Real prices decline, but major Gauteng residential regions still show general affordability improvements

|Article by John Loos - household and property sector strategist at FNB Home Loans.

Major Gauteng residential regions are still showing general affordability improvements as real prices decline.

However, clear patterns when comparing sub-regional performances are difficult to identify at present.

Our second quarter 2017 Gauteng Sub-Regional House Price Indices continue to show rates of growth below general economy-wide consumer inflation, pointing to ongoing price decline in real terms – when adjusted for consumer price inflation – and likely improvement in housing affordability when considering house price inflation relative to income inflation.

Using deeds office data, we constructed a set of house price indices for key sub-regions within the province of Gauteng, the aim being to evaluate this regional housing market’s performance in more detail.

We then rolled up this set of sub-regions into overall house price indices for each major metropolitan council region as well as for each district municipal region in those areas outside of Gauteng’s three metros.

All three of Gauteng’s major metros continue to show low single-digit house price growth.

In the second quarter of 2017, the City of Tshwane’s estimated average house price growth rate was 4.48% year on year, by a small margin stronger than Ekurhuleni’s 3.71% and City of Joburg’s 3.31%.

With Gauteng consumer price index (CPI) inflation at 5.2% year on year for the second quarter of 2017, these low nominal house price growth rates translate into house price declines in real terms when adjusted for CPI – Tshwane to the tune of -1.8% year-on-year, Ekurhuleni -1.4% and Joburg -1.8%.

The three Gauteng metros have been undergoing a gradual real house price correction for much of the time since the beginning of 2008. Since the first quarter of 2008, Tshwane’s cumulative real house price decline has been -22.7%, Joburg -23.6% and Ekurhuleni 25.9%.

Ongoing real house price correction in the Gauteng metros is contributing positively to a healthy balance between demand and supply of housing, and relative ease of entry for first time buyers compared to certain other major regions.

Both the Tshwane and Joburg regions – Joburg in the FNB Estate Agent Survey referring to City of Joburg as well as Ekurhuleni – continued to show estimated levels of first time home buying to be above the national average. For the first two quarters of 2017, first time buyers were estimated at 28,58% of total home buying in Greater Joburg, and 21.8% in Tshwane, the national average being slightly lower at 21%.

First time home buyers are on average more financially constrained than the more established repeat home buyers, and thus very sensitive to home affordability levels.

For the first two quarters of 2017, Joburg and Tshwane also had the highest percentages of first time home buyers of the major metros.

The recent years of real house price decline and improving affordability in the Gauteng metros appear to have been a key positive for these first time buyers.

In the second quarter of 2017, Gauteng’s Estate Agent Survey sample estimated average time of homes on the market prior to sale to be around 12 weeks, having remained near to that level through most of 2016/17.

This is a good level compared to the average time on the market for the three coastal metros, Ethekwini, Nelson Mandela Bay and Cape Town, whose average has risen noticeably to 20 weeks and three days.

Greater Joburg at 12.86 weeks and Tshwane at 9.57 weeks had the two lowest average times on the market of the major SA metro regions, Cape Town with a significantly longer 16.21 weeks, Mandela Bay on 16.29 weeks and Ethekwini on 20.93 weeks.

An interesting aspect observed in certain of the Gauteng data is that the lowest income regions may no longer be the best performing. Over the past five years, the region within Joburg with the highest cumulative house price growth has been the Diepkloof-Soweto-Meadowlands-Pimville Region, with 35.67% growth from the second quarter of 2012 to the second quarter of 2017. This is historically one of the country’s major apartheid era black township regions, and is on average the cheapest of our City of Joburg sub-regions.

But more recently, this region appears to have become an underperformer, showing slight average house price deflation to the tune of -1.16% year-on-year in the second quarter of 2017. Also noteworthy is that the highest priced Sandton and surrounds, the highest average value sub-region, is also in the doldrums, inflating by a mere 0.54%.

In Tshwane, we see something similar to City of Joburg in that over the past five years it has been the lowest income/priced Winterveldt-Mabopane-Soshanguve-Ga-Rankuwa-Hammanskraal region, a mix of former apartheid era black townships and Bophutatswana homeland areas, that has shown the highest price inflation in Tshwane region to the tune of 41.07%. Admittedly, in such regions there may be some price inflation distortions with subsidised housing not always registered in deeds offices at market price.

But, as in the case of the Soweto region in Johannesburg, this region had the weakest estimated house price growth in the second quarter of 2017, to the tune of a negative -0.76%. Like Joburg, too, the highest priced Pretoria East and Centurion sub-regions were also not superior performers, recording 4.42% and 4.68% year-on-year price growth respectively in the second quarter of 2017. Pretoria North East with 12.32% and Pretoria West regions had the fastest house price growth in the quarter.

Patterns are a little more difficult to identify in Ekurhuleni, but once again it is neither the highest or the lowest priced sub-regions that were the top performers recently.

Here too we find that the lowest priced sub-regions are some of the weakest in terms of house price growth. The major Tokoza-Vosloorus-Katlehong former township region showed low – below the metro average – year on year price growth of 1% in the second quarter of 2017, while Nigel, the region with the second lowest average price showed deflation of -0.78%.

On the high priced end within Ekurhuleni, we had Alberton, the highest priced sub-region, showing 3.82% year on year house price growth, Kempton Park, the second most expensive region, showing 4.05%, and Edenvale, the third most expensive region, recording a small 0.37% positive growth rate.

Best performers were certain of those priced somewhere in the middle, namely Brakpan with +12.98% year-on-year growth and Germiston with +7.25%, some of the more affordable regions but not the cheapest in Ekurhuleni.

But the most depressed market appears to be down on the Vaal in the heavily manufacturing-dependent region of Emfuleni District Municipality, which includes major towns of Van der Bijl Park and Vereeniging.

The manufacturing sector in South Africa has been below par for some years. Van der Bijl Park sees 32.3% of its GDP (Gross Domestic Product) coming from Manufacturing according to IHS Markit estimates, the highest percentage of any major town in Gauteng.

Perhaps not surprisingly, therefore, Emfuleni Municipal Area has seen its five-year cumulative house price growth underperform the three Gauteng metros, recording only 18.75% growth in total since the second quarter of 2012.

And from the second quarter of 2017, the region’s year on year percentage change was a negative -2.76%, with the manufacturing-heavy Van der Bijl Park seeing house price deflation of -4.08%, and the low income Evaton-Sebokeng former townships deflating by -3.67%.

Vereeniging, less manufacturing-heavy than Van der Bijl – manufacturing in Vereeniging a lesser 18.8% of its GDP – still saw moderate price growth of +3.56%.

Although the trends and patterns from Gauteng sub-regions are not strong ones at present, we believe that the message from the three Gauteng metros sub-region house price indices is that the most recent sweet spot is neither at the highest or the lowest-priced end, but somewhere in the relatively affordable middle where new middle class entrants probably like to buy.

For the low income groups, SA’s almost zero growth economy may be starting to bite in a lack of new job creation and income growth, which may mean that the lowest priced regions, many which would be former townships, have weakened more noticeably in terms of average price growth.

At the high priced end in each metro, on the other hand, confidence in the country’s economic future can be a reason for buyer caution among higher income groups, while it is also arguably about the high running and transaction costs related to higher value homes that comes with municipal rates and tariffs rising at rates well-above general inflation in recent years, and higher transfer duty brackets at the high end.

Down in the Vaal Regions, the manufacturing-dependent Emfuleni District appears to be the weakest housing region in Gauteng of late.

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