Recession will push home prices down

Consumers warned against negative equity

WITH the economy officially in recession homeowners and buyers need to get serious about preventing negative equity (the state of holding a property the value of which is less than the amount of mortgage still unpaid), according to Berry Everitt, chief executive at the Chas Everitt International property group.

“And 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 buyers to put down the biggest deposits they can.”

He explained the rate of property price growth had already slowed significantly in the wake of the “junk” investment ratings received earlier this year, and the subsequent loss of confidence in the economy by 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 negative equity.”

Everitt said this might not be a problem for homeowners who can ride out the recession and wait for property prices to begin rising again.

“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 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.”

He said consumers should not count on the SA Reserve Bank being able to lower interest rates by any percentage significant enough to boost the economy out of recession.

“This is what happened in 2009 and was also the response of many other central banks around the world, but this time around the bank also has to try to keep rates high enough to retain and attract investment.

“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.”

Meanwhile, he said, investors and home buyers would be able to take advantage of excellent purchase opportunities in the coming months – but they would also need to guard against the potential for negative equity by putting down significant deposits.

“They will find themselves in a strong position when 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.”

Berry Everitt