Investment in residential property in SA continues to shine

To say that it’s been a tumultuous year for the planet is definitely an understatement, and yet in the face of a sluggish and uncertain domestic and global growth environment and ongoing socio-political challenges, the residential property market in South Africa continues to exhibit extraordinary resilience and remains one of the few bright spots in an otherwise relatively lacklustre economy.
This is despite five consecutive years of subdued economic growth, a severe drought and repeated bouts of rand weakness, which have ignited renewed price pressures and prompted the Reserve Bank to gradually, but repeatedly, raise interest rates before stabilising them.

Investment in residential property in SA continues to shine
The strength of the housing market is attributable to the continued vibrancy of the country’s major metro areas coupled with an ever growing preference for property as an asset class at a time of extreme financial market volatility.

However, signs are now emerging that the national housing market is beginning to lose some momentum in the face of these persistent economic headwinds.

After registering an average house price inflation rate of 5.5% last year, the Pam Golding Residential Property Index (PGP Index) reached a cyclical peak of 5.7% in March this year and now appears to be slowing.

The gradual slowdown in national house price inflation is occurring at a time when rand weakness and higher food prices have driven the consumer price index above the Reserve Bank’s 6% upper inflation target limit.

While the PGP Index has averaged 5.6% during the year to date, the consumer inflation rate has averaged 6.2% during the same period. This would suggest that, after adjusting for inflation, real South African house prices have fallen by an average of 0.6% compared to the same period last year.

However, this picture is actually misleading since the national house price index is a weighted average of house prices across the country. As a result, this national average includes a wide range of divergent performances evident in the different regions, metros, price bands and unit types – all of which make up the national housing market.

When one begins to examine the overall housing market in greater detail it becomes clear that – even though national house price inflation is beginning to slow – there are still several sectors within the local housing market which continue to flourish and register positive real growth rates.

For example, during the year to date, house price inflation in the Western Cape has risen by 10.35%. Adjusting for inflation, this translates into a real increase in house prices of 4.2% during the first nine months of the year.

Location, not economy, a key determinant of time to sell

Furthermore, the importance of location when selecting a property to purchase was highlighted by recent research released by Lightstone that revealed that the suburb in which a property is located is a relatively more important factor in determining how long a property takes to sell than the state of the economy.

To illustrate this, the Western Cape may have experienced the highest overall growth in homeowners due to the well described and most significant semigration trend, but the suburb at the top of the pile from an activity perspective is not in the Cape but in Pretoria – with homes in Garsfontein selling within 2.8-months of listing. In contrast, a property in Parkhurst typically stays on the market for 7.4-months.

Generally speaking, however, the other the major trends in the national housing market during the past nine months remain unchanged:

Western Cape property market stays on top

The outperformance of the Western Cape housing market relative to both Gauteng and KwaZulu-Natal began in mid-2013 – which more or less coincides with the start of the semigration of buyers to the Cape. Factors fuelling movement to the Cape – the appeal of a proven record of service delivery, access to excellent schooling and the attractive lifestyle – are showing no signs of slowing down. There is still real growth in the property market.