Local price growth slowing down

THE STRENGTH of the Western Cape property market in recent years may soon come to an end as key home affordability measures in the province already reflect more deterioration than in other provinces.

Average house price growth is also showing signs of slowing and could see the market slowdown return to “healthy” status.

This is according to FNB household and property sector strategist John Loos. He says although the Western Cape property market may have been outperforming the rest of the country in recent years, it does not appear to have taken on the crazy credit-driven speculative “bubble” that was the case nationwide in the pre-2008 boom period.

Bubbles can often be cause for concern as not only could aspirant homeowners fear they will never be able to afford a home, but mortgage lenders could worry that an unsustainable situation is mounting that will eventually lead to major price declines. These declines can result in negative equity situations in which homeowners owe more on their homes than they are worth.

However, Loos believes the province is fairly safe.

“The Western Cape has seen its house price growth outstrip that of the other major regions in South Africa. Over the past five years, Western Cape cumulative house price inflation has measured 53.7%, significantly more than the next best major region KwaZulu-Natal, with 30.2%, Eastern Cape’s 26.6% or Gauteng’s 24.7%.

“However, while there has been significant property media coverage of the Western Cape’s recent performance, we do not believe the province’s market has experienced an ‘over-exuberant and speculative’ home buying spree.”

Comparing the market’s performance to that of the pre-2008 boom, Loos says the province’s house price inflation high of 10.8% in the first quarter of 2016 did not stand more than marginally ahead of the prime rate percentage.

“Unsurprisingly, therefore, we don’t see signs of widespread speculative activity in the form of a massive surge in homes resold within a short period after purchase. As at the second quarter of 2017, we estimated 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%, reached in the second quarter of 2005, suggesting minimal speculative activity or over-exuberant reselling to upgrade.”

Loos says there are also no signs of “mass over-exuberance” when viewing growth in ownership of secondary properties by local residents. Nor has mortgage lending in the province appeared to be aggressive.

“In the second quarter of 2017, we traced 5 293 bonded property registrations by individuals in the Western Cape. This is significantly lower than the 8 134 unbonded registrations traced in the same quarter and only 38% of the number recorded in the final quarter of 2004.”

Therefore, Loos says he believes the Western Cape’s superior housing market performance of recent years has been in strong demand from sources outside the province. This includes foreigner buying, but more significantly affluent migrants from other regions of South Africa.

More impressive was the estimated rise in repeat home buyers migrating from other parts of South Africa to the Western Cape, he says.

Loos says the Western Cape’s relatively strong housing market of recent years is very different to the pre-2008 national housing bubble, which was more strongly credit-driven.

However, he does not believe this house price growth strength can continue. “Already, we have seen some slowing in average house price growth in the province. But, given the apparent absence of a credit buying surge in recent years – surges which can lead to financial over-commitment – such a slowdown should be relatively ‘healthy’ and we need not see a sharp surge in financial stress within the region’s housing market.”