Recent talks with some of South Africa’s leading estate agency CEOs and financiers have confirmed his opinion that, had the banks operated differently during the recent downturn, the South African housing sector would not be in its present difficult position, says Bill Rawson, Chairman of the Rawson Property Group.
“I am now inclined to think that the banks embarked on their counter-recessionary strategies without consulting, broadly enough, with the housing sector leaders. It was, I feel, a mistake to react by closing down their lending departments so completely.”
The initial policy that the majority of the banks had adopted when bondholders fell into arrears, said Rawson, had been to repossess their properties and then to have the sheriff auction them off. This policy, he said, has proved to be the most counter-productive of any move made by the banks in the last 40 years because they did not provide finance to potential buyers of these auctioned properties – and without this “there could be no appetite” for buying such units. This fact would have been discovered by the banks if they had consulted adequately with the industry prior to making their first move.
“Once the banks realised that this policy was counterproductive,” said Rawson, “they changed their strategy and consulted with the real estate industry — deciding to abandon auction selling and allowing real estate to be the primary vehicle in selling their distressed and repossessed properties.”
However, the initial policy adopted, added Rawson, resulted in most of the properties eventually being disposed of at a 50% (or more) discount on their previous values – which, in turn, caused the entire housing market to lose significant value “almost overnight”. Only now, he said, are the losses incurred at last being recouped.
Asked how he would have liked to have seen the banks react, Rawson said that in his opinion they should have entered into co-ownership arrangements with defaulting bondholders. In effect, he said, this would have meant that they and the owners would both have had equity in the homes, which then could have been rented out for a five to ten year period, during which time they would have provided the banks with a steady income stream. As co-owners of substantial assets, their books would also have looked satisfactory.
During the five to ten year recovery period, added Rawson, the chances would have been good that the bondholders’ financial positions would have improved and they would then have been able to take up their bond repayments again. Furthermore, as co-owners in their homes, although not occupying them themselves, they would have ensured that the homes were well maintained.
“Regrettably,” said Rawson, “what the banks did reflects the current trend in many major corporations today, to focus on short-term profits (or loss containment) and to ignore the all-important long-term scenario.”
Rawson added that the National Credit Act “had not helped” because the penalties it imposed for irresponsible lending were so dire that they had made the banks extremely cautious. This, he said, was inevitable in view of the stringency of the penalties.
