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Tsunami of distressed home sales ahead

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Economist warns the situation will be quite severe with more than 20% of all upcoming transactions likely to be due to financial pressures as banks lift debt-freezes

Distressed property sales are expected to flood the market over the coming months as the impact of the national lockdown hits homeowners hard.

Financial pressure was already escalating before Covid-19 so now, given the deep recession, the levels of distressed selling could be “quite severe”, says FNB property economist John Loos. Citing FNB’s Q1 2020 Estate Agent Survey, he says 15% of sellers were doing so due to financial pressure in February. 

Last month’s survey, however, will probably show higher levels of such selling. “I would not be surprised if levels go into the 20s (percentages).” Most debt has been frozen for three months, but when this ends in a few days, says Joff van Reenen, director and lead auctioneer at High Street Auctions, reality is going to set in for a lot of South Africans.

“The tsunami is still coming and it’s going to be much worse than we can imagine. Distressed sales are going to spike.” Herschel Jawitz, chief executive of Jawitz Properties, says an increase in distressed sales has started to emerge although these probably date to pre-lockdown situations where sellers needed to sell quickly for financial reasons. “It is likely that there will be more distressed sellers as a result of retrenchments or people getting paid lower salaries.”

The long-term effect of the recent lockdown and its negative impact on commerce and affordability is just starting to be seen, agrees Paul Stevens, chief executive of Just Property. “Word on the street is dominated by news of retrenchments, business closures and economic disaster. If that is true, we can anticipate increased levels of distressed sales in the next three to six months.”

Absa, however, says it will consider other solutions for customers who are still experiencing financial distress once the bank’s payment relief measures – which have kept distressed sales at bay – end. If these solutions do not solve customers’ woes, the next option is for them to downsize or sell their properties, says Ewald Kellerman, chief risk officer at Absa Home Loans.

“Downsizing is a good option for customers who cannot afford their current property but do have the financial means to finance a smaller property. “However, where customers do not have the means to finance a smaller property, or are not willing to take on new debt, the rental option would be a good consideration.”

While the FNB Estate Agents Survey showed that, in February, 43% of sellers in distress turned to renting while 57% downscaled, Loos says higher numbers will turn to renting post lockdown. “When financial pressure escalates as it is doing now, amid job losses and salary cuts, distressed sellers will be more in favour of renting.”

Some will turn to short-term rentals to bide their time before buying again. Jawitz says there has been a trend towards downsizing and this might be accelerated in the current economy. “In times like these, people tend to adopt much more of a ‘must have’ versus a ‘nice to have’ mindset in order to reduce their expenses and this may filter into the residential market via people downsizing. In terms of rental properties, people who are forced to sell their homes may opt to rent for a while which may be more affordable until they can get their finances in order and stable.”

Repossessions are “going to spike” and there will be a fair amount of social change, such as younger people moving back in with their parents, adds Van Reenen. “People have already been downsizing for some time in a tight economy and it’s only going to accelerate from here. “They are already renting and the migration is going to get much bigger.”

Roger Hoaten, managing director for Seeff Berea, believes that most distressed sellers will rent rather than incur more debt. And Sabrina Errico, broker principal for Lew Geffen Sotheby’s International Realty in KZN from Blythdale to Durban North, says homeowners who were barely managing to service their home loans prior to the pandemic will have no option other than to sell and downscale.

“Many will make quite significant reductions in their living costs and will take drastic action,” she says. “The growing demand for storage space in many areas is testament to the fact that massive downscaling is occurring although some feel that they may be able to recover over time and resume their previous lifestyle.”

Lockdown has made many people realise that quality of life is not necessarily measured by how many possessions they own and so more people might downscale, says Chris Cilliers, chief executive and co-principal of Lew Geffen Sotheby’s International Realty in the Winelands. “I think that people are also afraid of this happening again in the future and will try and futureproof their lives against the high stress factor the next time.”

Agents are receiving many inquiries for rental properties from a broad spectrum of people, including tenants trying to reduce their expenditure and sellers who are not buying again, she adds. Jeremy Barnes, regional manager for Greeff Christie’s International Estate in Cape Town’s South Peninsula, says homeowners who are battling to make their home loan payments could consider restructuring their home loan or selling and looking for a more affordable property that better accommodates their current situation.

Greeff property broker Garrick Sutton adds: “We are starting to find that people with larger properties than they need are looking to downsize. “These are generally families where the kids have moved out and, as a result, they no longer require all that space.”


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