Property affordability a challenge in Western Cape

Cape Town - Mounting affordability challenges have likely caused some slowing in house price growth in the Western Cape in recent quarters, according to John Loos, household and property sector strategist at FNB.

However, he added that the Western Cape by a significant margin still had the fastest average house price growth in the first quarter of 2017, compared to the rest of the country’s major residential regions.

At the other end of the scale, the Eastern Cape and KwaZulu-Natal (KZN) remain the weakest of the major provinces. According to Loos, this might be due to the high dependency of these two provinces' economies on the manufacturing sector, which has been weak in recent years.

According to the FNB House Price Indices for SA’s major regions, the year-on-year (y/y) average house price growth for the Western Cape measured 6.2% in the first quarter, slower than the 7.7% rate of the previous quarter and now significantly slower than the 10.6% multi-year high recorded in the first quarter of last year.

However, despite slowing the Western Cape’s average house price growth for the first quarter remained well above other major regions.

The next fastest growth rate was 1.1% y/y in the FNB Smaller Five Provinces House Price Index, which includes Mpumalanga, North West, Limpopo, the Free State and Northern Cape.

This was followed by KZN with 1% growth, Gauteng with 0.7% and the Eastern Cape with a negative -1% rate.

Loos told Fin24 on Monday that in real terms, house price growth in Gauteng is actually negative if one takes CPI inflation into account.

"That is where the rest of the country really is, while the Western Cape is just the outlier," said Loos.

He said it is mostly due to gradual interest rate increases and near-zero gross domestic product growth - therefore, a multi-year stagnation. The resultant lack of job creation and slow income growth then impacts the demand for residential property.

Challenges for first-time buyers

"Despite the Western Cape having done very well in recent years in terms of confidence in the region and its ability to attract middle to higher income repeat home buyers from other major regions, ultimately the strong real house price growth in much of this region should lead to a mounting affordability challenge, and we believe that this may have been happening in recent quarters," said Loos.

"Such an affordability challenge would be more relevant for financially limited first-time buyers as opposed to more financially strong repeat home buyers, and the FNB Estate Agent Survey has for some time pointed to a very low rate of first-time home buying in the City of Cape Town metro."

First-time home buyers in Cape Town are believed to have made up a lowly 8% of total home buyers during the two summer quarters of 2016/17. By comparison, Johannesburg’s estimate was a far higher 27% and that of Tshwane a healthy 21%.

"It is in this first-time buying percentage that we believe we are seeing indications of a greater affordability challenge of late in the Western Cape, as opposed to the other 'slower moving' major residential markets," said Loos.

Average prices

Comparing the average price of homes transacted, according to the FNB House Price Indices, the Western Cape is the most expensive with an average price of R1.421m, with Gauteng the second most expensive at R1.041m.

Since the beginning of 2010 - the start of the post-2008/9 recession recovery - the average house price for the Western Cape has risen cumulatively by 78.2%. By comparison, the next strongest growth was in KZN, with a far more moderate 46.4% and Gauteng with 41.2% over the same period.

City of Cape Town metro

The Western Cape has had a somewhat unique period, though. It has built a strong brand as a well-run lifestyle province. There has been significant migration to the Western Cape by more affluent members of society relocating that way, Loos told Fin24.

"The Western Cape is doing well in terms of attracting older skills in the work place as well as retirees.

"Examining our FNB Major Metro House Price Indices, we see the slowest ones in the fourth quarter of 2016 to have been Nelson Mandela Bay with a -0.8% year-on-year decline, and eThekwini with +0.2% change," said Loos.

"At the top end of the growth scale, the City of Cape Town’s 8.2% year-on-year rate continues to be a major driving force behind the broader Western Cape house price growth."

Also pointing to eThekwini and Nelson Mandela Bay metros having the weaker markets of the major regions was the FNB Estate Agent Survey’s estimated average time of homes on the market prior to sale.

For the two summer quarters of 2016/17, the estimated time on the market in eThekwini was the longest of the major metro regions, to the tune of 17.29 weeks, followed by Mandela Bay’s estimated 16.64 weeks.

As for the Tshwane metro, Loos told Fin24 it seems to be a balanced sub-region. Prices are realistic and it is not under-supplied.

"Although not having significant house price growth, the Tshwane metro appears to have a vibrant market with the lowest average time of homes on the market to the tune of 10.14 weeks. This average beats Cape Town’s estimated 13.14 weeks," said Loos.

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