Questions have been asked as to the “heat levels” in the Western Cape housing market in recent months. Is it a bubble forming, or is it all driven by solid economic fundamentals?
According to FNB, the answer is usually somewhere in between, with solid fundamentals often starting a good market period, but later on as a result of the fundamentals-driven strength one can find “over-exuberance” or “buyer panic” setting in as market players respond to the recent price growth trend.
This can cause the market to “over-shoot”, according to FNB property strategist, John Loos.
The Western Cape housing market has experienced a relatively good period in recent years, and 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 KZN, with 30.2%, the 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 that the province’s market has experienced an over-exuberant and speculative home buying spree as the whole country, including this region, did prior to 2008,” said Loos.
“We make this claim through examining our various indicators of market psychology for the region. We find that, at a 10.8% high in the first quarter of 2016, Western Cape average house price inflation did not get more than marginally ahead of the Prime Rate percentage, thus never in the post-2008/9 period really creating a massive speculator’s paradise,” he said.
The property analyst said that there were no signs of widespread speculative activity in the form of a massive surge in homes resold within a short period after their purchase.
“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%, reached in the second quarter of 2005.”
He said that FNB had not found signs of mass over-exuberance when viewing growth in ownership of secondary properties by local Western Cape residents.
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. Most recently, in July, growth in estimated secondary homes was at a lowly 0.11% in the region, Loos said.
So what has driven the Western Cape’s superior housing market performance of recent years? “We believe that it has been strong demand from sources outside of the province, including foreigner buying, but more significantly affluent ‘semigrants’ from other regions of South Africa,” Loos said.
“Can the Western Cape’s housing market strength continue? Not likely,” said Loos.
Key home affordability measures show Western Cape home affordability to have deteriorated more noticeably than other major South African regions,” he said.
From 4.35 in 2011, the province’s Average House Price/Per Household Income Ratio has deteriorated (risen) to 5.56 by 2016, which is only mildly lower than the pre-2008 boom time peak of 5.97 in 2005.
Loos further cautioned that while the overall Western Cape market situation has not appeared overly extreme in recent years, quickly considering sub-regions, “we would raise some eyebrows at what has happened of late near to Table Mountain, notably in the City Bowl and Atlantic Seaboard.
“In these sub-regions, year-on-year house price inflation as measured by our indices as has been well in excess of 20%. Such rates may well have fueled “over-exuberant” investor buying by some who merely extrapolate such strong capital growth into the future in formulating their expectations.”
Such price growth trends never last, but while they do they can cause a significant level of over-investment and thus a price overshoot, FNB said.