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Johannesburg - The April rate hike is causing panic amongst homeowners caught up in debt, with many now wanting to sell.
Prospective buyers are relatively scarce and this is causing a flood of property on the market.
Rael Levitt, executive head of the Alliance Group, says that these acute factors have already forced the selling price of property to drop by 10%.
The figure is higher in coastal areas, with areas such as Mossel Bay and Jeffrey's Bay being especially hard-hit, he says.
Since the recent increase in interest rates, the group's call centres are inundated with calls by sellers feeling the pressure and seeing auctions as a quick fix for their financial problems.
The situation could get markedly worse if there should be another rates increase this year.
All price categories are affected, but properties above R15m and below 500 000 are not as badly affected. This does not mean that these segments are immune to a market correction, warns Levitt.
"There is no doubt that the sellers are becoming more realistic about price, largely due to supply exceeding demand for the first time in six years."
The housing market's predicament is problematic for both homeowners and their financial institutions, "specifically for home loans that were awarded last year and where signs of negative equity are starting to appear," Levitt says.
Negative equity occurs when the property is worth less that what it originally cost.
Levitt feels the market is not anywhere near the conditions experienced in 2001 when certain properties experienced negative equity of up to 20%. Market conditions are putting pressure on homeowners who are not able to sell their homes to cover their outstanding bonds.
He believes that the property market will experience tough times until the end of 2009.
John Loos, a property analyst at First National Bank's (FNB) home loans division, says that he believes house price are not falling nationally, though this could happen later in the year.
"According to FNB's research, some sellers are selling at less than they paid but this does not apply to the majority of properties on the market, Loos says.
"One has to look at the cycle, at some point the rates need to come down again. It's only a matter of time."
He predicts that the market could get better in the second half of next year when market sentiment should improve.
At present the inflation outlook means that the property market will remain under pressure and bank economists expect another rates hike in June.
- Sake24