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FNB Property Barometer - Former “Township” Markets

FNB has reported that in the 2nd Quarter of 2015, so called former black township house price growth continued to accelerate and outstrip higher price “suburban” regions, but they expected that this would taper by next year.

The higher average house price growth appears to reflect greater residential supply constraints relative to demand, compared with the former areas with race classifications. However, it may also point to a typical “late in the cycle” search for affordability, as the household sector starts to feel more financially constrained.

The FNB House Price Index for areas in the 6 major Metro regions rose by a very strong 17% year-on-year. This is up from a revised 13.7% in the previous quarter, and was significantly higher than the overall Major Metro Regions House Price Index (Ethekwini, Cape Town, Nelson Mandela Bay, Ekurhuleni, Johannesburg and Tshwane) growth rate of 7.4%.

Despite the growth in house price these areas remain the most affordable areas of the market on average, with an average estimated house price of R339 717.

John Loos, FNB Property Economist, writes that this relative affordability search may have “a lot to do with a superior rate of house price growth that lags the higher valued suburban markets.” 

Loos further adds that a decade ago, major metro overall house price inflation peaked at the end of 2004 at 35.4% year-on-year. Township house price inflation only peaked a few years later at 51.4% in the 2nd quarter of 2007, by which time the cracks were showing in the economy, interest rates were rising and the overall residential market was slowing.

This time around, as economic news deteriorates, growth has slowed for 3 consecutive years, and interest rates are rising slowly, once again it is Township house price inflation that accelerates while the overall market’s house price inflation has mildly tapered.

There exists the possibility that, as affordability starts to deteriorate in the normal suburban markets, there is a turn by some to the townships as they search for greater affordability. But this lag may also say a lot about lower income households moving slower on home buying decisions
than upper income households, the result of far more limited financial resources and perhaps a slower flow of information regarding market trend changes.
 
The lower income groups are highly credit dependent, and often work in more cyclical sectors in larger numbers, such as manufacturing. The township market therefore also appears to be noticeably more volatile than the suburban markets over time, with higher house price growth peaks and lower troughs, as the -16% year-on-year drop will show back in the 2nd quarter of
2009

For now it would seem that for the foreseeable future these areas will remain on average the most affordable residential regions, despite a recent surge in average township home values. 

However, keep in mind that you will still have to factor in high transport costs and long transport times to places of work against home affordability, therefore relative home affordability isn’t attractive to everyone. 

In the very near term, township house price inflation could significantly outstrip suburban house price inflation, but we would expect that by next year house price growth in these areas would also start to slow, curbed by expected further rises in interest rates and the reality of a weak economy and weaker rates of net job creation that appear to be coming our way.

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