Provincial House Price Growth

Private Property South Africa
Elna Moolman and Gina Schoeman

**The residential property market continues to be buoyant, although the

growth in house prices has softened substantially from last year's peak.**

In February, for example, house prices grew by 21.95% from the year before

compared with growth in excess of 36% towards the end of 2004. But as usual,

these aggregated growth rates mask noticeable differences across provinces. For

example, there has been continuous and gradual acceleration in property price

growth in Gauteng, while there has been substantially more volatility in the

growth of property prices in the Eastern Cape and Limpopo. In contrast, house

price growth in the Free State appears to have remained relatively low and

stable until it experienced a sharp increase in 2005.

Provincial house price growth

*Provincial house price growth *

This suggests that although national factors may have a similar impact on

provincial property markets, each province is nevertheless susceptible to its

own internal factors, which in turn contribute to determining its reaction to

nationwide factors such as the increasing popularity of property as an

investment. While some of the key drivers of house prices, notably interest

rates, are the same across the country, the provincial differences such as

income are expected to cause variation in house price behaviour across the

provinces.

Indeed, provinces such as the Eastern Cape and North West have similar income

levels (around R20 000 per capita) and similar house prices (x and x

respectively). Elsewhere, however, the expected positive relationship between

house prices and income appears to be absent. For example, KwaZulu-Natal (KZN)

and the Free State enjoy similar income per capita levels (R29 942 and R26 975

per year respectively), although their average house prices differ markedly

(R351 313 and R262 596 respectively). Similarly, Limpopo and the Western Cape

have similar average house prices (R368 333 and R360 000 median house prices

respectively), but their income per capita differs substantially (R211 395 and

R247 500 respectively).

*Average house prices and annual income per capita (2004) *

This suggests that there are more factors contributing to house prices in

different provinces. For example, in the two instances mentioned earlier, the

differences in urban/rural status could play a meaningful role, while factors

such as the presence of tourists in KZN, for example, could contribute to

different house price growth. Factors other than income that could cause

differences across regions include the extent of urbanisation, the role of

tourism and foreign home ownership, and other economic factors such as the

structure of production in the local economy and spatial phenomena.

Some recent provincial trends include:

  • The Western Cape experienced relatively strong house price growth

    in 2000 and 2002 before it levelled off in 2003 and 2004. House prices

    subsequently rose rapidly during the latter part of 2004 and in 2005. The

    strong increase in prices and activity in 2002 could have been influenced by

    the sharp depreciation of the rand exchange rate towards the end of 2001,

    especially since foreigners and tourists play an important role in this

    region. For example, in 2002 almost a third of the South African residential

    properties bought by foreigners were in the Western Cape. The subsequent

    decline in activity in the previous year, combined with very high prices and

    price growth, may reflect the relatively limited supply of houses in this

    region, which enables sellers to raise prices.

  • House price growth in the Eastern Cape remained on a steady path

    during 2005, growing at 33% in the third quarter. There was a decline in the

    number of houses sold (as in all other provinces) but it still ended at a

    level in line with the number of houses sold between 1999 and 2001,

    suggesting that the market has probably been normalising rather than

    collapsing. This region is relatively poor, with the second lowest income

    per capita (R20 845 in 2003, second only to the North West with an income of

    R19 651 per capita) as well as the second highest proportion of people

    living in poverty (36%, following 38.1% in the Northern Cape).

  • The Northern Cape includes a large rural area and, as such,

    property prices tend to be relatively low compared to more urbanised

    provinces. For example, its median house price of R247 500 in the third

    quarter of the previous year was well below that of Gauteng (R411 395). This

    is also a relatively stable market, perhaps less influenced by economic

    changes than, say, Gauteng. Over this period, the Northern Cape recorded a

    relatively stable growth path (apart from the growth spike in the third

    quarter of 2005) and also less fluctuation in the number of transfers taking

    place.

  • The Free State recorded an increase in house price growth of

    almost 50% in the third quarter of 2005. This experience is similar to that

    of the Northern Cape, where generally stable growth rates were followed by a

    catch-up period. Also (and again in line with the Northern Cape experience),

    the Free State saw a decline in the number of houses sold, but this was less

    steep than in most other provinces. This suggests that although the Free

    State experienced the effects of the boom in the property market, it was not

    affected as much as other provinces were.

  • KwaZulu-Natal's housing market includes a large number of coastal

    properties, which generally sell at a premium relative to inland property.

    Consequently, its median house price of R295 000 in the third quarter of

    2005 exceeded that in all provinces except Gauteng (R411 395). House price

    growth of more than 55% was recorded in the third quarter of 2005. The

    number of houses sold declined following a spike in 2002, which could, as in

    the Western Cape, at least partly have been the result of a relatively weak

    exchange rate, which spurred purchases by foreigners.

  • The growth path of house prices in North West Province differs

    from most provinces. The province recorded above-average growth prior to the

    recent property market boom, with house price growth close to 20% during

    2001 and 2002. Thereafter, growth surged in 2004 before subsiding in 2005,

    when the national house price growth rate peaked. This can be at least

    partly attributed to movements in the rand exchange rate and commodity

    prices, which play a crucial role in the mining sector that in turn is an

    important driver of the economy of the North West Province.

  • Gauteng recorded house price growth of 48% during the third

    quarter of 2005. This follows more than five years of strong growth.

    Although the correlation between economic and house price growth is

    generally not very strong, the stability in house price growth in this

    province is in line with its economic growth path, which has been less

    volatile than in other provinces. Gauteng has the highest provincial median

    house price of R411 395.

  • The housing markets of Mpumalanga and Limpopo have

    recorded vigorous price growth since 2004, while the drop off in the number

    of houses sold in this region corresponds to the national trend in the

    property market. Both provinces enjoy relatively stable GDP growth, which

    supports the continuous growth in house prices.

*The outlook *House prices continue to be supported by relatively sound consumer

fundamentals and a benign economic outlook. Despite a rise since the end of

2002, South Africa's household debt repayment to income ratio is still not

punishingly high, which suggests that they have some scope to further increase

their exposure to the housing market. However, their rate of debt accumulation

could slow in due course. Further consolidation in house price growth is

expected next year as a result of the reduction in pent-up demand after several

years of brisk buying; the fading impact of previous interest rate cuts; and

recent above-trend growth that has created a high base from which future growth

rates will be calculated. Nevertheless, nominal income is expected to grow at

around 10% this year. Since house prices are not inaccessible, they should at

least keep pace with this growth in income.

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