Lower house price growth disguises a range of trends

© Kriangkrei Somintr – 123RF.com

"While the index continues to ease, recording an annual growth rate of 5.92% in April, the slowdown in house price inflation remains gradual - with the annual increase in prices just 0.76% below the cyclical peak reached in September 2014," says Dr Andrew Golding, chief executive of the Pam Golding Property Group.

"Notwithstanding the fact that house price inflation at a provincial level appears to be losing momentum, within the country's major metropolitan areas prices continue to accelerate, registering healthy growth rates. Limited land availability within these areas, combined with rapid urbanisation and migration between metros - with a steady influx of people seeking economic opportunities, are contributing to a steady increase in metro house prices.

"When comparing the four metro regions, it is clear that house prices in the Cape Town metro are outperforming by a considerable margin, followed by Tshwane, Johannesburg and eThekwini. Although KwaZulu-Natal has overtaken the Cape as the top performing regional residential property market in terms of house price growth, Cape Town continues to dominate."

Economic outlook

"While the outlook for the economy - and hence the housing market - remains relatively modest, there are clearly areas of robust house price inflation within the various market segments. After moderating during the global financial crisis and subsequent local economic recession, house price inflation in the affordable price band (R250,000 and below) has rebounded - accelerating strongly since early 2014.

"Price inflation in this category is fast approaching the levels recorded during the 2004 boom, with a robust annual growth in prices of 30.65% in April 2015. The growth in affordable house prices undoubtedly reflects the growing housing backlog, with an estimated two million households currently living in informal settlements," says Dr Golding.

The trends in the performance of house prices within the various price bands remains broadly unchanged - with the lower price band (below R1m) continuing to register the strongest performance (+8.96%) in April. However, the national price performance in this lower price band is losing momentum and appears to be approaching an upper turning point. Once price performance in this sector has started to slow, all price bands will be registering a declining trend in price inflation.

Within the three major regions, the performance of house prices in the lower-price band varies significantly. In the outperforming KZN housing market, this category continues to register robust price growth (+18.29%) followed by the Cape (+12.35%) and Gauteng (+8.96%).

First time buyers

A further factor supporting demand in the lower price bands is the growing presence of first time buyers in the market. The percentage of first-time buyers has risen steadily in recent years and accounted for 53% of total sales during the first quarter, according to bond originator Ooba. Unsurprisingly, affordability is a key priority for many of these new market entrants.

From mid 2013 to early 2015, the Western Cape enjoyed the strongest house price inflation among the three major provinces. However, acceleration in the rate of growth in house prices in KZN saw the province begin to outperform the Cape in early 2015. Since then KZN house prices have continued to strengthen while the other major provinces - and South Africa overall, have experienced a slowdown in the pace of house price inflation.

Looking at the various price bands within KZN, it becomes clear that the region's outperformance has been driven by strong growth in the upper price band above R2m and, to a lesser extent, healthy growth in the lower price band below R1m. In contrast, the middle price band from R1m to R2m has performed broadly in line with the overall market.

The strong growth in the upper price band in KZN of +19.69% year on year in April, is out of sync with the slowdown evident in top-end house prices in Gauteng (+3.92%) and the Western Cape (+0.68%). However, growth in this category in KZN has now peaked and is beginning to lose momentum, which will ultimately bring it back in line with the top-end performance in the other major regions.

Acceleration in inflation

During the past decade, house price inflation in Johannesburg and Tshwane has closely tracked the performance of house prices in Gauteng as a whole. However, in recent months, as house price inflation in the province has started to soften, price inflation in Johannesburg and, to a greater extent in Tshwane, has accelerated. The last time growth in metro house prices exceeded growth in the province overall was in the early 2000s - ahead of the 2004 housing boom.

Similarly in the Western Cape, average regional house price inflation is clearly losing momentum, while Cape metro house prices have accelerated sharply since mid 2014. This is the first time that this stark divergence between metro and provincial house prices has been recorded since 2000.

The acceleration in house prices in the Cape metro is largely attributable to the severe stock shortages experienced in many suburbs as well as the geographical limits on land available for development, while the continued relocation of home owners from other provinces further underpins this trend.

Sectional title properties

"Given that the metro areas are the epicentre of economic activity within each province, local cities continue to experience relatively rapid rates of urbanisation. With limited land availability within each metro and with growing congestion discouraging long daily commutes, the housing market is seeing a steady increase in densification. As a result, there has been a steady increase in the number of sectional title properties in South African housing markets," says Dr Golding.

"This can be seen when considering what percentage of residential building plans passed is for flats and townhouses rather than freehold properties. In the first quarter of 2000, sectional title units accounted for just 10.9% of total residential building plans passed. However, by the first quarter of 2008, sectional title accounted for 40.3% of total plans passed. The percentage declined during the post-crisis economic downturn but has subsequently risen - reaching 38% in the first two months of 2015," Dr Golding concludes.