Potential size of the South African housing market

Private Property South Africa
Jacques du Toit

Jacques du Toit, Senior Property Economist for the Absa Group looks at market performance over recent years in determining the potential size of the housing market in South Africa.

Against the background of various supporting factors, such as a strongly growing

economy, low inflation and interest rates, the residential property market

performed particularly well during the past few years. During 2000 to 2005,

nominal growth in house prices was about 20% per annum, implying growth of

around 14% per annum in real terms over this period. These growth rates apply to

housing in the middle segment of the market (houses of between 80m² and 400m²,

costing up to R2,2 million), in respect of which mortgage loan applications were

approved by Absa.

Based on the abovementioned housing market performance at a national level since

2000, the potential size of the housing market in South Africa and the various

regions can be determined.

This analysis takes into account average house prices at the lower cut-off point

of the size range for the small (80m²), medium (140m²) and large (220m²)

categories of housing, average annual household income, and the number of

households in each region that can afford to buy a house under certain

assumptions.

The potential size of the housing market

In an attempt to determine the potential size of the housing market at different

levels, the average price of residential properties at the bottom end of each of

the small, medium and large size categories is taken (determined according to

the lower cut-off point in terms of the size range of houses in each category).

After which the minimum gross income is calculated that a household in each

region should earn to qualify for a 100% mortgage on a residential property, of

which the monthly repayment does not exceed 30% of the gross monthly income.

From these calculations, the number of households per size cut-off that are

above the minimum annual qualifying income in each region is determined. This

number, or percentage, of households is regarded as the potential size of the

housing market in each region.

Based on this analysis, 1 792 994 households in South Africa (or 14,4% of the

total number of 12 445 791) were able to afford a residential property of 80m²+

in 2004, taking into account the abovementioned assumptions. In 2004, the

potential market size for houses of 140m²+ was 1 296 519 households, or 10,4% of

the national total, whereas the potential market size for houses of 220m²+ was 1

035 692 households, or 8,3% of the national total in 2004.

The relatively low percentage of households that were able to afford a house at

the abovementioned size limits in 2004, was the result of a skewed distribution

of income in the country. Just more than 8 million households in South Africa

(64,4% of the total) earned an income of up to R54 000 per annum in 2004; about

2,4 million households (19,5% of the total) earned an income of between R54 000

and R132 000 per annum in 2004; around 1,3 million households (10,5% of the

total) earned an income of between R132 000 and R360 000 per annum in 2004; and

about 700 000 households (5,6% of the total) earned an income of R360 000+ per

annum in 2004.

In each of the three categories of housing, Gauteng was the province where the

largest percentage of households could afford to buy a house of the

abovementioned sizes last year. This was the result of the fact that Gauteng was

the province that had the highest level of income per household in 2004.

The Eastern Cape was the province where the smallest percentage of households

could afford to buy a house in any of the three categories in 2004, mainly

because this province had some of the lowest levels of income per household last

year.

In the case of the major metropolitan areas in South Africa, Johannesburg North

and West were the areas where the highest percentage of households in all three

categories were able to afford to buy a house last year, followed by Pretoria.

Cape Town emerged as the metropolitan area in the country where the smallest

proportion of households could afford to buy a house of 80m²+, 140m²+ or 220m²+

in 2004. This can most probably be ascribed to house prices being, on average,

relatively high in the Cape Town metropolitan area, whereas income levels were

lower compared with some other metropolitan areas in the country ([click

here to view supporting figures](https://www.privateproperty.co.za/news/images/200605jdt/potentialsizeofthehousingmarket_2004.pdf)).

Conclusion

House prices have showed relatively strong growth in all the provinces and

metropolitan regions over the past few years, but diversities in terms of growth

in house prices and, especially, the level of and growth in household income

during this period create a different impression of the state of the property

market in the various the regions.

The potential size of the housing market in South Africa (as indicated by the

number and percentage of households in a position to afford a house of 80m²+ in

the so-called middle segment of the market) can be regarded as relatively small.

This was the result of a much skewed distribution of household income in the

country, implying that a large percentage of households earned relatively low

levels of income.

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