CT house prices: Booming, a bubble or just strong?

On the back of significant increases in the price of Western Cape, and specifically Cape Town, house prices, FNB Household and Property Sector strategist, John Loos, has attempted to identify the underlying causes of the recent strength as well as assess the “health” of the market.

In a 40-page report published at the end of August, Loos (with the help of statistician Lize Erasmus) correctly notes that “identifying housing market bubbles, or market ‘overshoots’, is always a tough task”. Before attempting to dissect the state of the Western Cape market, he offers the 2000-2008 “boom” in the overall South African housing market as useful context. Over this eight year period, price inflation was 304%.

In analysing this boom, Loos points to six factors that were observed:

1. High rates of buy-to-let purchases;
2. Aggressive mortgage lending;
3. “A surge in ownership of less essential secondary properties”;
4. What he terms “over-exuberant” buying and selling behavior;
5. House price inflation that far outstripped the prime rate percentage at the height of the boom; and
6. “Major deterioration in a variety of house price affordability measures not seen in recorded history”.

Importantly, he notes that the “residential market behavior at that time proved unsustainable, because structurally SA’s economy was not capable of keeping up the 5%+ annual economic growth which we saw briefly just prior to 2008”.

“More recently, some questions have been asked as to the ‘heat levels’ in the Western Cape housing market. Is it a bubble forming, or is it all driven by solid economic fundamentals? Normally, the answer is somewhere in between, with solid fundamentals often starting a good market period, but later because of the fundamentals-driven strength one can find ‘over-exuberance’ or ‘buyer panic’ setting in as market players respond to the recent price growth trend. This can cause the market to ‘over-shoot’.”

The Cape Town metropole has arguably seen the steepest increases in house prices over the past five years, with an average increase of 77.6% (to the end of June 2017). Overall price inflation in the metro is almost exactly double the national House Price Index published monthly by the bank over the five-year period.

Read: Here’s how Cape Town property prices have exploded

When considering recent movements in the Western Cape through the lens of the six factors cited above, Loos highlights the following:

1. The bank’s Estate Agent Survey estimates that, in the first half of 2017, 11.06% of total home buyers in the province were buy-to-let buyers. This is ahead of the national average of 9.66%, but nearly half of the high in 2008/2009 of 20.5%.
2. Nearly 5 300 bonded property registrations were traced in Q2 for the province (versus 8134 un-bonded registrations). This is “only 38% of the number recorded in the final quarter of 2004”.
3. “The estimated number of secondary homes, expressed as a percentage of total homes, was 14.26% in July 2017, slightly lower than the 14.6% high reached late in 2010. Most recently, in July, growth in estimated secondary homes was at a lowly 0.11% in the region.”
4. As at the 2nd quarter of 2017, we estimate that 4.6% of Western Cape homes resold had been bought within 12 months or less prior to the resale. This is far below the province’s pre-2008 boom time peak of 16.8%, reached in the 2nd quarter of 2005.
5. In the first quarter of last year, house price inflation in the Western Cape peaked at 10.8%. This is only marginally ahead of prime, “thus never in the post-2008/2009 period really creating a massive ‘speculator’s paradise’.”
6. Affordability has deteriorated more noticeably than in any other province over recent years. And although slightly lower than the 2008 boom peak, this is the one area that has something in common with what was observed in the first decade of the 2000s.

The FNB Estate Agent Survey (for H1 2017) estimated that only 6.6 of every 100 buyers were first time buyers in the City of Cape Town. This is significantly lower than the national average estimate of 21% and far below any other of the major metros.

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Source: FNB

While this is obviously a major problem for those trying to enter the housing market in Cape Town, the lack of affordability should start to weaken demand from those semigrating to the region as well as from foreign buying. Loos says this “may be starting to happen, although it is a bit early to tell for certain”. While Loos has been expecting “some slowing in the net inward migration into the Western Cape to begin in 2017”, there has been “nothing more than a vague hint of such a slowdown” in the year so far. He does not mention the drought in this report, nor its potential impact on house prices, as this would typically be a cyclical factor.

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Source: FNB

Despite growth in Western Cape house prices outstripping those of other major regions in South Africa in recent years, Loos says he does “not believe that the province’s market has not experienced an “over-exuberant” and “speculative” home buying spree as the whole country, including this region, did prior to 2008”.

However, in certain of the sub-regions of (especially) the Cape metro, Loos says “we would raise some eyebrows at what has happened of late near to Table Mountain, notably in the City Bowl and Atlantic Seaboard. In these sub-regions, year-on-year house price inflation as measured by our indices as has been well in excess of 20%. Such rates may well have fueled “over-exuberant” investor buying by some who merely extrapolate such strong capital growth into the future in formulating their expectations”.

Importantly, “when we claim that we don’t perceive the Western Cape market to be overly- ‘bubbly’ or ‘over-exuberant’ in the extreme, this does not mean that a downward correction in real house prices cannot happen [emphasis Loos’s]. It can, and we believe it will. This is because we believe that the entire country’s house prices are still at high real levels by historic standards, levels are still more reflective of that 5%+ annual economic growth economy prior to 2008, and that they have not fully corrected to reflect a national economy whose growth capability these days appears to be near to zero, with the Western Cape and Gauteng perhaps only marginally better than the national average. This high level of real house prices is more an overhang from the pre-2008 boom though.”

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