Property market keeps an eye on new entrants

First-time buyers at lower end would lift sector after rough few years

LUXURY house price growth peaked in 2014 and could tip downwards this year. But the overall prognosis for South Africa’s residential property market hinges on the extent to which people living in informal housing “buy up” into the formal property market.

There has been strong price growth in the lower and middle segments of the property market. Paul-Roux de Kock, analytics director of Lightstone, said this increase in demand for formal housing had kept the overall residential property market healthy.

This has prevented South Africa’s property market from taking its second major dive since the financial crisis of 2008.

“Since the middle of 2014, the lower value segments have also been performing well. Our view is if the luxury market goes into a downward turn, that will help soften the blow. There’s a link between the low-value market where people enter for the first time and all the other higher market segments,” said De Kock.

But there are some looming threats — most notable of which is that the struggling economy could reduce buying power, and lead to banks reining in their risk and tightening their lending. This would stem the tide of South Africans moving from the informal to the formal market.

Lightstone’s analysts were spoton in their prediction that average house price growth for 2014 would be 6.7%. But, given the uncertainty in South Africa’s economic picture, it is more tricky to predict what the market might do in 2015.

If economic growth is strong, property prices could grow by an average of 8%; in the worst-case scenario, with more labour unrest and flagging growth, home prices could rise just 3.5% year-on-year. That leaves a middle-ground view of a likely 5.8% growth in South African home prices this year.

The swings in the residential property market are a good barometer of the health of the country’s entire R6.4-trillion property market. As De Kock pointed out, residential properties constitute 78% of the 7.8 million properties in the country — 66% of the value of the entire market. Digging into those numbers, sectional title homes (including flats and townhouses) make up 12% of all the 6.1 million formal residential properties, while freehold properties constitute 82.8% and estate or gated community homes make up 5.2%.

But the estates and sectional title homes are worth relatively more. In fact, estates make up 35% of the number of homes valued at R3-million or more.

Estates and gated communities — including golf, equestrian or lifestyle estates — hold an estimated 318 000 residential properties valued at R643-billion, or, if priced individually, an average of R2-million per home. This is nearly three times the national average home value of R700 000. More than 50% of these estates are in Gauteng, with a 25% in the Western Cape. KwaZulu-Natal has 5.8% of estate homes.

Gauteng contains a third of South Africa’s residential properties, followed by the Western Cape with 17.8% of homes and KwaZuluNatal with 13.2%. By value, the picture is similar, with 37.3% of the market located in Gauteng, followed by the Western Cape with 25.1%. KwaZulu-Natal is third with 12.7% of the market’s total value.

The Northern Cape has 2.8% of all South Africa’s homes, at just 1.4% of the market’s value, but De Kock said this province has bucked the trend in all other provinces, showing aggressive price growth, albeit off a low base, following industrialisation.

Of the homes worth less than R250 000, 36% have mortgage bonds, with that proportion falling the higher one moves up the price chain. But by value of mortgage bonds granted, the trend is reversed — the largest value of bonds lies in the R1.5-million to R3-million segment, with 24.1% of all bank bonds’ value being serviced there.

Standard Bank is the leading lender by value, just below R10billion per quarter, followed by FNB (just over R8-billion), Absa (about R6.5-billion), Nedbank (about R4.5-billion) and Investec (R4-billion).

In the event that buyers became distressed and properties are forced into an auction, De Kock said, banks tended to recover an average of just less than 70% of the value in the luxury market, gradually falling towards the bottom tier. A distressed sale in the lowvalue segment would realise less than half the property’s value.

He said deeds office registrations remained flat for freehold properties, with sectional title registrations slightly up at about 5 000 in the last quarter.

Since the middle of 2014, the lower value segments have also been performing well