Western Cape property market kick-starts national inflation average

But indications are that the impact of the region’s market power is no longer confined to the Western Cape; it’s also become the main driving force behind the national house price inflation rate, which is starting to show signs of recovery.

FNB Property Barometer

This is according to a recent FNB Property Barometer which largely attributes the rise in national house price inflation during the second quarter of 2016 to the dynamic Western Cape market.

The FNB House Price Index revealed a 7.4% year-on-year national growth for the month of June, which was slightly higher than the 7.2% rate recorded for May, “extending the recent mild accelerating trend in average house price inflation to five months”.

In contrast, according to the report, the Western Cape enjoyed a second quarter year-on-year house price growth rate of 12.1%, which was up from 12% during the first quarter of 2016.

And with the other provinces experiencing far more subdued average growth rates of between 2% and 5%, it’s the Western Cape’s market buoyancy that has bolstered the national average.

Core growth force in residential sector

Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, says while the recent local government election results should boost the national property market with marginally better international confidence in the country’s economic outlook, in the medium term the Western Cape’s buoyancy will continue to be a core growth force in the residential sector.

Geffen says: “Shortly after the election results were announced international ratings agency Moody’s indicated that increased political competition had the potential to increase reform momentum in the lead-up to the 2019 national government elections.

“It’s quoted as saying that ‘over the medium to longer term this would indicate a shift from redistributive policies towards more growth-orientated economic management and effective service delivery’ and if that proves to be true it can only be good for the country’s economy.”

Geffen says even mild national economic growth, which the Reserve Bank’s Monetary Policy Committee currently predicts will be 0% in 2016, would create more stability in the residential property market beyond the borders of the Western Cape and further drive house price inflation.

“All of that is, of course, if international confidence in South Africa isn’t further weakened by Finance Minister Pravin Gordhan being under siege by the Hawks.”

Stabilisation of socio-economic climate

Geffen says the exponential growth in the Western Cape’s market was first felt in Cape Town about eight years ago when the socio-economic climate in South Africa began to destabilise. And in recent years the trickle of upcountry buyers in search of a more relaxed lifestyle and dependable municipal services escalated to a flood.

“Sentiment toward the Western Cape became progressively more positive as the province continued to show sound economic management and we are now seeing significant interest from repeat buyers from other provinces.”

Chris Cilliers, CEO and principal for Lew Geffen Sotheby’s International Realty in the Winelands, says: “This scenic region has become increasingly popular with professionals looking to de-urbanise and buyers from Gauteng seeking a more secure lifestyle as well as retirees wanting move away from the hustle and bustle of the city.

“Up to 40% of our current investors in the Winelands and Somerset West are from Gauteng and other parts of South Africa.”

Retirement properties

Cilliers adds that they are also seeing more upcountry buyers investing in retirement properties which they rent out until they are ready to move to the Cape.

“This gives people the opportunity to plan for their old age with the confidence that their capital investment will not only hold its value, but will also offer excellent growth.”

Steve Thomas, franchise manager for Lew Geffen Sotheby’s International Realty in False Bay and Noordhoek, says: “Ironically, Cape Town’s market strength is being boosted by the ever-growing number of upcountry investors who now account for up to 30% of buyers in the most sought-after areas, with sales peaking during the summer holiday season.

“We have noticed a significant shift in the buyer demographic in recent years with the False Bay coastline fast becoming the new ‘hot spot’ for upcountry buyers looking to invest in second homes in the Cape.”

Thomas adds that this shift is not only driving up property values, but also closing the gap between asking prices and achieved selling prices.

Buyers looking further afield

Geffen says that although the market surge in the Western Cape was initially confined to Cape Town and surrounds, this is no longer the case.

“The growing influx of upcountry investors moving to the Cape has seen property prices in Cape Town soar and, as a result, buyers started to look further afield to other coastal towns where they can enjoy a similar lifestyle at more accessible prices.

“Semigration currently accounts for 35% to 40% of all sales in the Garden Route and for the first time our offices in towns like Knysna are now selling more primary residences than holiday homes to buyers originating in Gauteng.”

According to the FNB Barometer analysis, the percentage of repeat buyers moving between provinces rose from just 6.4% during the 2008/09 recession to a high of 12.9% in 2015.

The study also found that the Western Cape has the lowest percentage of repeat buyers leaving the province as well as by far the strongest net inward migration of repeat buyers from other provinces, which is attributed to its solid economic growth rate and perceptions of a high quality of life.

Topographical influence

While there is no doubt that the migration from other provinces is contributing significantly to the strength of the Western Cape housing market, in Cape Town another major influence is the region’s topography that restricts the city’s ability to expand.

Because of the natural limitations imposed by the coastline, mountains and the percentage of land under conservation, available greenfield land is becoming increasingly scarce and the spiraling demand will soon result in a dearth of investment opportunities and sharp increases in price.

FNB Property Economist John Loos says: “The Western Cape’s repeat buying has accelerated steadily since 2009, now dwarfing the net migration rates of the other eight provinces and it continues to be the preferred ‘semigration’ destination.

“It is therefore very likely that we will continue to see the Western Cape’s housing market outperform the other regions and bolster the national averages for the remainder of 2016.”