South Africa, being the open economy that it is, can’t escape the current global economic weakness and risks. KZN’s residential market is no exception, with the region’s economy being highly manufacturing and global trade-driven.
South Africa, being the open economy that it is, can’t escape the pressures of global economic weakness, and the risks associated with that. The global economy finds itself being dragged slower by extremely high levels of debt.
This, in turn, suppresses commodity prices, important for South Africa’s exports. KwaZulu-Natal (KZN) Province is arguably even more exposed to the current global economic pressures, having an economy highly dependent on manufacturing and trade, with the province possessing South Africa’s 2 major harbor cities/towns.
Domestically, a lack of positive structural change to the economy provides a further drag on the region’s economy. With these economic headwinds, along with interest rates that have been creeping up gradually for the past 2 years or so, it should not be surprising to see signs of slowing in this province’s economy, and in its residential property market.
But the province is not the worst, when it comes to market strength. It finds itself somewhere in the “middle of the pack”, not as advanced in the slowdown phase as Gauteng yet, but at the same time not “outperforming” as could be said of the Western Cape market.
The FNB KZN House Price Index showed slower year-on-year growth in the 1st quarter, of 5.6%, down from the prior quarter’s 5.9%, and representing the 2nd consecutive quarter of slowing inflation. Adjusted using the province’s CPI (Consumer Price Index) inflation rate of 6.6%, this translated into a real house price deflation rate of -1% in the 1st quarter.
The Ethekwini Metro, however, appeared to be something of a “stabilizing” influence on the province, seeing its own house price index year-on-year growth accelerate mildly to 5.8% year-on-year, from a prior quarter’s 4.8%.
Whilst the the province’s, and indeed Ethekwini Metro’s exposure to global economic pressures has been mentioned, the Metro remains a far more developed and diversified economy than the smaller centres, and could thus still perform better than surrounding towns in times of slowdown, especially outperforming the holiday property driven KZN coastal towns markets. Holiday towns are generally more sensitive to negative economic events due to the non-essential nature of holiday home buying. This form of demand recedes more sharply that primary residential demand in times of economic weakness, so we would expect KZN’s coastal towns to be something of a relative weak spot within the province during these times.
Other FNB housing market-related indicators also point to general slowdown in the region. The FNB Estate Agent Survey’s Activity Rating for the Ethekwini Metro market, an indication of how a sample of estate agents sees their market, has pointed to a still-“stable” 6.45 rating on a scale of 1 to 10. However, this represents the 2nd quarter of year-on-year decline in this rating, so agents do appear to perceive some slowing in activity from a year ago.
The market still appears fairly well balanced between supply and demand, with an average time of homes on the market hovering near to 3 months (12 weeks and 2 days in the 1st quarter of 2016), well down on a 22 weeks and 6 days high back in 2013. But further decline in this average time has been lacking of late.
Nevertheless, FNB is reasonably happy with the state of the residential market in general, currently, as it possesses little in the way of “over-exuberance” or speculative activity which can periodically cause market “overshoots” that end badly. Mortgage lending has remained relatively conservative since the end of the pre-2008 boom period. FNB’s estimated loan-to-purchase price ratio early in 2016 was around 0.895 for the market as a whole, noticeably below the 0.95 high reached at a stage of 2007.
This relatively healthy lending stance over just less than a decade has contributed greatly to a reduction in the level of overall Household Sector indebtedness, from an 88.8% Household Debt-to-Disposable Income ratio early in 2008 to 77.8% by late-2015. This has reduced the vulnerability of the national household sector to interest rate hiking significantly, perhaps explaining still-low levels of financial stress in the residential and mortgage market. However, financial stress may be just starting to hint at some increase, as FNB sees the estimated percentage of sellers selling to downscale due to financial pressure being off its 2015 low point.
In the 1st quarter of, the FNB Estate Agent Survey estimated 13% of sellers to be “selling in order to downscale due to financial pressure” on a national average basis. Ethekwini Metro appears to be slightly on the higher side with an estimate of 16%. Another statistic also pointing to a slightly worse financial performance in the region’s housing market relates to the percentage of rental tenants “in good standing” with their rental payment. Whereas TPN estimates the national average of tenants in good standing at 85%, KZN’s percentage is at a lower 81.2%, while the Western Cape is at the top end of the spectrum with 88.7%.
The KZN market does thus appear to have slightly more financial pressure/constraint in the residential market than the national average. The key longer term challenge for KZN is to increase its regional competitiveness and grow its economy and household income faster. According to IHSGlobalinsight estimates of real economic growth, KZN saw an annual average real GGP (Gross Geographical Product) growth rate of 3.3% from 2005 to 2014. This was more or less in line with Gauteng’s 3.3%, and only marginally behind the Western Cape’s 3.4%. However, the province remains extremely poor by comparison to those “Major 2” provinces, with a per capita income of R39,068 in 2014 compared to Gauteng’s R72,418.
The Province’s housing market, over the past 15 years, has performed relatively strongly. Its average house transaction price (not home value), according to FNB’s calculations, was R1,017 million, the 3rd most expensive province, similar tp Gauteng’s R1.032 million although somewhat lower than the Western Cape’s R1.353 million.
In terms of cumulative house price growth since the 1st quarter of 2001, when the FNB provincial house price indices started, KZN has recorded 320.3%, more than Gauteng’s 286% and Western Cape’s 290%.
But given KZN’s low per capita income, this level of prices makes the province’s housing market significantly less affordable than Gauteng and the Western Cape. Whereas Gauteng has an estimated House Price/Per Household Income Ratio of 4.38, and the Western Cape 5.14, KZN has a significantly higher ratio of 6.13.
Part of the province’s development priorities need to be to sharply raise household incomes through stronger economic growth, amongst other potential measures, in order to improve the level of housing affordability.