The FNB Residential Property Barometer points to activity levels, as viewed by estate agents in the various regions, being lower in the coastal regions compared with the Gauteng market. Splitting it up further, the Tshwane metro appears to be head and shoulders above the other major regions, while KZN is currently the weakest.
These findings should be expected, with the coastal regions having a far greater
component of holiday and investment buying activity, which is more sensitive to
interest rate and economic cycles. The coastal regions should thus tend to hit
higher peaks and lower troughs during the cycle.
The superior performance of Gauteng at present, on the other hand, is the
reflection of a market dominated by the less-cyclical primary residential
demand, while the superb performance of Tshwane in particular may have much to
do with estimates of real economic growth in that metro outstripping the others
in recent years.
AFTER A GREATER DETERIORATION IN AFFORDABILITY, COASTAL MARKETS ARE FEELING THE PINCH MORE THAN GAUTENG.
The release of the third quarter results of FNB's Property barometer shows an
across-the-board strengthening in activity levels during the third quarter,
compared to the July survey which was done shortly following the National Credit
Act (NCA) implementation in June. However, compared with the regular quarterly
survey for the second quarter, activity levels remained on a slowing path in the
Regionally, trends similar to the national trend were reported.
However, with regard to relative regional performances, the barometer indicates
that Gauteng has consistently been holding up better than the 3 major coastal
regions since early-2005. This is after being outperformed by the coastal
regions at the height of the property boom in 2004.
Although the barometer time series only started in 2003, it appears to be
telling us that the Gauteng market has indeed been less cyclical than the major
coastal regions in recent years.
This is to be expected, given that Gauteng is dominated by primary residential
buying. This can be classified as a more essential form of buying than
investment and holiday property buying, and should thus be less sensitive to
interest rates and economic growth cycles.
The coastal regions on the other hand, have a greater proportion of holiday and
investment buying, which I believe contributes to their more cyclical nature.
Therefore, one should not interpret the Barometer readings as indicating weak
long prospects for coastal markets, but rather that in adverse interest rate and
economic conditions the coast becomes the poor cousin to Gauteng, and vice versa
in better economic and interest rate times.
The graph below, reflecting the Gauteng Barometer reading minus the Coastal
Barometer reading, bears this out. When the Barometer survey was started back in
2003, at the peak of the property boom, it was the Coastal regions that were
outperforming Gauteng. This situation reversed itself in 2005 as the interest
rate situation deteriorated (in terms of a lack of cutting rates after 2003 and
then hiking from 2006) and the residential property cycle weakened.
Breaking the Gauteng and coastal regions up into smaller regions, we see that it
is the Pretoria region of Gauteng that is by far the star performer in terms of
activity levels at present, while of the coastal regions the Western Cape is in
the best shape, although trailing both Joburg and Pretoria, and KZN appears to
be the weakest.
As mentioned previously, much of the explanation lies in the composition of
demand for property in each region, which the Barometer survey also attempts to
shed some light on. According to agents surveyed, 88% of total buying in Gauteng
is primary residential buying, whereas down at the coast primary residential
buying averaged a lesser 72% in the third quarter. KZN is the big holiday
property province (relative to its overall market size), being closely located
to Gauteng and the greater inland economy formerly known as Transvaal, and its
percentage of purchases for primary residential purposes was the lowest of all
the major regions at 70% in the third quarter. In addition, the proportions of
sales type are bound to vary over the cycle (with greater holiday and investment
buying back nearer to the peak of the cycle one would expect). Indeed, KZN's
proportion of primary residential sales was an even lower 63% as recently as the
first quarter of 2007 when we started asking this set of questions.
Comparing the Lightstone Risk Management Coastal Property Price Index to the
Non-Coastal Property Price Index supports the view regarding the more cyclical
nature of strongly holiday property-driven markets.
The Coastal Property Index incorporates all residential property within 500m
from the shoreline, right around SA's coastline. It is thus far more strongly
holiday property-driven than the Non-Coastal Index, which includes all other
property (and obviously has a far larger sample size).
One can see the difference in year-on-year price inflation of the 2 indices. At
the peak of the boom, year-on-year price inflation was estimated higher than 60%
for the coastal index for a short while, far outstripping non-coastal inflation.
More recently, the more stable non-coastal index has outperformed the coastal
one in terms of price inflation.
So what would explain the Tshwane (Pretoria and surrounds) region's far superior
performance even to inland Joburg? It would appear to be a superior economic
growth performance. Long gone are the days when Pretoria was known as the civil
service town. The Tshwane metro has developed as a diversified services-driven
economy and arguably the country's most rapid economic growth metro too.
Examining South African Property Owners' Association (SAPOA) office stock since
1998, it would appear that decentralised office space in Pretoria may have been
the most rapidly growing of the major metros. This would suggest the possibility
of superior economic growth, given the dominance of the services sectors these
Globalinsight economic estimates support such a view, putting Tshwane top of the
major metros, having averaged real GDP growth of 5.2% per annum over the past 10
years (with Joburg next best at 4.8%), while in 2006 its growth was estimated at
an impressive 7.7% (followed by Cape Town with 6.8%).
In addition to a superior economic growth performance, which points to superior
residential purchasing power growth, growth in new residential stock in Tshwane
appears to have kept up well with demand over the boom years. The result has
been that affordability in terms of the average house price/average household
income ratio appears to have risen (deteriorated) the least in the case of
Tshwane (compared to the major 4 metros)
It should therefore come as little surprise that Tshwane's Barometer reading is
holding up best during these times of uncertainty and residential market
For as long as the adverse interest rate situation persists (which we don't
expect to be to much longer), one should expect the coastal regions to
under-perform the Gauteng market due to the higher degree of non-essential
investment and holiday buying in the coastal markets, which makes them more
Within the coastal region, KZN is possibly the most cyclical, having the lowest
proportion of primary residential buying of the major regions.
Within the Gauteng region, Tshwane appears set for superior capital growth and
activity levels, with the metro's purchasing power believed to have outstripped
the other metros, including Joburg, driven by more rapid estimated economic
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