Western Cape house price growth tapers further, although remaining the strongest of the major regions

by JOHN LOOS

Examining the FNB House Price Indices for the country’s major regions, gradually slowing price growth in the country’s top performing region, the Western Cape, continued in the second quarter of 2017.

The year-on-year average house price growth for the Western Cape measured 5.7% in the second quarter, slower than the 6.9% revised rate of the previous quarter and now significantly slower than the 10.8% revised multi-year high recorded in the first quarter of last year.

However, despite slowing, the Western Cape’s average house price growth for the second quarter remained well above other major regions, the next fastest growth rates being the 2.3% rate for Gauteng and 2% in KZN. This was followed by 1.7% year-on-year growth in the FNB Smaller Five Provinces House Price Index (includes Mpumalanga, North West, Limpopo, Free State and Northern Cape Provinces), while the Eastern Cape experienced a slight decline of -0.1%.

The relatively strong house price growth differential between the Western Cape and the rest of the major regions can be in part, but not fully, explained by the province having the second highest economic growth rate of the nine provinces.

In 2016, IHS Markit estimates GDP (Gross Domestic Product) growth for the Western Cape of 0.9%, above the national average of 0.3% and second only to Gauteng’s 1% estimate. But Gauteng is arguably a better supplied housing market, being landlocked, whereas the City of Cape Town region, which drives the Western Cape, has a far greater land constraint.

The greater support for the Western Cape housing market in recent years, however, is believed to have come from a very strong net inflow of repeat home buyers from elsewhere in South Africa, a source of support which other provinces don’t have nearly as much of.

However, we believe that the time has come for the Western Cape’s housing market to cool off, and indeed the gradually slowing average house price growth rate for that province appears to point to such a cooling off emerging.

This region’s market is the most expensive in SA, with an average transaction price estimated at R1.437 million in the second quarter of 2017, the next highest average price being that of Gauteng at an estimated R1.050m.

Western Cape level of inaffordability is not quite as bad as it seems from the level of house prices, because the province also has the highest per household income (according to IHS Markit) to the tune of R248 587 in 2016, compared to Gauteng’s R241 476. The third highest per household income is that of KZN at a far lower R173 871 for 2016.

However, the Western Cape’s affordability ratio – the average house price/household income ratio has shown the most deterioration of any of the major regions in recent years, from a multi-year low of 4.35 in 2011 to 5.56 in 2016.

Whereas until 2015 the Western Cape had the second lowest house price/household income ratio behind Gauteng, in 2016 its ratio rose to higher than the 5.35 of the five minor provinces, and is now near to the Eastern Cape’s 5.70.

We have thus seen the Western Cape showing significantly greater housing affordability deterioration since 2011 than any other major region, and the province’s aspirant first time buyers appear to be battling in greater numbers to enter the housing market in that region.

This mounting affordability challenge in the Western Cape is our key reason for expecting that province’s house price growth rate to taper off in the near term to low single-digit house price growth that is more in line with the low rates of the other regions.

Examining our FNB Major Metro House Price Indices, we see the slowest ones in the second quarter of 2017 to have been Nelson Mandela Bay with a -2.7% year-on-year decline, and Ethekwini with +2.8% rise. At the top end of the growth scale, the City of Cape Town’s 7.9% year-on-year rate continues to outperform the other metros, but has seen slowing growth in recent quarters.

In summary, the Western Cape continued to have by a significant margin the fastest average house price growth in the second quarter of 2017, compared to the rest of the country’s major residential regions.

However, mounting affordability challenges in that province, caused by its noticeably superior house price growth compared to other regions in recent years, are believed to be behind the slowing in its house price growth. The slowing average house price growth in the Western Cape started early last year, and continued into the second quarter of 2017.

Viewing the period from the beginning of 2010 to the second quarter of 2017, the Western Cape has had 79.9% cumulative house price growth, followed by 49.2% in KZN and 41.7% in Gauteng. The Eastern Cape has had 38.7%, and the five smaller provinces have recorded 37.2%.

A combination of high per household income but significantly lower house prices than the Western Cape makes Gauteng the most affordable major housing region, with the lowest average house price/household income.

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