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How affordable is property in South Africa?

10 Jun 2015

By historical standards, housing in South Africa remains affordable and also compares favourably to affordability in other global housing markets. However, slower growth in local household income has seen a gradual deterioration in affordability since late 2013. 

The relative affordability of housing in Gauteng can be attributed to the fact that Gauteng recorded the highest average taxable income in South Africa in 2013, while average provincial house price inflation in that province has lagged behind that of the Western Cape and, more recently, KwaZulu-Natal as well.

This is according to Dr Andrew Golding, chief executive of the Pam Golding Property (PGP) group, who says bearing in mind that they are excluding the ‘affordable housing sector’, namely homes priced below R250 000, it is interesting that a recent SARS data released allows for the comparison of affordability in various provinces and major metros. 

Coupled with this, rising congestion, in regard to population and density in general in major centres, is prompting some analysts to argue for a new, more complete, measure of housing affordability, he says. 

“Typically, the affordability of housing is measured by the ratio of house prices to average household income. House prices have a tendency to become overvalued, resulting in housing ‘bubbles’.” 

A measure which allows potential homeowners and policymakers to monitor whether the housing market is becoming overheated is thus crucial, he says. 

“Using the long-term average ratio of house prices to household income as the benchmark, it is possible to determine whether the current ratio of house prices to income is above (over-priced) or below (under-priced) the historical average.” 

Using this methodology, the housing bubble of 2007 is clearly visible and should have served as a warning to potential buyers and policymakers alike. 

Dr Golding says the most recent affordability figures show a gradual deterioration in the affordability of local housing. Since the beginning of 2013, growth in house prices has outstripped growth in household disposable income by a margin of around 2%, causing housing to become gradually less affordable. 

Taking a longer-term perspective, however, the current ratio remains close to the historical average and is thus unlikely to be of concern to policymakers or potential buyers, he says. 

When compared to other global property markets, South African house prices remain affordable, while those of Australia, in particular, and Britain, remain expensive compared to household disposable income, he says. 

The affordability ratio in Australia remains close to the record levels recorded in late 2003 and early 2010, suggesting that a housing bubble remains. He says in Britain, the affordability ratio declined quite sharply during the 2008 global financial crisis, but is now rising rapidly once more. 

However, Dr Golding says as with house prices in general, the national average disguises a wide range of divergent trends in different regions, cities and suburbs. 

In countries like China, a country in which many believe that house prices have soared well beyond the reach of ordinary people, the Economist Intelligence Unit has created a city-level index to track the relationship between housing prices and incomes. 

While annual household incomes in China’s biggest cities such as Beijing and Shanghai are on average 14 times higher, for smaller cities the ratio is eight. Overall, housing in China has become more affordable over the past four years, and many smaller cities are in fact suffering from an over-supply of housing. 

“While a city-level index is not currently available in South Africa, it is possible to monitor affordability in South African in different regions and metros,” says Dr Golding. 

“Recently released tax statistics allow for a more detailed look at affordability across South Africa.” 

Major provinces at the extremes

A recent release of data by the Treasury and SARS provides the average taxable income in 2013 for taxpayers in provinces and metros across South Africa; data that is not easily available for household disposable income. 

Using taxable income rather than disposable income generates a different result from the more traditional ratio, since this measure excludes all non-registered taxpayers. 

While this ratio is not directly comparable to the global measure as used by The Economist, he says it allows for comparisons to be made within South Africa between various provinces and metros. 

According to Dr Golding, working with 2013 taxable income and average house prices for each province (using Absa house prices), it is clear that the two major provinces, Gauteng and Western Cape, are at the extremes of the range of affordability in South Africa, with house prices in the Western Cape the least affordable and Gauteng the most affordable. 

The relative affordability of housing in Gauteng can be attributed to the fact that Gauteng recorded the highest average taxable income in South Africa in 2013, while average provincial house price inflation in that province has lagged behind that of the Western Cape and, more recently, KwaZulu-Natal as well, he says. 

“Furthermore, Gauteng accounts for a growing share of new housing units coming onto the market, with the provincial share of the total build rising from 48% in 2007 to over 55% in 2014 (to end-August 2014). This is helping to ease the chronic stock shortage which continue to drive prices higher in the Western Cape and KwaZulu-Natal.” 

The 2013 tax statistics also provide details of taxable income for various municipalities and metros across the country. The list of the top 10 municipalities offers some unexpected concentrations of wealthy households, with Gamagara (Sishen), for example, boasting the second highest average taxable income in 2013 (see table below). 

Top 10 municipalities for average taxable income (2013)

City of Johannesburg

Gauteng

R318 533

Gamagara (Sishen)

Northern Cape

R295 431

Stellenbosch

Western Cape

R291 799

City of Tshwane metro

Gauteng

R271 853

Midvaal

Gauteng

R267 874

Emalahleni (Witbank)

Mpumalanga

R257 507

Steve Tshwete (Middleburg)

Mpumalanga

R248 317

Mogale City

Gauteng

R242 436

City of Cape Town

Western Cape

R241 704

Thaba Chweu

Mpumalanga

R241 570

SOURCE: Mail & Guardian, 13 March 2015 

Johannesburg is the country’s most densely populated metro, with 4.4 million inhabitants. In 2013, it had over 660 000 taxpayers who earned the highest average taxable income in South Africa. 

Johannesburg is home to most of South Africa’s wealthy individuals, with nearly 10 900 households in the top income bracket (R2.5 million or more a year). While this accounts for 23% of the country’s wealthiest households, the wealthy comprise less than 1% of the total number of households in the metro. 

While average taxable income for the metro is R318 533, the average annual household income for the metro is just R29 400. 

Tshwane is the third largest municipality, with 2.9 million people. It is home to numerous government departments and has the second-highest number of embassies in the world after Washington DC. 

This undoubtedly helps explain why the metro is home to 5 891 households in the wealthiest income bracket, the second highest number after Johannesburg. 

Cape Town is home to the third largest number of wealthy households in South Africa, with 5 066 in total. 

By comparison, Stellenbosch municipality (which includes both Stellenbosch and Franschhoek) is home to just 305 wealthy households. Nonetheless, the 2013 tax statistics reveal that average taxable income is higher in Stellenbosch than in the Cape Town metro. 

While Stellenbosch is the third highest in South Africa, Cape Town is ranked in ninth place. 

A similar pattern emerges within the major metros as seen in the various provinces, with one exception, housing in Mangaung (Bloemfontein) is less affordable than in the Cape Town metro. In line with Gauteng as the most affordable province, the City of Johannesburg offers the most affordable housing of South Africa’s major metros.

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