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Be aware of potential price decline of your home

Aug 14 2016 11:10
Carin Smith

Cape Town - It is crucial that property purchasers get the buying price right so as not to financially over-commit, according to John Loos, household and property sector strategist at FNB.

This financial over-commitment can result from a lack of good research regarding prices in an area and not having a good understanding of the many home running-related costs.

"Although in the majority of cases the resale price is higher than the original purchase price, we cannot entirely take it for granted that this will always be the case," said Loos.

"Especially bonded homeowners and aspirant home buyers need to understand that there is always a degree of risk of a 'negative equity situation' developing."

This refers to a situation where a home owner owes more than the property is worth. Should the owner then have to sell it, settling the outstanding mortgage debt could become a challenge.

"The good news for current home owners, however, is that currently the problem of price decline is not that widespread by historic standards," said Loos.

"It is nevertheless important for aspirant home buyers to understand that there exists the risk, although not currently a large one, that they may not necessarily achieve a selling price higher than their purchase price at some future stage."

He explained that such risks are increased when home buyers financially “over-commit” on their home purchase, because that is when the risk increases of households not being able to afford full maintenance of the home, which can negatively impact its value.

Survey

Analysing data from the latest FNB Estate Agent Survey, Loos estimates that over the four quarters up to and including the second quarter of 2016, 6% of investment residential homes being resold achieved a price less than what they were originally bought for.

"This is well down on an estimated 25.5% for the year 2012 - that year probably reflecting the hangover from the end stages of the pre-2008 boom years where 'less seasoned' investors were buying low yielding investment properties for exorbitant prices," explained Loos.

The survey data also suggests that about 9.25% of total investment property sales over that period are estimated to have achieved close to their original purchase price. Loos points out that, in the case of this category, effectively some loss was probably incurred due to the significant transaction-related costs of buying and selling homes.

"Add this percentage to that of the properties believed to be selling below the original purchase price, and in the case of 15.25% of investment properties resold you may have had some loss in the process," he said.

"So for now, by recent historic standards, the situation is relatively good. The overwhelming majority - that is 85% of investment properties being resold - are believed to be achieving 10% or more of their original purchase price."

He estimates that of all properties which reached more than 10% of its original purchase price, 45.75% are estimated to have been in the 10% to more than 20% range, 22.25% in the 20% to more than 30% range, and 17% fetching 30% or more than the original purchase price.

As for home sales in general, Loos estimates 8.3% of total properties which were sold in June 2016 achieved a price in a range of 5% to 50% below their original purchase price, and 3.7% of sales to have been concluded at 0% to 5% less than the original purchase price.

"As in the FNB Estate Agent Survey in investment property sales, this percentage estimate is significantly improved on the post-boom high of 20.9% of sales that took place at prices below original purchase price in September 2009, just after the last recession," said Loos.

"The worst it ever got in the past two decades was when 31.9% of homes were estimated to be selling at below their original purchase price - back in January 1999, not long after that severe interest rate spike of 1998, when prime rate peaked at 25.5%."

He added that the best the situation ever got was in July 2006, after a massive house price boom, when the estimated percentage of properties selling below their original purchase price reached a low of 2.1% of total homes sold.

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