Re­ces­sion will push home prices down

Con­sumers warned against neg­a­tive eq­uity

Weekend Argus (Saturday Edition) - - FRONT PAGE - STAFF RE­PORTER

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

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