Having dedicated the last six articles to JSE-listed ETFs, this week we take a look at the South African residential property market.
Land expropriation and higher taxes
Land expropriation without compensation continues to sell papers and raise temperatures among South Africans. It has been cited as a major concern by rating agencies, and activity in real estate is being hampered by the uncertainty that this debate has delivered.
According to Jacques du Toit, property analyst at Absa Home Loans, property market sentiment may continue to be hampered over the short to medium term by the issue, and also by the financial strain experienced by consumers due to higher indirect taxes.
SA property posts negative real returns
FNB’s Household and Property Sector Strategist, John Loos, has pointed out that real house growth in South Africa as a whole, continues to lag general inflation. According to FNB’s Property Barometer report, January 2018’s year-on-year (YoY) nominal return was a positive 3.8%, but with CPI inflation coming in at 4.4%, the net effect in real returns was a sobering -0.6%.
February’s YoY figures fared even worse, coming in negative once more - this time, by an even bigger margin at -1.3%. We await March figures, but the trend that is developing is worrisome indeed, considering the improved consumer confidence and economic sentiment since Ramaphosa’s swearing in as South Africa’s new president.
"Viewing the longer term picture, the index is down by -20.9% since the end of 2007, which marked the final stages of SA’s pre-2008 housing bubble," says Loos.
Western Cape growth slows down overall
The property price growth in the Western Cape has for many years been propping up the national average, often masking the losses experienced in regions elsewhere in South Africa. This emphatic growth rate has been slowing, however, and is approaching what John Loos refers to as "pedestrian", much like the rest of the country.
According to Absa’s Homeowner Sentiment Index (HSI) released on 23 April 2018, the Western Cape saw a severe dip of 11% in positive market sentiment from 82% in the fourth quarter of 2017 to 69% in quarter one of 2018. This is largely believed to be related to the drought experienced in the region over and above the land appropriation anxiety, explaining the larger-than-average national decline in sentiment.
Gauteng also experienced a dip from 82% to 76% over the same period, while respondents in KwaZulu-Natal recorded a 72% positive sentiment rate compared to 79% in the fourth quarter of 2017.
Of course, if one were to dig a little deeper, there are areas in the Western Cape that continue to experience noteworthy growth. For example, Pam Golding suggests that Milnerton has experienced a 75.3% increase over the last 5 years and that current demand for the area is putting pressure on the supply of inventory. Big Bay has seen a similar explosion due in part to the success of the Eden on the Bay retail and residential development. Just take a look at Property24’s median house sale price trend chart below for three choice suburbs in Cape Town still experiencing growth in the double digits over the last year.
Source: Property24 as of 6 May 2018
Home loan update
According to home loan originator Ooba’s "oobarometer", the first quarter of 2018 represented the highest home loan approval rate in over ten years. The approval rate came in at 76.9%, a healthy increase of almost 5% over the first quarter of last year.
Ooba’s CEO, Rhys Dyer is of the opinion that South African consumers are currently benefiting from cheaper access to credit as competition among lenders heats up. Ooba has itself seen an improved average interest rate achieved for clients from prime plus 0.35% in the first quarter of 2017, to prime plus 0.16% in the first quarter of this year.
Deposit requirements are also loosening. Dyer has been quoted in the media as saying: "Banks are increasingly willing to lend the full value of a property without requiring a deposit."
This encouraging component together with improved political and economic sentiment could perhaps take the SA housing market into real return territory in the near future. The FNB Property Barometer is suggesting 4.8% growth this year which could just about do it, depending on where the final inflation number ends up for the year. It is, after all, a healthy 1% above last year’s number (3.8% growth rate for 2017).
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: firstname.lastname@example.org
The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.