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Cape Town house prices 'cool off' - expect more of the same

11 Jun 2019

Property News

Brought to you by Property24

Most areas in Cape Town are experiencing slowing house price growth, with expensive suburbs “hardest hit” and the expectation that this downward trend will continue.

The Atlantic Seaboard has seen average house price growth plunge from a multi-year high of 25.5% year-on-year in the first quarter of 2016 to an all-time low of -5.1% by the first quarter of 2019.

These are findings of the FNB 1Q19 City of Cape Town Sub-Regional House Price Indices, which showed a further softening in house price growth to 1.2% year-on-year in the first quarter, down from 3.2% in the last quarter of 2018.

This was the slowest growth since the global financial crisis at the end of 2009 and the second consecutive quarter of real house price decline i.e. below inflation growth, says FNB Economist Siphamandla Mkhwanazi.

“We read this as a continuation of the normalisation process, to align prices with economic fundamentals in the region,” he says.

Can we expect more of the same?

When looking at price-to-income ratio as a proxy, the findings showed that affordability in the city had not yet improved, despite slowing house price growth since the second quarter of 2016.

“If experience is anything to go by, then there is reason to believe that this ratio will soon normalise, which means there is scope for further downward price adjustments,” says Mkhwanazi.

It is conceivable that the house price deflation seen in some upmarket regions around Cape Town could reverberate throughout the city, resulting in meaningful improvement in affordability.

If this happens, he says any meaningful recovery in national prices would be undermined, which could ultimately prolong the period of subdued house price growth in South Africa.

Upmarket property worst hit

The upmarket suburbs in and around the Cape Peninsula have been hit hard, with the most expensive sub-region, the Atlantic Seaboard, seeing its average house price growth "plunge" from a multi-year high of 25.5% year-on-year in the first quarter of 2016 to an all-time low of -5.1% by the first quarter in 2019.

The sub-region was the first to slide into contraction, with -0.08% year-on-year growth in 3Q18, says Mkhwanazi.

He says the deflation appears to have “spilled over to the rest of the regions near Table Mountain”.

“The City Bowl, the economic hub of the region, slid deeper into contraction in 1Q19, registering -2.0% year-on-year from a mild contraction of 0.2% in the previous quarter.

“The Southern Suburbs (incorporating suburbs such as Claremont, Newlands and Observatory) followed suit and contracted by 2.4% y/y in 1Q19, from a peak of 15.4% y/y in mid-2015.

“In the same vein, the Eastern Suburbs (incorporating suburbs such as Woodstock, Maitland and Pinelands), which for some time held up better than the rest of the regions surrounding Table Mountain, declined by 4.2% y/y in 1Q19.”

Mid-priced suburbs fare slightly better

Mkhwanazi says the Northern Suburbs, generally in the middle of the price spectrum, are holding up relatively better, but showing a sharp deceleration in house price growth.

For some time, these regions were perceived as offering more affordable housing opportunities, he explains, but “ultimately, prices overshot and completely counteracted their initial attractiveness”.

Unsurprisingly, says Mkhwanazi, as demand slowed, price growth slowed. “To this end, the Western Seaboard sub-region registered 1.8% year-on-year in 1Q19 from 3.8% year-on-year in 4Q18; the Bellville-Parow and Surroundings (including Goodwood) and Durbanville-Kraaifontein-Brackenfell sub-regions slowed to 4.0% and 2.9% year-on-year from 6.1% year-on-year and 4.2%, respectively.”

Lower-priced suburbs buck the trend

The more affordable sub-regions in the city, which incorporate township areas, are performing well above the city’s average and remain in the double digits, says Mkhwanazi.

“The Cape Flats region has held relatively steady around the 12% mark over the past year, although it retreated to 11.3% year-on-year in 1Q19 from 12.1% in 4Q18.

“Elsewhere, while growth has been cooling in the Elsies River/Blue Downs/Macassar region over the past year or so, it now appears to be stabilising around the 10% year-on-year mark and is the only region that did not experience slowing prices in 1Q19. Average house price growth ticked up to 10.5% year-on-year in 1Q19, from 10.1% in 4Q18.”

Finally

Mkhwanazi says affordability has not improved sufficiently in the region, despite a sharp deceleration in house price growth over the past 18 months. “This suggests there is scope for further downward adjustment in Cape Town house prices, and a nominal decline in prices is conceivable at this point.”

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