Has the Platteland gone crazy?

Private Property South Africa
John Loos

John Loos, FNB Property Strategist, takes a perspective on property booms in the more rural regions.

The Platteland has experienced a major property boom along with the rest of

the country. This is largely because it also experienced a massive reduction in

borrowing rates just the same as the rest of the country, and the interest rate

adjustment since 1998 has arguably been the most important driver of the

country's housing boom. But the Platteland market has not by-and-large gone

crazy, or become irrational. It is still significantly cheaper than the major

urban markets, reflecting weaker household buying power. During the boom period

from 1999 to 2005 the smaller provinces surrounding Gauteng actually lost ground

to the country's economic powerhouse, both in terms of their economies as well

as in terms of average house prices.

Platteland towns nearer to the metros have got a lot going for them - being able

to capitalise on economic activity flowing out from the metros as they "burst at

the seams", cashing in on some urban commuters, as well as the growing metro

"getaway" market. Gauteng mining towns are also benefiting from a commodities

boom and Eskom is expanding electricity generation capacity around some

Platteland towns.

But there is another Platteland property market. Platteland towns farther off

the beaten track, unable to capitalise on tourism, mining or commuters, will

continue to battle as the urbanisation process moves ahead, and their fortunes

rest on a slow growth and volatile agriculture sector.

For many years, urbanisation in South Africa has been a reality, implying a

certain degree of "depopulating" (ontvolking van die Platteland) of the more

rural areas, or "Platteland" as it is often called. Many of the Platteland

economies have been battling, as much of the new economic activity in SA

centralises around major metros. Agriculture, the mainstay of many Platteland

towns, has not been a rapid long term growth sector, while former major railway

junction towns such as De Aar and Noupoort, hives of activity in days gone by,

have suffered greatly as Spoornet has steadily streamlined its operations.

How, then, do many such towns also manage to experience significant residential

property booms. Has the Platteland gone crazy? Has the demise of the Platteland

reversed the trend? "Not necessarily" is the answer to both of these questions.

UNDERSTANDING THE MAIN DRIVERS OF THE NATIONAL PROPERTY BOOM - 1998 to 2005

Firstly, understanding the drivers of the national property boom are key to

understanding why even some of the poorest performing Platteland regions have

experienced massive residential property booms themselves. The foremost driver

of the national property boom, which took place from around 1999 to 2005, was a

major interest rate reduction, and the Platteland experiences exactly the same

interest rate trends as the major metros.

Let's unpack what is arguably the most important index of housing affordability,

i.e. the index measuring the trend in the ratio of repayment value on the

average priced house/average household income. I claim it to be the most

important index, as opposed to the average house price/average household income

ratio because for a huge number of people mortgage debt is the way houses are

purchased.

In 2005, the average value of this index was 15% higher than the average value

in 1998, indicating deterioration in this measure of affordability. 15% is a

fairly modest rise, given that the average house price (according to Absa) was

218% higher in 2005 than in 1998.

How was it possible to contain the deterioration in affordability to such a

modest magnitude? Arguably the single-most important factor was the massive

decline in interest rates. From an average rate of 20.5% in 1998, the average

mortgage rate declined to 10.63% in 2005. Given that total supply of overall

housing stock couldn't adjust rapidly, the surge in housing demand due to the

greater affordability caused by interest rate reduction largely translated into

price inflation.

In an attempt to isolate the direct interest rate effect over those years, I ask

by how much could house prices have risen from 1998 to 2005 without the index

rising above 100, and assuming that per household income growth was 0% over the

period? The answer is 71.3%. What accounted for the remainder of the 218%

increase? Total nominal per household income was 61.4% higher in 2005 than in

  1. How much could the average house price rise without the affordability

index exceeding 100 in 2005, given the actual combination of growth in per

household income and interest rate reduction? The answer is 176.5%, which means

that the growth in per household income of 61.4% over the period accounted for a

further 105.2 percentage point's worth of house price growth assuming an

unchanged affordability index.

Of the 105.2 percentage points accounted for by nominal per household income

growth, I estimate over half the amount to be due merely to inflation as opposed

to real income growth. Furthermore, a significant chunk of real disposable

income growth over the period was due to interest rate cuts and the stimulus

that they provided for the economy and thus income growth.

In short, a major chunk of house price inflation during the boom years was

driven by interest rate cuts, via their direct and indirect effects, along with

inflation. Admittedly, by 2005 the affordability index had risen above the 1998

level of 100 to 115, due to house prices rising by more than the "allowed"

176.5%, with the 2005 average house price being 218% higher than the average in

  1. The additional drivers were probably sentiment-related. While the beginning of

interest rate reduction post-1998 was arguably the catalyst for a strengthening

market, many property investors move in merely because of the recent improvement

in the property market, thereby enhancing the trend. Some of these people would

be called speculators. The sentiment effect, along with some other factors such

as land shortages around urban areas probably accounted for the cumulative

deterioration in the affordability index to above the level of 100.

EXPLAINING THE PLATTELAND

I take the Free State excluding Bloemfontein for my Platteland example. The

average house price for this region in 2005 was 160.4% higher than in 1998

according to Absa figures. This is well lower than the national average growth

of 218% over the period, and far worse than the star performing province,

Gauteng, with 239.2%.

The poorer house price inflation is probably largely explained by far lower real

economic growth. Whereas neighbouring Gauteng averaged real GDP growth of around

4.9% per annum from 1999 to 2005 according to Globalinsight data, the Free State

excluding Bloemfontein averaged a mere 0.4% per annum. Even including

Bloemfontein, the total provincial growth rate was only slightly better at 1.1%

per annum.

Nevertheless, 160.4% house price inflation is significant by anybody's

standards. Has the Free State Platteland gone crazy? Hardly. Despite very low

economic growth, and thus real income growth, the combination of inflation and

real growth saw to it that nominal income per household in 2005 was 36.8% higher

than in 1998, while the region faced exactly the same interest rate trend as the

rest of the country.

Given the combination of interest rates, the rise in nominal per household

income, and cumulative house price inflation of 160.4%, the affordability index

for the Free State excluding Bloemfontein only rose above 100 (the 1998 level)

in 2005, 11% higher than 1998 and reflecting an overall deterioration in

affordability that was less than the national average.

Cumulative house price inflation of up to 134.5% from 1998 to 2005 could have

taken place without the housing affordability index rising above 100. In other

words, had the cumulative house price inflation rate been 134.5% over the 7 year

boom period, the above measure of housing affordability would not have

deteriorated in the Free State Platteland region, due to the combination of per

household income growth and interest rate reduction.

Cumulative house price inflation rates of 177.3% for Limpopo, 189.6% in

Mpumalanga, or 191.9% for Northwest would thus not seem too inappropriate. These

rates are lower than Gauteng, and so they should be, given their lower average

economic growth rates than the country's economic powerhouse.

Therefore, although housing markets and economies across the country benefited

greatly from a massive downward adjustment in interest rates, and they all

experience similar inflation (general inflation, not house price inflation)

rates, the Platteland regions have not been on some crazy, irrational path. The

smaller and largely Platteland provinces surrounding Gauteng lag the country's

largest provincial economy and housing market in every way.

During the housing boom years, Gauteng showed far superior cumulative house

price inflation of 235.2%.

Superior house price inflation saw Gauteng open up an even larger average house

price lead on the surrounding provinces.

To a large extent the superior Gauteng house price inflation is a reflection of

far superior average real economic growth of 4.9% per annum from 1999 to 2005.

Gauteng also has far higher average per household income of R142,393.

On the whole, therefore, the Platteland has not gone crazy. It has experienced a

house price boom along with the rest of the country largely on the back of the

direct effect of interest rate reduction since 1998, as well as the indirect

impact of the interest rate stimulus on real economic growth and thus income

growth. However, economic and house price growth-wise, the Platteland provinces

surrounding the Gauteng province have fared poorer than the country's major

metropolitan province, are significantly poorer, and have significantly cheaper

housing markets on average as a result.

A PART OF THE PLATTELAND HAS A LOT GOING FOR IT

Housing trends in future will reflect a "tale of 2 Plattelands", with mineral

rich Platteland areas and those nearer to the large metros faring far better

than the far-flung towns.

As the large metros grow, some of the Platteland areas will gradually be partly

or fully "absorbed" by the metros. Areas northwest of Tshwane such as Brits and

Hartebeespoort Dam may be good examples. As Gauteng runs out of space, and as

the existing space becomes pricier in this metro, so industrial and commercial

activity looks for new places to happen. This will benefit the likes of Brits as

well as other surrounding towns, ultimately perhaps even as far afield as

Witbank and Middelburg to the east and Potchefstroom/Klerksdorp to the west, in

years to come.

Surrounding towns' property markets also benefit from increased "dormitory" town

status. We have seen this in the case of Hartebeespoort Dam, and there has been

some anecdotal evidence of people commuting from as far as Potchefstroom. While

many people will look to move closer to the main centres such as Sandton or

Joburg CBD due to increasing traffic congestion, technology makes it possible

for some to move further out of the metros, and to cut their number of weekly

commuting trips to the metros.

"Getaway" trends may also benefit the Platteland even more in future. Corporate

South Africa is following global trends, being increasingly exposed to global

competition since the end of the isolation years. As corporate life for many

professional people becomes more competitive, working hours become longer, and

long holidays become more difficult to take. Many individuals, therefore, either

prefer or are forced into taking a greater number of shorter duration holidays.

This increases the need for "getaway" places nearer to the large metros.

The demand for nearby getaway destinations is further enhanced by the

increasingly congested and stressed urban lifestyles, not only in Gauteng, but

also in Cape Town and Durban. Not surprisingly, therefore, small towns near Cape

Town such as Greyton and McGregor thrive, as does the Natal Midlands and Central

Drakensberg, while previously-quiet towns such as Clarens in the Free State and

Dullstroom in Mpumalanga have become real hotspots. Expect more such towns to

rise in prominence in future.

The "getaway" destination demand is further enhanced by the accelerating long

term growth rates in the metros, which is driving more rapid growth in the

country's middle class.

Finally, let's not forget the need for greater power generation, supporting

greater economic activity on the Mpumalanga Highveld as well as near the new

coalfields in the Waterberg (Limpopo), or the general commodity boom which is

benefiting much of the region formerly known as the Transvaal. Towns near to

coal reserves, for example Ellisras, are set to benefit, while Rustenburg which

lies in platinum country has been benefiting for some time.

Many Platteland areas that can benefit from tourism or commodities or nearby

metro urban expansion have a lot going for them.

However, there are more far-flung areas battling to benefit from any of the

above. I think of the former railway junction towns of De Aar and Noupoort as

examples. These two towns were once hives of activity in the heyday of the

railways, but have suffered severe setbacks as Spoornet has cut back activity

dramatically in these areas. They are many miles from the major metros and are

off the large road routes. Their estimated average annual real economic growth

rates over the property boom years were not far above 1%. This is the other

Platteland. It benefited from the interest rate adjustment of the boom years as

did everyone to a greater or lesser extent, and probably had a considerable

property price boom by its own standards. But relative to the rest of the

country, such areas' economies and property markets will probably struggle.

All-in-all, therefore, while prices in some Platteland areas may seem crazy, its

residential market has by and large not "lost its marbles", and on average still

lags the major economic regions considerably.

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