High number of distress sales in Western Cape

The level of indebtedness in the Western Cape is the highest in SA and this is having an obvious and adverse impact on the property market in the province.

The latest Cape Metro FNB Property Barometer reveals that just over 15% of home sellers in the second quarter of 2010 sold because they were forced to do so by financial pressure or as a result of having their homes repossessed by a bank.

The 15,5% was some 3% higher than the number selling to upgrade their homes in the same quarter – a complete reversal from the situation in 2006 – 2007.

Clinton Martle, FNB Home Loans’ regional sales manager for the Western Cape, says the Western Cape is believed to have the highest level of indebtedness, or a debt-to-disposable income ratio of 88%. Well lower in second place in Gauteng with a ratio of 88%.

“While the 15,5% is a big improvement on the figures for all four quarters of 2009 (where financial pressure caused up to 33,5% of all sales) it is still a cause for serious concern,” said Lanice Steward, managing director of the estate agency Anne Porter Knight Frank (APKF).

“This type of seller is often so desperate that they will take an unjustifiable drop in their price to get some cash in hand. This, of course, retards the growth in prices and the recovery of the housing sector generally.”

The latest review, said Steward, also indicates that only 6% of sellers are doing so now due to a relocation within South Africa. This, she said, indicates that new jobs are few and far between at the moment, “which is exactly what we would expect in a post-recession period”.

As many as 12% of sellers, however, she said, are moving to be closer to work or amenities, including schools.

“In the Greater Cape Town area, I would guess that up to 15% of those living in the Northern Suburbs and the popular fast growing areas of the West Coast are contemplating a move of this kind so as to be closer to the city.

This is because the commuting times at peak hour traffic have become intolerable. However, the problem may be alleviated by the introduction of the Integrated Rapid Transit System in 2011.”

“The good news is that this has come about because the Western Cape’s per capita income is the second highest in the country. However, an average debt level of 101% in relation to income, i.e. a debt level of just on a total of an individual’s annual earnings, will limit borrowers’ ability to get loans from the banks – who, by and large, like to see their mortgages awarded to those with little or no debts elsewhere.”

Martle says when it comes to indebtedness, it is difficult to say for sure as to how much the Western Cape’s high level of estimated debt-to-disposable income ratio is due to its high property values. “Nevertheless, I think it must have some effect.

But it is also difficult to ascertain what level of indebtedness means trouble.”
“What we do know, however, it that during the last interest rate hiking cycle, which wasn’t extreme by our historic standards, SA’s level of indebtedness caused a high degree of pain in terms of bad debts.

With the Western Cape being on the high end of the indebtedness caused a high degree of pain in terms of bad debts. With the Western Cape being on the high end of the indebtedness spectrum, therefore, one can’t help but feel that we are vulnerable to nasty surprises such as interest rate hikes and economic downturns,” he said.

Many leaders in the property sector, said Steward, have been campaigning for an easing of the National Credit Act (NCA) criteria. She, however, does not go along with them.

“If well applied, the Act does protect the purchaser in the long term. What really needs to be looked at are the onerous lending criteria applied to self-employed buyers. Although many have been forced into becoming self-employed they have become very successful and are entrepreneurial – exactly the type that South Africa needs right now.”

In most cases, added Steward, the FNB Property Barometer shows that the higher the earnings, the larger the debt incurred. People earning above R750k per annum, she said, have an average debt in relation to income of 156% - over 50% higher than the average for the Western Cape. Under the NCA rules, this makes it very hard for them to qualify for a bond of the size they would probably feel necessary.

Martle concluded by saying that “if you are not on the housing ladder, now may be a good opportunity to get on”. “However, I continue to urge people to buy well-within their means, bearing in mind that interest rates ultimately do rise, not to mention huge electricity and possibly other utilities tariff hikes to come.” – Eugene Brink