Deflation hits upmarket Cape Town house prices

Deflation in house prices in the Mother City – previously only really seen along the Atlantic Seaboard – has spilled over to other regions near Table Mountain. The latest Cape Town Sub-Regional House Price data from FNB shows that price growth turned negative in the City Bowl, Southern Suburbs and Eastern Suburbs (such as Salt River and Woodstock), along with the Atlantic Seaboard, in the first quarter of 2019.

The latter – which stretches from Green Point through Sea Point, Clifton and Camps Bay to Hout Bay – led the price declines in the metro, first slipping into contraction (-0.08% year on year) in the third quarter of 2018.

On average, prices in the area declined by 5.1% year on year in the first quarter, the worst performance to date. The plunge from the multi-year high growth rate of 25.5% in the first quarter of 2016 has been rapid. Factor in inflation (>4%) and the real decline in these suburbs is approaching double figures.

South Africa’s biggest property portal, Property24, shows that the number of properties on the market (as listed on the site) in Camps Bay, for example, spiked to 477 in April, from levels of just over 400 earlier this year. The picture in Sea Point is similar, with a jump from 698 listings in January to 838 in April.

FNB economist Siphamandla Mkhwanazi says prices are “softening … across virtually all sub-regions, with the upmarket sub-regions in and around the Cape Peninsula being the hardest hit”. On average, house prices contracted by 4.2% in the Eastern Suburbs, 2.4% in the Southern Suburbs, and 2% in the City Bowl. The drop in the Eastern Suburbs is especially pronounced. Only the Atlantic Seaboard and City Bowl were previously in decline.

Deflation underway in upmarket regions

One region to watch carefully is that of Somerset West, Strand and Gordon’s Bay, where year-on-year price growth has declined sharply – from 5.3% in the last quarter of 2018 to just 1.7% in Q1, 2019. House prices had been growing at around 10% in this region in 2017 and early 2018.

Overall, house price growth across the city “softened further to 1.2% year on year, from 3.2% in [the fourth quarter of 2018],” says Mkhwanazi, who notes that this is the slowest growth rate since the end of 2009, and the second consecutive quarter of a real house price decline (below inflation growth).

Further evidence of this slowdown can be seen in Lightstone Property’s residential property indices, whose regional data trails FNB’s, which shows price growth in Cape Town of 4.8% in January, from 8.5% in Q1 last year.

Slowest price growth for Cape Town property since 2009

Areas in the Northern Suburbs are holding up “relatively better” but showing a sharp deceleration in house price growth, says Mkhwanazi.

“For some time, these regions were perceived as offering more affordable housing opportunities, as affordability deteriorated rapidly nearer the mountain. Ultimately, prices overshot and completely counteracted their initial attractiveness. Unsurprisingly, as demand slowed, price growth slowed.”

Year-on-year price growth in the Western Seaboard (Blouberg, Milnerton and Melksbosstand) dropped from 3.8% in Q4 to 1.8% in Q1; Belville, Parow and surrounds from 6.1% to 4%; and Durbanville and Brackenfell from 4.2% to 2.9%.

What happens next?

FNB’s Mkhwanazi says looking at affordability in the city’s housing market over time is one way of figuring out whether prices will see further “downward adjustment”.

The bank uses the ratio of the average property purchase price in the city to the average household income in the province as a proxy – and says the ratio has been “rising since 2012 and reached 6.6 by 2018, the highest it has ever been in the period for which we have data [since 2000]”.

“This means the average priced house in Cape Town was roughly 6.6 times the average household income in the province,” says the bank. “Furthermore, the fact that the trend is upwards means affordability had not really improved by the end of 2018, despite slowing growth in prices since Q2 2016.”

It says based on past experience in the previous housing market cycle, “there is reason to believe that this ratio will soon normalise”.

But, says Mkhwanazi, “given the subdued economic environment, the only logical way that could happen is if Cape Town house prices adjust further down.

“Thus, it is conceivable that the house price deflation we are seeing in some upmarket regions could reverberate throughout the city, resulting in meaningful improvement in affordability. If this happens, any meaningful recovery in national prices would be undermined, which could ultimately prolong the period of subdued house price growth in South Africa.

“A nominal decline in prices is conceivable at this point,” he adds.

Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za

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