Former township house price growth still outstrips suburbs

The areas formerly classified as “black township areas” under apartheid era classifications, saw their house price inflation rate continue to outstrip that of the higher value “suburban” areas in the first quarter of 2015.

Their higher average house price growth appears to reflect greater residential supply constraints relative to demand, compared with the former “white suburban areas” or areas with other former race classifications.

The FNB House Price Index for areas formerly classified as black townships in the six major metro regions rose by 11.6 percent. This is up from a revised 9.3 percent in the previous quarter, and was significantly higher than the overall major metro regions house price index for Ethekwini, Cape Town, Nelson Mandela Bay, Ekurhuleni, Johannesburg and Tshwane, which showed a growth rate of 7.3 percent.

The former townships, however, remain the most affordable areas of the market on average, with an average estimated house price of R323 472.

The reasons for this growth can be twofold, according to FNB.

First, the FNB Estate Agent Surveys continue to point to a high percentage of first time buying early in 2015. First time buyers expressed as a percentage of total home buyers had admittedly declined slightly in the first quarter of 2015, to 25 percent from a high of 28 percent three quarters before this, according to the FNB Estate Agent Survey. However, this remains a high percentage agent survey, and may still be a key source of support for these most affordable residential regions, with affordability being a key priority for many new entrants to the market.

Second, residential affordability no longer appears to be meaningfully improving, with interest rates having started to rise last year, and house prices running close to average income growth.

Can the former townships continue to indefinitely outpace other residential areas in terms of house price growth? Probably not, says John Loos, household and property sector strategist at FNB Home Loans.

“We tend to find that these markets are more cyclical than the higher priced suburban regions. Home buyers in these regions are on average more sensitive to economic and interest rate cycles than higher income households, so these markets tend to outperform the average in the better times and underperform in the bad times. In the tougher times, first time buyers tend to diminish in number, waiting it out for better days, and this could have more of a dampening impact on township markets than on higher priced areas, should interest rates resume their rise later this year.

“If we look back at the 2008/9 recession as an example of this greater cyclicality, we see that the township house price deflation rate bottomed at around -16 percent year-on-year in the second quarter of 2009, whereas the overall major metro house price index deflation rate was far less severe, bottoming at -4.3 percent in the same quarter.

“Looking forward, therefore, the expectation of a resumption of interest rate hiking late in 2015, along with an economy battling to achieve even 2 percent growth, makes it possible that towards 2016 we will see the FNB township house price index’s inflation slowing more into line with overall national trends,” says Loos.

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