Cape house prices: boom or bubble?
The Cape Town metropole has arguably seen the steepest increases in house prices over the last five years.
On the back of significant increases in the price of Western Cape house prices, FNB Household and Property Sector strategist John Loos has tried to identify the underlying causes of the recent strength.
In an August report, Loos notes that “identifying housing market bubbles has always been a tough task”.
He offers the 2000-2008 “boom” in the overall SA housing market as useful context. Over this eight-year period, price inflation was 304%.
In analysing this boom, Loos points to six factors:
High rates of buy-to-let purchases; Aggressive mortgage lending; “A surge in ownership of less essential secondary properties”;
What he terms “over-exuberant” buying and selling behaviour;
House price inflation that far outstripped the prime rate percentage at the height of the boom; and
“Major deterioration in a variety of house price affordability measures not seen in recorded history”.
The Cape Town metropole has arguably seen the steepest increases in house prices over the last five years, with an average increase of 77.6% (to end June).
Overall price inflation in the metro is almost double the national House Price Index.
When considering recent movements in the Western Cape through the lens of the six factors cited above, Loos highlights the following:
The bank’s Estate Agent Survey estimates that, in the first half of 2017, 11.06% of total home buyers in the province were buy-to-let buyers.
This is ahead of the national average of 9.66%, but nearly half of the high in 2008/2009 of 20.5%.
“The estimated number of secondary homes, expressed as a percentage of total homes, was 14.26% in July 2017, slightly lower than the 14.6% high reached late in 2010.”
As at the second quarter of 2017, we estimate that 4.6% of Western Cape homes resold had been bought within 12 months or less prior to the resale.
This is far below the province’s pre-2008 boom time peak of 16.8%.
In the first quarter of last year, house price inflation in the province peaked at 10.8%.
This is only marginally ahead of prime, “thus never in the post2008/2009 period really creating a massive ‘speculator’s paradise’.”
Despite growth in Western Cape, house prices outstrip those of other major regions in South Africa in recent years,
Loos says he believes the province’s market has not experienced an over-exuberant home buying spree as the whole country did prior to 2008.
However, in certain of the sub-regions of the Cape metro, Loos says we would raise some eyebrows at what has happened of late, notably in the City Bowl and Atlantic Seaboard.
Importantly, when we claim that we don’t perceive the Western Cape market to be overly bubbly, this does not mean that a downward correction in real house prices cannot happen, Loos emphasizes.