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Friday Nov 25, 2011

Residential property's shadow inventory to depress market

Estimates of residential property's shadow inventory vary widely, but one thing analysts do agree on is that the overhang is massive and will likely weigh on market dynamics for the next 18 to 24 months.

Auction Alliance, the country's largest auctioneer, defines the shadow market, as properties which are in mortgage distress and will still hit the market.

Measurements of soon to be repossessed and foreclosed homes that have yet to hit the market range from 10 000 to as much as 50 000, says Alliance." We believe that the number of houses which are to be foreclosed on over the next 12 months is around 25,000. Much of the discrepancy stems from the different calculations used and how they determine which loans will inevitably default and sink into the shadows", explains CEO, Rael Levitt.

The analysts at Auction Alliance factor into their equation the number of properties that are distressed and are not yet on the market. They also include homes that are already going through the foreclosure process and those where the borrower is at least 90 days in arrears.

Auction Alliance's assessment falls in the middle of the estimate range, "if anything, by erring on the side of caution our measure is probably an underestimate" say the company's analysts. They put the industry's shadow inventory at a minimum of 25,000 as of the end of the third quarter of this year, which is up from the company's reading in the first quarter of 2011.

"With more than 25,000 homes waiting in the wings to eventually be added to the supply of properties for sale, any normalisation in the visible housing inventory is two years out, which will limit meaningful price gains for the foreseeable future", says Levitt.

The company says even by its cautious measure, it is quite clear that a very large number of homes will be joining the visible inventory of distressed houses at some point, which already holds in excess of about 10,000 properties for sale.

According to property economist Erwin Rode, "bank spokespersons have often stated that they are not in the business of repossessing houses. Thus, one can assume that they will try postponing the evil day as far into the future as possible. Nevertheless, with only about 7000 properties transferred per month, any sizeable overhang of non-performing properties constitute a threat to an already vulnerable market. This threat is in addition to the already bearish outlook for residential prices".

At current rates of sale, it would take more than 18 months to clear both the visible and shadow inventory, says Levitt. "Many banks have been as resolute as their debtors with foreclosure avoidance and we have thus seen a leveling off of distressed properties at auctions in recent months, but that doesn't mean mortgage distress has gone away or that these debtors will not be foreclosed on in the future".

Rode asserts that, "it stands to reason that banks would feed the market these distressed properties only gradually because a collapse in the market resulting from a big-bang approach is in nobody's interest. Hence, the most likely scenario is a long term depression of prices, no collapse".

Kim Royds, the managing executive in charge of collections at Absa Retail, said in early November that the bank has recently begun seeing a steady increase in the number of house foreclosures, which shows that even her bank's customers are still struggling to recover. Royds said foreclosures were up 14% from last year. The banking sector had also noted an increase in the number of people applying for debt counselling and insolvencies.

"Approximately three years' worth of data indicates that distressed sales have increased over the period with average values per house also increasing", says Levitt.

While a deliberate and calculated release of the shadow inventory limits the likelihood of a detrimental price shock to an already weak market, Levitt says the bad news is that the problem appears likely to be with us for the next two to three years, suggesting future price appreciation may be slow.

Auction Alliance Press Release


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