Aerial view of Cape Town
by JOHN LOOS
Most of our FNB residential data regarding the Western Cape points towards a region whose estate agents experience things better than most other major regions, and whose residents have more confidence in the long term future of the region than the rest of South Africa’s major regions.
Although many people look at residential property markets simply as a function of supply and demand, driven largely by interest rates and banks’ desire to lend, this market’s information can provide far deeper insights than that.
But let’s start with the simple aggregated supply and demand related data for the province. It all points to a region that has outperformed its neighbours of late. The FNB Western Cape House Price Index for the second quarter of 2015 showed year-on-year inflation of 7.7 percent, the highest of all of the major four provinces.
This above-average price inflation comes despite the fact that at the estimated average house price of the Western Cape was R1 230 487 in the second quarter, based on what was transacted and financed through FNB, making it on average the province with the most expensive homes, significantly higher than the second most expensive province, Gauteng, with its average of R1 011 214.
A similar picture emerges from the FNB Estate Agent Survey for the second quarter of 2015 where, at a level of 6.61 (on a scale of 1 to 10), the agents’ residential market activity rating in the second quarter 2015 survey has once again exceeded the national average rating of 6.33.
It goes on, with estate agents in the province estimating that the average time of homes on the market before selling has dropped as low as 9.1 weeks, considerably quicker than the 12.1 week national average estimate, and far quicker than the province’s average time of 20 weeks back in the third quarter of 2013.
However, these market strength indicators are not necessarily a sign of longer term confidence levels. Often they are just a reflection of income and interest rate levels on the one hand, and land scarcity on the other hand. That the Western Cape is the most expensive residential market has much to do with it having the second highest provincial per capita income behind Gauteng, but simultaneously having a greater land scarcity than landlocked Gauteng.
We look at other indicators for signs of longer term confidence, either in the region’s property assets as an investment, or in the province’s long term future as a place to live.
The data points to a region whose residents have significantly higher confidence in its residential property as an investment, with the FNB Estate Agent Survey estimating buying to let at higher levels than the national average, despite a lower estimated average yield than most major regions.
This may not be irrational, however, because the province appears to have a lower risk tenant base if one views TPN (Tenant Profile Network) data, with a higher percentage of tenants in good standing with their rent compared to certain other major regions. Buy-to-let buyers may therefore be perceiving a lower risk tenant on average, and so a better quality buy-to-let investment, and paying a premium for it in the Western Cape.
But the superior confidence levels of the province go further than merely property performance indicators and buy-to-let levels. Examining “departure-related” selling habits, it appears that the province’s home owners have greater confidence in the province’s long term future as a place to live too.
For the first half of 2015, the estimated percentage of sellers selling to emigrate was estimated at 2 percent, around half of the national average percentage which hovers nearer to 4 percent.
For the same period, the estimated percentage of sellers selling to move to another part of SA was 4.5 percent. Once again this was significantly lower than the 9 percent national average estimate.
Nevertheless, the region’s housing market can’t defy gravity indefinitely, and the signs are that its pace of strengthening has been slowing recently, with affordability constraints mounting, as house price growth outstrips average income growth. The Western Cape house price inflation rate of 7.7 percent year-on-year represents a slower pace of growth since a 10.4 percent high reached early in 2014. The FNB Estate Agent Survey Activity rating, too, has shown a slowing pace of growth.
This slowing pace of growth is believed to be the result of a deterioration in residents being able to afford housing in the province through 2013 and 2014. House price growth outpacing household income growth in the province, along with the start of interest rates last year, has driven this affordability deterioration. The Western Cape average house price/average household income ratio has risen (deteriorated) from 4.5 in 2011 to 4.89 by 2014, while the instalment value on a new 100 percent loan on the region’s average priced house/average household income ratio has risen (deteriorated) from 0.49 in 2012 to 0.54 in 2014.
But despite a slowing pace of market strengthening, tied to affordability deterioration, the Western Cape’s big “upside” surprise in the most recent surveys has been an increase in the estimated first time buyer percentage.
The FNB Estate Agent Survey estimated that, in the second quarter of 2015, 25 percent of buyers were first time buyers. This represents a further rise on previous quarter’s 21 percent, and is now above the declining national estimate of 21 percent. A potential concern is that this rise in the level of first time buying may be driven by increased buyer panic, the result of recent years of market strength and strong house price growth.
We ask estate agents for their perceptions of what percentage of first time buyers suffers from buyer panic, a phenomenon that normally occurs in a strong market, when aspirant first time buyers fear that if they don’t buy now they may not be able to afford it in future.
By the second quarter 2015 survey, this estimated percentage had risen to 58 percent of total first time buyers, once again a higher estimate than other major SA markets. This is not necessarily a healthy development, because it can lead to such first time buyers making hasty buying decisions and over-committing financially.
Posted in Western Cape Residential News
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