Property Barometer – City of Cape Town House Price Indices

FNB’s second quarter 2018 ‘City of Cape Town Sub-Regional House Price Indices‘ continued to show the high end markets around the mountain to be slowing. However, the slowdown has broadened, and an increasing number of regions (9 out of 12) saw price growth slowing in the second quarter.

Despite good recent rains and signs of drought alleviation in the region, which is good for its economy and sentiment, FNB remains of the belief that poor levels of home affordability in the region, after strong house price growth in recent years, will cause house price growth to continue to slow in the near term, with household incomes in the region being required to catch up with house prices before FNB can see another strong house price growth period.

The overall city picture

Using Deeds Office Data, FNB compiles a set of house price indices for key sub-regions within the City of Cape Town Metro using a repeat sales methodology.

FNB has then rolled up this set of sub-regions into an overall ‘City of Cape Town Metro House Price Index‘. In the second quarter of 2018, the City of Cape Town’s estimated average house price growth rate continued to slow, recording 8.7% year-on-year.

This year-on-year price growth rate represents the eighth consecutive quarter of slowing from a ten-year revised high of 15.4% recorded in the second quarter of 2016.

Cape Town sub-region house price trends

Second quarter 2018 key Cape Town sub-regional house price growth rates

In FNB’s first quarter release, FNB noted that year-on-year house price growth had slowed in eight out of twelve of their defined Cape Town sub-regions. This broadened slightly to nine out of twelve sub-regions seeing slowing house price growth in the second quarter.

In and around the Cape Peninsula, the most ‘affordable‘ option in close proximity, the near Eastern suburbs region appears to have held up best.

In the second quarter of 2018, FNB saw further slowing in house price growth in the City Bowl and two of the three major sub-regions closest to the City Bowl, i.e. in and around the Cape Peninsula.

These sub-regions near to the city and the mountain have shown some of the strongest house price inflation of all of the Cape Town sub-regions over the past five years, and this prior deterioration in home affordability appears to have led to slowing demand, and thus price growth, in recent quarters.

The most expensive sub-region in the City of Cape Town Metro, i.e. the Atlantic Seaboard, has seen its average house price growth slow the  most sharply off the highest base, from a revised multi-year high of 27.7% year-on-year in the final quarter of 2016 to 1.9% by the second quarter of 2018, and now has the slowest price growth of all of our City of Cape Town regions.

This remains as we had expected, as this sub-region had until recently experienced the most rapid growth of all the sub-regions.

The City Bowl started its price growth slowdown a little earlier than the Atlantic Seaboard, and has gone from its revised multi-year year-on-year growth high of 23.9% in the second quarter of 2016 to 9.7% by the second quarter of 2018.

The Southern Suburbs, the other one of the “most expensive three” sub-regions, saw further slowdown from 8.6% in the prior quarter to 7.4% in the second quarter of 2018, having gradually slowed from a multi-year high of 15.9% in the second quarter of 2015.

The “Near Eastern Suburbs” sub-region, however, continues to “defy gravity” for the time being at least, it would appear. In 2016, this region’s price growth had also begun to slow. However, more recently it appeared to see a slight resumption of growth acceleration, from 16% year-on-year in the second quarter of 2017 to 17.6% in the second quarter of 2018.

What can still be driving this region where others nearby have slowed more significantly? Proximity close to the City Bowl, a key place of employment, is still a priority for many households as traffic congestion in Cape Town gets steadily worse. The ‘Near Eastern Suburbs‘ including amongst others Woodstock, Salt River and Pinelands is one of the closest to the city centre, and on top of this it the most affordable sub-region of those adjacent to the City Bowl. Especially Woodstock has been known for some meaningful property upgrades and developments, which can contribute to good price growth. And after major affordability deteriorations in City Bowl and Atlantic Seaboard homes, the Near eastern Suburbs’ attractiveness for property investors may have increased significantly.

However, while this region’s price growth has held up better than the other three sub-regions in close proximity, FNB believes that this is a mere lag, and that ultimately the more affordable sub-regions begin to follow the slowing price growth trend with a lag, as is beginning to happen out in the more affordable norther regions.

The trend of slowing growth has broadened out to the more affordable suburban markets in the north too.

Further away from Table Mountain, in Cape Town’s more affordable suburban areas, FNB has seen house price growth holding up relatively well, and even accelerating somewhat back in 2017. FNB believes that this relatively solid price growth performance had much to do with the prime regions in and around the Peninsula having become far less affordable after massive price growth in the past five years or so.

It forced a portion of demand perhaps to look out north for more affordable housing opportunities as affordability nearer to the mountain deteriorated.

However, this has resulted in a significant home affordability deterioration in the Northern Suburbs too, and more recently FNB has begun to see price growth slowing in all three major Northern Suburbs sub-regions.

Two out of three major Northern Suburbs sub-regions still saw double-digit average house price growth rates in the second quarter of 2018, with one out of the three moving into single-digits.

The ‘Western Seaboard Sub-Region‘ (including Blouberg, Milnerton and Melkbosstrand) saw a slowing in year-on-year price growth, from 14.3% in the third quarter of 2017 to 10.2% by the second quarter of 2018. This is the most noticeable slowing in price growth off the highest base of the three northern sub-regions.

The “Bellville-Parow and Surroundings” sub-region also saw its price growth slow, from 11.9% year-on-year in the final quarter of 2017 to 11.2% in the second quarter of 2018, after prior quarters of strengthening.

The Durbanville-Kraaifontein-Brackenfell sub-region also started to slow slightly, from 10.1% growth in the first quarter of 2018 to 9.9% in the second quarter.

Moving into even more affordable regions, ones which incorporate many of the city’s Apartheid Era former so-called “Coloured” and “Black” Areas, where FNB has recently seen significant price growth accelerations, of late FNB has also started to see a slowing in the rate of growth of the Elsies River-Blue Downs-Macassar Region. From a high of 20.4% year-on-year in the final quarter of 2017, this region’s growth slowed to 17.4% in the second quarter of 2018.

In short, the City of Cape Town’s overall housing market continues to “cool” and in the process we saw the eighth consecutive quarter of year-on-year house price growth slowdown in the metro.

As the market slowdown takes place, FNB sees a broadening in slowing growth to an increasing number of sub-regions (nine out of twelve sub-regions having experienced slowing year-on-year house price growth in the second quarter of 2018), now including some of the more affordable ones which had “defied gravity” for a little longer than the high end regions close to the mountain.

FNB believes that the recent drought may have had some cooling impact on the Cape Town housing market , via its negative impact on the Western Cape economy, as well as on sentiment within and towards the region.

However, the good recent rains, which will alleviate the region’s water shortage somewhat, FNB does not believe will reverse this house price growth slowdown in the near term.

This is because they remain of the view that the recent slowing price growth has been driven largely by some years of significant housing affordability deterioration, and that slower house price growth for a considerable period is due, until such time that affordability has meaningfully improved.

First time home buyers have battled to enter Cape Town’s housing market in recent years, with the level of 1st time buying in the region already significantly lower than in other metros in the country, according to the FNB Estate Agent Survey.

Whereas first time home buying is estimated to have been 18.82% of total home buying national, for the first half of 2018, in the Cape Town Metro Region this estimate has dropped to a lowly 8.57%, a reflection of very poor home affordability.

FNB has also estimated that repeat home buyer “migration” to the Western Cape from the rest of South Africa slowed in 2017, a further factor in slowing Cape Town housing demand. This slowing may also be in part due to poor home affordability in Cape Town, with other major coastal regions in South Africa offering many more affordable alternatives for aspirant “semi-grants” to the coast from inland regions such as Gauteng.

Therefore, while severe drought conditions may be in the process of being alleviated in the Western Cape, which can be a positive for that region’s economy, FNB remains of the opinion that Cape Town’s house price growth will continue to slow in the near term, and move into a lengthy “benign” period in line with the broader South African housing market, while incomes in the region gradually catch up with prices.

Read more here: Property Barometer – Cape Town House Price Indices – August 2018