WC house prices increase further in Q2, market balance improves

In addition, the FNB Estate Agent Survey pointed to further general improvement in the main indicators that point to activity levels, market balance and price realism. The Q2 2014 Residential Activity Indicator (agents' perceptions of residential market activity levels on a scale of one to 10) rose further, from the previous quarter's 6.5, to 6.7. This further rise in the Western Cape Activity Rating took it to above the National Average Activity Rating of 6.33 for the quarter, suggesting that the Western Cape is currently one of the national residential market's 'strong points'.

Second most affordable residential market of the Big 4 provinces

The Estate Agent Survey for the region appears to explain the recent house price growth acceleration, with growing residential stock constraints pointing to a steadily improving balance between demand and supply. This is reflected in a further decline, in the second quarter survey, in the estimated average time of homes on the market prior to sale, from the previous quarter's 13.7 weeks to 13.3 weeks in the second quarter of 2014. This is the lowest estimated average time on the market since the first quarter of 2010.

Along with agents pointing to a decline in the average time on the market in the second quarter survey, their estimate that 81% of sellers are being required to drop their asking price to make the sale is significantly lower than the 95% early in 2013. In addition, the average estimated asking price drop of -7% in the second quarter was slightly less than the -8% estimate of the previous quarter, and significantly smaller than the estimated -12% a year ago.

The FNB Estate Agent Survey also suggests that the Western Cape has regained its popularity amongst foreign buyers. Whereas the percentage of home buyers estimated to be foreigners dropped to as low as 3% by late-2011, a recovery in the popularity of residential property as a global asset class since 2012 has seen this percentage rise considerably. For the first half of 2014 it was estimated at 7.5% of total buying.

Data sources: IHS, FNB

Despite the region's relative market strength and superior price growth of late, however, by our estimates it still remained the second most affordable residential market of the Big 4 provinces (Gauteng, Western Cape, KZN and Eastern Cape) in our annual provincial affordability estimates for 2013, only marginally behind Gauteng which is the country's most affordable major residential region. This is because, despite having the highest home prices, the Western Cape is the region with the second highest per capita income, and the highest 'per household income' of any of the nine provinces, and this to a large extent compensates for the province having the highest average house price.

The Western Cape thus appears to be in a relatively good space at present.

However, it is possible that the province's Average House Price/Per Household Income Ratio affordability measure may start to deteriorate (rise) in 2014, after some years of improvement, given the combination of the recent house price growth acceleration and possible economy-driven slowdown in household income growth.

When examining the factors cited by agents as important in driving their near term expectations, some key negatives are there, most notably 'Economic Stress/Pessimism'. While interest rates as an estate agent concern receded in importance in the second quarter of 2014, this could re-emerge as a key concern should the Reserve Bank raise rates further in the near term as we expect.

Perhaps, therefore, one should expect the pace of market improvement to slow in the near term, given broad signs of economic weakness as well as expectations of further interest rate hiking. Indeed, while the FNB Valuers' Market Strength Index for the Western Cape continues to show improvement, the pace of improvement has slowed mildly in recent quarters, and this could be an early sign.

Therefore, while the Western Cape exceeds the national average in terms of house price growth as of late, showing a double digit year-on-year increase, we expect to see some tapering in this growth later in 2014.