We use data from the Deeds Registry for all registered property transactions in South Africa, both cash and mortgage transactions; we then estimate the volume of property transactions in South Africa.
According to our estimates, property transactions in Q4:16 were at a low last seen in Q1:10, and were also 48% below the peak of Q1:07. This is not surprising given high interest rates and the soft labour market. Moreover, given low consumer confidence, households have been wary of financial commitments such as purchasing a house.
The number of cash and mortgage transactions is converging amid tighter credit conditions post-GFC (Global Financial Crisis). Data suggests that the share of cash transactions increased significantly from around 20% in 2006/07 (before the global financial crisis) to around 40% in 2009 (post-GFC); and then slipped to around 36% by Q3:11 before rising again. By Q4:16, we estimate that cash transactions had risen to 46% of residential property transactions, the highest since Q3:02 (Figure 1).
The sharp increase in the share of cash purchases in 2008 and 2009 was a function of mortgage transactions declining sharply rather than the number of cash transactions increasing. Likewise, mortgage transactions have fallen faster than cash transactions, particularly between Q4:15 and Q4:16, with mortgage transactions declining by 24.5% versus a 20% decline in cash transactions in the same period. This reflects adverse labour market conditions and tighter credit conditions, which limits the number of people able to access a mortgage; fewer such constraints apply to cash buyers. This situation echoes that of the financial crisis. We do not, however, expect a similar nominal decline in house prices as was experienced during the financial crisis. But we expect that the tight lending standards currently applied by lenders will hinder robust growth in property prices.
Data shows that the median purchase price paid by cash buyers has been lower than that of mortgaged counterparts since around Q3:02. In Q1:17, we estimate that the median purchase price paid by cash buyers was 24% lower than that paid by mortgaged buyers. Further, cash buyers buy relatively bigger properties, at a lower median price per square metre. In Q1:17, the price per square metre differential between cash and mortgage transactions was 32%.
Cash buyers are usually in a better bargaining position, and also, sellers may be more amenable to offering a discount to cash buyers in trying to expedite a transaction. This is also more likely when a property has been on the market for a long time. Related to this, cash buyers likely have more time to look around for bargains, which may include distressed sales. All of this can lead to higher price volatility in cash transactions.
In absolute terms, both mortgage and cash transactions are falling. We expect a meaningful recovery in household credit extension only in H1:18, which should support purchasing activity, particularly mortgaged-backed purchases.
A regional perspective
Gauteng has the most property transactions at 42% of all transactions in 2016, followed by the Western Cape with 25%, KZN with 11.5%, and Eastern Cape with 6%. After the surge in house prices in the Western Cape, the volume of transactions has risen significantly, to 25% in 2016, from 19.5% in 2008, possibly as buyers chase yields. The rest of the provinces (Free State; Limpopo; Mpumalanga; North West; Northern Cape) in 2016 accounted for a combined 13% of all property transactions in SA (roughly 2% could not be allocated definitively) (Figure 3).
In contrast, data from BMR shows that these provinces (Free State; Limpopo; Mpumalanga; North West; Northern Cape) accounted for approximately 23% of household disposable income in 2016 i.e. close to double the share of property transactions (Figure 4). This implies that while people derive a decent income in these provinces, they prefer houses in urban provinces such as Gauteng and the Western Cape.
The proportion of cash transactions is increasing across all the major provinces mainly as a function of declining mortgages rather than an increasing number of cash transactions. This reflects tighter domestic credit conditions. Of the cash transactions, Gauteng accounts for 34%, Western Cape accounts for 31% (Figure 5). However, Western Cape now has more cash than mortgage transactions, with cash transactions accounting for 56% of all transactions (Figure 6). The Western Cape now attracts more affluent buyers who can buy property cash, as opposed to middle-income buyers who rely on mortgage financing.
The benign SA economy is impinging on purchasing activity. In absolute terms, both mortgage and cash transactions are falling. Mortgages, however, are falling faster than cash transactions, reflecting the impact of adverse labour market conditions and the tightening of credit conditions; fewer such constraints apply to cash buyers. We expect a meaningful recovery in household credit extension only in H1:18, which should support purchasing activity, particularly mortgage-backed purchases.