Is Cape Town’s Property Market In A Bubble Phase?

According to John Loos, the FNB Household and Property Sector strategist, the significant increases in the price of houses near to Table Mountain in Cape Town (Atlantic Seaboard and City Bowl) is raising some eyebrows. He has therefor 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 behaviour 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.

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.

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.