Until the recent international financial crisis, when two US mortgage giants were quasi-nationalised, Lehman Brothers collapsed, Merril Lynch and HBOS were forced into mergers and AIG was saved by a government bail -out, many South Africans were hoping that the international credit storm had passed and missed domestic markets.
"South African financial institutions have no sub-prime credit exposure but we are certainly not a lone island in the eye of a global financial storm which has arisen because of falling home prices being fuelled by troubled mortgage securities," says Alliance Group Chief Executive, Rael Levitt.
Levitt believes that South African home prices are still falling while mortgage stress and defaults continue to rise. Alliance Group's research in the first quarter revealed that 55,000 South Africans were in mortgage stress with their bond repayments being two or more months in arrears.
The asset services group's research in the second quarter now reveals that mortgage stress has increased by 21,5% to 70,000 South African home owners. Alliance predicts that this number may continue to grow into mid-2009. Severe mortgage stress, where bondholders are four or more months in arrears, also spiked in the second quarter and reached 12,000 home owners with more and more defaulters now reaching a late stage delinquency whereby they are either forced to sell their homes or face legal foreclosure.
Levitt points out that in 2007 there was insignificant severe mortgage stress in the country and until the last quarter of the year "we hardly saw any house foreclosures or distressed selling".
That being said, explains Levitt, "despite our interest rates being far lower than they were in the early and late 1990s, our residential property market grew aggressively in the last five years and because of the residential and credit boom we are now seeing levels of mortgage stress and defaults that are nearing the numbers experienced in the 1992 property downturn where the country experienced large scale mortgage default".
"One must bear in mind that the current default results come off a historically low base with a vastly developed property market and in global terms these default rates are small both in volume and percentage terms."
The Alliance Group's research also shows that increasing numbers of small, medium and some larger residential property developments have been liquidated during the second quarter. "Over the last six months we have experienced more liquidations of new residential property developments than we have seen throughout the last six years", Levitt points out.
"These bankruptcies are also nowhere near what is being experienced internationally and they also come off a low base. That said, they are real and they are happening."
Levitt believes that residential property developments which go to the wall won't have a major impact on local banks' bad debt provisions, "but what they are doing is causing poor sentiment to drive down demand for new home developments and they are causing downward pressure on vacant land prices".
"There is no doubt that 2010 will improve investor sentiment and cause house prices to stabilise and in certain suburbs trigger price increases, but when it comes to mortgage stress, interest rates are the single largest factor that determine arrears levels."
"Furthermore, when a homeowner gets into arrears and is in a mortgage debt trap through negative equity in home values, the lag effect after the economy has turned the corner and interest rates have declined, can often be a further 12 to 18 months," says Levitt.
"What largely triggered and underpinned the post-2000 South African housing and retail boom was access to cheap and easy credit and what will cause the residential property market to turn the corner will be a decrease in the cost of home loan borrowing."
In the mean time, explains Levitt, investors, home buyers and first-time home owners have a window of opportunity to purchase into a cheap market which will soon bottom out.
For more information contact Rael Levitt on 021 443 6000 or send an email.
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