Areas and Places Research

FNB – The Western Cape residential market outperforms other major regions, and reflects a province whose residents have more confidence in the future than others

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.

While 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 as of late. The FNB Western Cape House Price Index for the 2nd quarter of 2015 showed year-on-year inflation of 7.7%. the highest of all of the major 4 South Africa 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 2nd 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 2nd most expensive province, Gauteng, with its average of R1,011,214.

A similar picture emerges from the FNB Estate Agent Survey for the 2nd 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 2nd 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 prior to sale 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 3rd 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 2nd 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 thus 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 1st half of 2015, the estimated percentage of sellers selling in order to emigrate was estimated at 2%, around half of the national average percentage which hovers nearer to 4%.

For the same period, the estimated percentage of sellers selling in order to relocate to another part of South Africa was 4.5%. Once again this was significantly lower than the 9% 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% year-on-year represents a slower pace of growth since a 10.4% 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 housing affordability 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% 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 1st time buyer percentage.

The FNB Estate Agent Survey estimated that, in the 2nd quarter of 2015, 25% of buyers were 1st time buyers. This represents a further rise on previous quarter’s 21%, and is now above the declining national estimate of 21%. A potential concern is that this rise in the level of 1st 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 1st time buyers suffers from “buyer panic”, a phenomenon that normally occurs in a strong market, when aspirant 1st time buyers fear that “if they don’t buy now they may not be able to afford it in future”. By the 2nd quarter 2015 survey, this estimated percentage had risen to 58% of total 1st 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 1st time buyers making hasty buying decisions and over-committing financially.

Read more here: FNB Property Barometer_2nd _Quarter_Western_Cape_Estate_Agent_Survey_Jul_2015 & here: FNB Property Barometer_2nd_Quarter_2015__Western_Cape_House_Price_Index_Jul_2015