It’s a Long Hard Road Back for Eastern Cape Property Following a Severe Recession

Private Property South Africa
John Loos

The Eastern Cape, and especially its largest residential market, Mandela Bay, has arguably taken more of a knock than the bigger property regions such as Gauteng or the Western Cape, or so FNB’s own figures seem to suggest. This, we believe, is due to a number of factors, notably a significant portion of very cyclical holiday property, as well as a major dependence on manufacturing including the highly cyclical vehicle manufacturing, which took great pain as a result of the Global recession, and impacted on the Eastern Cape (especially Mandela Bay) economy. If this is not enough, a drought must also be seen to have taken its toll on the province’s economy in some form. As such, we still saw the FNB Eastern Cape House Price Index languishing in year-on-year deflation to the tune of -7.3% during the first quarter of 2010, compared to the national price index which had already turned to positive growth at that stage. We estimate that price decline has been worse around Mandela Bay metro, which ties in with our view that Mandela Bay may have been harder hit by recession than the rest of the province, and that this sub-region (and in its immediate surroundings) may be where a worse oversupply of new residential stock may have been created. Nevertheless, although perhaps lagging the national market, many of the region’s other residential property indicators point to improving health, with demand steadily growing and supply of new stock, as well as supply from financially stressed sellers, seemingly being curbed. Key points from the Mandela Bay component of the 1st quarter FNB Property Barometer survey include a mild quarter to quarter improvement in the demand activity rating (scale of 1 to 10), from 5.45 to 5.73, which, although not yet impressive, is 43% up on the corresponding quarter a year ago. First time buying and buy-to-let buying have both made increased contributions to overall residential demand in the Mandela Bay region. A lack of realism in pricing remains a constraint on property trade volumes, with 85.5% of sellers still having to drop their asking price, and the average percentage drop in price is estimated at 14%. However, there has been some improvement in pricing realism, or at least perhaps the strengthening demand in the market is “catching up” to price levels, and the average time of homes on the market at 13 weeks and 5 days is significantly lower than the 16 weeks and 7 days peak reached at a stage last year. The process of containing supply until demand has caught up is crucial in returning an oversupplied region to market balance, and in so doing returning the market to positive price growth, something that we believe is starting to happen. The past 4 quarters’ worth of residential building space completed was 14 percent down on the previous 4 quarter period, while plans passed were 29% down suggesting further decline in completions. In addition, supply emanating from financial stress selling appears to be on the decline. From the 3rd quarter of 2009, where estimated “selling in order to downscale due to financial pressure” peaked at 25.5% of total selling, this percentage has dropped to an estimated 15.5% in the 1st quarter of 2010. We believe that sufficient oversupply will have been mopped up by the 2nd half of the year, at which stage we expect positive average house price growth to resume. However, it is important not to expect too much from the current recovery. The household sector still has considerable financial stress, despite the improvements on this front to date. We also believe that prospects for economic growth both globally and locally are mediocre at best, and the Eastern Cape’s high dependence on manufacturing makes it sensitive to global economic events. Therefore, unlike last decade’s boom, we believe that the current property market recovery will be a short and moderate one, with residential demand growth beginning to taper off in the 2nd half of 2010, although importantly still remaining in positive growth territory.

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