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    Caution on Negative Property Equity   Mail Print

The South African Reserve Bank (SARB) cautioned on Thursday in its latest Financial Stability Review that a possible impact on financial stability of the weaker property market could be felt through negative equity.

This would occur as some sellers are selling their properties at prices equal to or below their earlier purchase prices.

"Since properties are usually used as collateral when acquiring credit from financial institutions, negative equity erodes the value of that collateral and therefore, if widespread, can be detrimental to the stability of the financial system," explained the SARB.

It noted that confirmation of slowing residential property market activity came from the fact that the market continues to be a buyers' market.

The SARB said that the number of properties sold below asking price increased to 85% in the second quarter of 2008 (from 82% in the previous quarter) and 82% of properties remained in the market for three months or longer.

The average time that property remained in the market also increased to 15 weeks in the second quarter of 2008, from 12 weeks and four days in the previous quarter, according to First National Bank.

The SARB concluded that factors stated as having influenced the residential property market negatively include rising costs of borrowing, slowing economic growth, emigration, an increase in the number of sellers selling property in order to downscale due to financial pressure, rising building costs and the lagged impact of the National Credit Act (NCA).

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  I-Net Bridge, 24-10-2008 [ View all articles ]  
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