Virtually unnoticed amidst the bleak economic news flow and ongoing political turmoil, South Africa’s housing market appears to be staging a modest recovery, says Dr Andrew Golding, CE of the Pam Golding Property group.
“From mid-2014 to mid-2015, the Pam Golding Residential Property Index (PGP Index) remained broadly unchanged with house prices growing at a rate of around 5.7 percent from year-earlier levels. However, late last year national house price inflation began to accelerate once more and, after averaging 5.9 percent during 2015 as a whole, recorded an average increase of 7 percent during the first quarter of 2016.
“In an attempt to understand what is driving the gradual reacceleration in South African house price inflation, it is useful to take a more detailed look at the various market sectors and the key trends currently evident.
“In part this reflects the continued rapid urbanisation of the South African population, which is underpinning demand for housing in the major metro areas. As the urbanisation rate rises, the metro housing markets become more dominant within the national housing market and also become increasingly independent of national trends. Price growth in the Cape, in particular, is benefiting from the geographical limits to supply and the net influx of repeat buyers from other provinces, attracted by the region’s unique lifestyle offering.”
The Western Cape is the ‘hottest’ regional housing market, registering double digit increases of 10.65 percent in prices in Q4 of 2015 (most recent data available), for the second consecutive quarter and a continuation of a sustained period of out-performance which began in early-2013.
In contrast, house price inflation in Johannesburg, Durban and Pretoria has remained fairly stable at around 6 percent during this period, while prices accelerated in recent months in Pretoria, recording an average increase of 7.6 percent during the final quarter of 2015.
While the national housing market’s upper price band above R2 million is experiencing the weakest price growth (-5.7 percent), house price inflation in the lower price band below R1 million continues to register robust house price inflation (10.1 percent). The lower price band has been the top-performing sector since mid-2015 and prices continued to accelerate during the first quarter of 2016. This pattern is evident in both the Gauteng and Western Cape housing markets. In KwaZulu-Natal (KZN), however, the top-end continues to register robust growth – averaging 9.6 percent during the first quarter.
Since late-2014 the top-end of the KZN market has been outperforming both the Gauteng and Western Cape housing markets, with the surge in house price inflation in this region largely attributable to the booming growth nodes along the North Coast. This resurgence in prices is mainly as a result of the relocation of King Shaka International Airport, coupled with the region’s decentralisation of business nodes and schools along with a proliferation of new upmarket housing estates, which has triggered a migration of families to the area from elsewhere in the province as well as attracting commuters from other neighbouring regions.
The PGP Index says the concentration of people and economic activity in major metro areas is a global trend. A recent article by The Economist noted that globalisation is generating an influx of people, capital and ideas from across the globe to prime global cities. As a result, these cities – and their housing markets – are performing increasingly independently of their national economies. Consequently, house price inflation in these prime global cities often outpaces the national average. In Europe’s major capitals, for example, house prices are growing at double the pace of the national averages.
As seen in global cities, South African cities are also experiencing a similar influx of young people, which is not surprising as official estimates show that South African cities’ average incomes are some 40 percent higher than incomes in the country overall, while employment opportunities in metro areas increase at twice the national pace. As economic activity and the population become increasingly concentrated in the major cities of South Africa, the metro housing markets become more dominant within the national market.
A recent study of housing markets in major cities across America mapped metro areas according to two dimensions: increases in house prices over the past three decades (1980 – 2010) and the expansion of residential development. It concluded that there is an inverse relationship between outward expansion and house price inflation – the more a metro area is able to expand outwardly and create new housing supply, the less its housing prices tend to rise.
For example, cities like San Francisco, New York and Washington, categorised as America’s ‘expensive’ cities, have seen relatively little residential expansion but have experienced robust house price inflation. In contrast, cities like Las Vegas and Atlanta, which fall into the category of ‘expansive’ cities, have recorded more modest house price inflation alongside much more residential development.
Here in South Africa it is obvious that Cape Town’s coastline and mountains act as a major constraint on the city’s ability to expand, which goes some way towards explaining the outperformance of the Cape housing market despite Johannesburg’s economic dominance and superior global ranking according to the 2015 Global City Index. The Johannesburg metro does not have such constraints and the rising demand for housing, generated by the influx of young people from across the country, has seen the proliferation of ‘new cities’ in recent years – including luxury developments such as Waterfall Estate and Steyn City. In KZN, the coastline provides a constraint to development, although the recent migration to the growth nodes on the North Coast has clearly eased pressure on the Durban metro housing market.
Another factor which appears to be contributing to the Western Cape housing market’s relative outperformance is the net in-migration of homeowners from other provinces. According to FNB analysis, the percentage of repeat buyers moving between provinces has risen from just 6.4 percent during the 2008/09 recession to a high of 12.9 percent last year. Typically periods of strong economic growth generate an increase in inter-regional migration as people move to areas experiencing greater economic activity and generating employment opportunities.
With the national economy entering its fifth consecutive year of stagnant growth, one would have anticipated that this mobility would be slowing – and yet the FNB study suggests that it remains relatively high. This, it is argued, is due to a structural change which has taken place in recent years, which has seen the Cape greatly enhancing its relative appeal.
A healthy economic growth rate and perceptions of a high quality lifestyle offered by the City of Cape Town and its surrounds appears to be attracting both wealth and skills to the province. As a result, the Western Cape has the lowest percentage of repeat buyers leaving the province as well as by far the strongest net inward migration of repeat buyers from other provinces.
With housing supply in the Cape limited by geography and housing demand fuelled by the semi-gration of repeat buyers to the region, properties in Cape Town are enjoying a price premium relative to the other six major metro areas.