Cape Town luxury home prices cooling, but rest of the market still strong

John Loos, household and property sector strategist at FNB Home Loans.

by John Loos

FNB’s fourth quarter 2017 City of Cape Town sub-regional house price indices continue to show some of the most expensive region’s house price growth to be slowing noticeably. But with very expensive home values in recent years in Cape Town encouraging a greater search for affordability, some of the City’s more affordable housing regions appear to have been performing quite well.

Overall, though, our deeds data-driven City of Cape Town House Price Index continued to show a gradually slowing price growth rate, albeit still strong.

Using deeds office data, we compiled a set of house price indices for key sub-regions within the City of Cape Town Metro using a repeat sales methodology.

We then rolled up this set of sub-regions into an overall City of Cape Town Metro House Price Index. In the fourth quarter of 2017, the City of Cape Town’s estimated average house price growth rate remained just within double digit territory to the tune of 10.8% year on year.

However, while still very strong, this year on year price growth rate represents the sixth consecutive quarter of slowing from a 10-year high of 15.7% recorded in the second quarter of 2016.

The FNB City of Cape Town Sub-Regional House Price Indices still show widespread strength across much of the metro. However, six of our 12 defined sub-regions saw their year on year growth having slowed in the fourth quarter of 2017, and three of these were the three most expensive sub-regions.

However, in the more affordable regions there still appears to be some resilience, with quite a few of these sub-regions showing recent price growth accelerations. This is not too surprising to see, given that the huge price growth of recent years in higher end sub-regions must surely have encouraged a more recent shift in some demand towards those more affordable sub-regions. But the fact that many sub-regions still see double-digit house price growth points to still very strong buying power in the City of Cape Town.

In fourth quarter of 2017, we saw more noticeable signs of house price growth slowing down in the City Bowl and two of the three sub-regions closest to the City Bowl.

These sub-regions near to the city and the mountain have inflated very strongly in recent years, and we suspect that resultant mounting home affordability challenges here are contributing to a natural price growth slowdown.

While many people ask us questions as to whether the severe Western Cape drought has had a noticeable impact on house prices, we don’t believe so yet. Rather, our opinion is that the mounting affordability challenge (from massive house price growth) of recent years has begun to naturally lead to slowing house price growth in these high end markets.

The most expensive sub-region in the City of Cape Town Metro, the Atlantic seaboard, has seen its average house price growth slow from a multi-year high of 27.2% year on year in the final quarter of 2016 to 10% by the third quarter 2017. It is possible that a slowing in the rate of foreigner buying of SA property last year, due we believe to a widespread negative sentiment towards the country at the time, could have had some negative impact on price growth in this sub-region which is typically big on foreign owners and buyers. But again, we believe that 122.8% cumulative house price growth of the past five years has been key in leading to major affordability challenges, which ultimately must slow demand in both foreigner and local demand alike.

The City Bowl started its price growth slowdown a little earlier than the Atlantic seaboard, and has gone from its multi-year year on year growth high of 23.5% in the second quarter of 2016 to 12.0% by the fourth quarter of 2017.

The southern suburbs, the other one of the most expensive three sub-regions, saw further slowdown from 12% in the prior quarter to 11.2% in the fourth quarter of 2017, having gradually tapered from a multi-year high of 16.3% in the second quarter of 2015.

Interesting is that the most affordable sub-region close to the City Bowl, the near eastern suburbs sub-region including Salt River, Woodstock and Pinelands, may be benefiting from the deterioration in affordability within the City Bowl region in recent years. Proximity to the City Bowl (and for that matter to Claremont business node) is becoming increasingly important as the city’s traffic congestion deteriorates, and we have yet to see noticeable slowdown in price growth in this sub-region.

From a 16.8% low in the second quarter of 2017, the near eastern suburbs house price index showed renewed growth acceleration to 17.5% by the final quarter of last year, now showing the fastest price growth of any of the regions close to the mountain.

We’ve mentioned before that further away from Table Mountain, in Cape Town’s more affordable suburban areas, the pattern of slowdown in price growth is less clear, and in fact there has been some acceleration in many sub-regions. The now very high prices in the areas close to the City Bowl may have been causing a portion of aspirant buyers to shift their focus to these more affordable City of Cape Town housing markets a little further away, in search of greater affordability.

All three major northern suburbs sub-regions thus saw some renewed acceleration in their average house price growth rates in 2017.

Admittedly, in the final quarter of 2017 the Western Seaboard Sub-Region (including Blouberg, Milnerton and Melkbosstrand) saw a slowing in year on year price growth after a prior three quarters of acceleration, but still stood solid at 13.9%.

The Bellville-Parow and surroundings sub-region saw its price growth accelerate further, from 9.5% year on year in the final quarter of 2016 to 13.3% in the fourth quarter of 2017, while more recently the Durbanville-Kraaifontein-Brackenfell sub-region went from 8.9% growth in the second quarter of 2017 to 10% in the fourth quarter.

Moving into even more affordable regions, which incorporate many of the city’s apartheid era former coloured and black areas, we have recently seen similar price growth accelerations.

This, too, we believe could reflect a mounting search for relative affordability as higher priced suburban areas prices rise.

Therefore, the Cape Flats House Price Index growth has accelerated from 10.16% year on year as at the third quarter of 2016 to 12.6% by the final quarter of 2017. The Elsies River-Blue Downs-Macassar region has accelerated more significantly, from 5% in the third quarter of 2015 to 20.8% by the final quarter of 2017.

In short, overall the City of Cape Town has seen some mild slowing in average house price growth over the past six quarters, although the most recent 10.8% year on year growth rate remains strong.

When viewing the major sub-region house price indices, however, slowdown is far from across the board. Rather, it would appear that the most noticeable slowing in house price growth is at the high end, after some years of strong affordability deterioration. But the resultant search elsewhere for greater affordability has perhaps been key in sustaining solid demand lower down the house price ladder, and we have indeed seen price growth accelerations in 2017 in many of these more affordable housing regions (relatively speaking) further away from Table Mountain.

Has the drought taken its toll on the housing market in Cape Town in a significant way? We are not yet convinced. We believe the price growth slowing is more due to market natural causes in response to prior years of significant home affordability deterioration.

In future, however, should the drought conditions deteriorate further, at some point it is conceivable that they may become recessionary for the Western Cape economy, should it reach a level where much industrial production needs to be scaled back and a lack of water hampers tourism and other economic sectors. A negative economic and employment impact should ultimately be a negative housing market impact. But we don’t believe that it has got to this level yet, and much will depend on this winter’s rainfall.

John Loos is the household and property sector strategist at FNB Home Loans.


John Loos, household and property sector strategist at FNB Home Loans.