Banks "distorting" property prices

Realestateweb recently ran an article suggesting it is high time for agents to slash their hefty 5-10% (before VAT) commission (click here to read Time for agents to cut commissions). This way they would help inject fuel into the property market. Visitor Richard Waring says there's more to the picture, in his letter. Sellers are over-charging and banks aren't always bothering to check up on property values in relation to the amounts home-owners are borrowing:

You are missing a vital point. A properties' ‘selling' price is determined by the seller, not the agent. In 90% of cases, a SELLER has extended him or herself and used their property as collateral with the bank. A valuator from a bank will determine the properties value based on Deeds Office transactions for the particular area. In many cases, the valuator will not even visit the property. Thus they don't even see if the home is actually in a state to live in, and how it does actually compare to the average for an area.

Another important point to note is that in most cases, the extended loan is not used for improvements to the home.

Use the example of an area where the average home price is R800 000.

When a seller now has to sell the property, they call an agent. On viewing, an agent will determine that the property is only worth R700 000, based on ‘actual' comparisons for the area even if the average for the area is R800 000.

However, the seller tells the agent that he requires a minimum of R850 000 nett, to cover the bank and make a small profit. The estate agent adds his commission on top of the nett and markets the property - R890 000 (less than 5% comm. ) - and tries to sell a property that is way overpriced, no matter the average for the area.

If the bank had done its job properly in the first place, the situation would never arise.

What happened to understanding that a ‘bond' is a 20 year loan term, not 12 months, two or five years?

In the last five years, I have seen very few bank valuators actually visit a property to determine if it is worth the money the homeowner is trying to borrow.

An idea to possibly alleviate some of the mess would be for banks to tie homebuyers into a minimum 5 year term on any property purchased. At the moment, property prices are distorted due to high turnover in short ownership periods.

Thank you for an interesting article.

Kind regards

Richard Waring

Do you agree with Richard Waring? Should home loan clients be tied to a property for a minimum period? Are there other ways to get the property market moving? Share your views below this article, or write or send a blog to news@realestateweb.co.za

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Comments

 

responses to this article

What stupid letter I can't believe you published this. Blame the banks that's absurd. It's their cash (well not really but we won't get into that right now) they can decide how to lend it. They sit with the risk. Lets go through your points: Minimum 5 year bond - . .more this is the worst of the lot, if you want to kill the property market completely go right ahead and do this. No one would buy a second home as an investment cause they wouldn't be able to get it off their hands if they wanted to. This is just one of the problem with this idea in general the idea is so utterly retarded I can't even list them all and it hurts my brain just thinking about them. The seller determines the price - wrong - the market determines the price. Just like a share (except it's a really illiquid one that has huge trading costs). If you try to sell firstrand shares at R 25 no one will buy them just like the house in your example. All estate agents are is nasty "brokers" who try to convince you, in a hurry, to buy the shares/houses they sell. And they then charged a huge commission for doing it. Basically people need to take responsibility for their own finances and investments and stop blaming the banks for everything. . .less by Rubbish on November 26 2009, 18:43 Find this comment inappropriate? Report it

@Richard That's one of the dumbest ideas I have ever heard. Are you perhaps an estate agent Richard? by Rogi on November 26 2009, 18:55 Find this comment inappropriate? Report it

Which price? The asking price is determined by the seller. The transaction price is when the seller & buyer agree. by Ambrose Bierce on November 26 2009, 19:31 Find this comment inappropriate? Report it

Banks are part of the problem I have recently seen properties offered for sale where the outstanding bonds are R2.2m etc, while I estimate the replacement cost at around R1.8m, and the current market values at around R1.5m. The banks have allowed people to over extend themselves. Now . .more the poor owner must take a huge loss. The bank never takes any risk! . .less by Markus on November 26 2009, 19:34 Find this comment inappropriate? Report it

agree with rubbish and rogi absurd idea blaming a bank for sellers' prices is totally phgging delusional by charlie on November 26 2009, 19:54 Find this comment inappropriate? Report it

All of us... Found the article okay. Basically all stakeholders (sellers, buyers, banks, etc) need to do their homework. If not - sooner or later one has to pay for it; either directly or indirectly. Banks have been too easy with the money (pre 2008) and no they are . .more too strict. But that is okay too - now is a good time to recon one's assets, liabilities and cash flow. "we can have anything we want, if we are prepared to plan and wait for it." . .less by PeterM on November 26 2009, 20:34 Find this comment inappropriate? Report it

Fatuous claptrap and irrelevant baloney In essence the writer says that the banks are to blame. What bull. If I want 1.5 bars for a house that is worth R800k then so what? Its a free market and the transaction price is determined by buyers and sellers. What irks the writer is the fact that the . .more house is unlikely to sell. Is he obliged to try to sell the house at an inflated price? of course not! Whose fault is it that the homeowner has negative equity ? Who decided to borrow the money? Who purchased the house in the first place? What he is suggesting is the worse kind of social engineering. The banks "tie down" home owners. Where is the free market? If his house can't sell at his asking price, then tough. He's stuck. Lower his price or stay. Agents must get a life. When requested to, they have a right but no obligation to market or not market a house as much has the seller has a right to sell but no obligation. Likewise a buyer is never forced at gunpoint to sign. . .less by Lord Max master of infinity on November 27 2009, 00:22 Find this comment inappropriate? Report it

Willing buyer Willing seller As far as I know this is still the case? Buyers have usually done some fair research on what they can expect to pay in the area they are interested in buying. If the seller is not getting buyers, the price may be reduced. The market will determine the . .more price. The banks job is to make sure that the price is reasonable and that they will not be at risk for their bond. . .less by Gavin on November 27 2009, 05:36 Find this comment inappropriate? Report it

First sentence wrong, buyer determines the price, what BS ... by Koos on November 27 2009, 07:30 Find this comment inappropriate? Report it

by the property bubble is bursting on November 27 2009, 07:38 Find this comment inappropriate? Report it

What a moron This is a one sided view point. This is someone who got burnt in the current market he would not have even thought of this three years ago when most people were making massive profits on housing. If you want to blame the banks then lets talk about the . .more multiple charges that get piled on during the purchase and repayment process. . .less by al on November 27 2009, 07:53 Find this comment inappropriate? Report it

Market Prices are formed by buyers and sellers influenced by market factors at the time of offer. by eric on November 27 2009, 08:43 Find this comment inappropriate? Report it

Banks Banks are most defintely PART of the problem. They have a responsibility to assess the actual value of a property and not only to grant a percentage of the purchase price whatever that is as was recently the case, hence the property . .more bubble. Come to think of it, much of our local property market resembles a piramad scheme, where property are repeatedly onsold for more than its' actual value. Works out fine while you are able to sell to your purchaser at a premium, but if there is an economic meltdown then you are stuck with an overpriced liability which you cannot get rid of. Sounds like Adriaan Niewoudt's vrotmelk scheme? . .less by Chippie on November 27 2009, 10:34 Find this comment inappropriate? Report it

Disagree Richard With all your statements! But agree with everyone who posted a comment. Your notional com (of less than 5%) is just lip service anyway. We all know estate agents like to think of themselves as the cornerstone of the property market, but I think we can . .more give the number of agents a chop by 80% and be fine. Plus, if I had money to invest in property, why would I pay an agent up to 10% com when I can buy listed property on the JSE and pay a broker fee of 0.25%? . .less by Johnny V on November 27 2009, 11:54 Find this comment inappropriate? Report it

The real problem is the hidden player everyone ignores. The axiom is thefreer the market the better the liquidity given potential volume. Adequate volume determines the true market price. So who are the hidden players? Government and SARS. The fist mschief is capital gain tax. In the case of RSA . .more this is largely a tax on the inflation created by the self same governemnt. It turns those who experience a good boom into relectant sellers even at rental returns near 3%. This ais a bif seller woe and commission is thesecond seller woe. The buyer gets hit at outset by the highest acquisition costs in the world. Those very unfair property rates add to the middle class woes care of huge subsidies of for all non payers of mainly darker skin colour - like immigrants and disadvantaged. See outanding charges fromrate, water, electricity, TV licicence and other parastatal imposts. The costs go on though. . .less by Free the Rest on November 27 2009, 12:11 Find this comment inappropriate? Report it

@ Free the Rest Good points, but can government creat inflation? And if so, why can't they contain it? by Johnny V on November 27 2009, 16:23 Find this comment inappropriate? Report it

@ Johnny V Yes they do create inflation, they are the cause of inflation. They can contain it but choose not to. Why you ask? Because its a hidden tax on citizens that they let you believe that rising prices are the cause of inflation and that the solution . .more to control inflation is a hoax called inflation targeting. Actually its the other way round, rising prices are the result of inflation and not the cause. Increasing the money supply is the real cause of Inflation or to put it in better terms increasing the money supply is inflationary. The majority of followers are lead to believe that we are in a deflationary cycle yet in actual fact we are in a global inflationary cycle but the "effect" - rising prices have not set in yet. Gold is telling us this as it is real currency and cannot be inflated. Hence the move away by central banks in the 70's from the gold standard as if you are on a gold standard you cant create money out of nothing. . .less by Brennan on November 27 2009, 18:12 Find this comment inappropriate? Report it

Estate agents create too high expectations with the seller in order to get a mandate!!! by What utter garbage on November 30 2009, 19:54 Find this comment inappropriate? Report it

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