNB

Submitted 13 Mar 17 / Views 934