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Cape Town - While the Western Cape’s relatively strong economic and “perceptional” performance within South Africa has driven relative strength in its residential market, this could become a growth constraint, John Loos, household and property sector strategist at FNB, said on Tuesday.
He explained that high property values are often extolled as a virtue. If, however, they ultimately prohibit the attraction of skills due to unaffordability, which could eventually become a negative factor for economic growth. In his view, this is a potential future risk for the Western Cape should stock constraints and affordability challenges be left unaddressed.
The number of first time buyers in the Western Cape, for instance, is low compared to the national average, while Gauteng has the highest number of first time buyers.
"One has to ask why the Western Cape has a lower estimated level of first time buying. Is it affordability? That could be Gauteng’s competitive advantage," explained Loos.
"Higher per capital income and lower house prices could perhaps become a key contributor to Gauteng’s perceived ability to attract young skills, and a reason why that province has a far higher rate of first time home buying."
In his view, Cape Town and the Western Cape must think of how to retain younger skills, despite the province being marketed as a lifestyle province. Increased congestion in the city could also have an adverse effect on potential buyers.
"Quality of life is a key driver of long term growth as skilled workers look for lifestyle. Challenges, however, may be in retaining younger skills, which we believe may often be lured to Gauteng to launch their careers," said Loos.
Too expensive for certain professions
For the time being, however, the Western Cape continues to do relatively well in what he calls the “skills and purchasing power war".
"Does expensive property curb the attraction of younger skills to Cape Town and surrounds? London, for instance, has seen such a trend where lower income professionals like nurses simply cannot afford to buy or rent in the city. How would this impact on hospitals, for instance?" asked Loos.
Stellenbosch is another example of an expensive property market, which might even lead to impacting the attraction of academic talent to the university, due to the high cost of property. Property in Gauteng, on the other hand is seen as more affordable.
"I believe Gauteng's economy benefits from attracting young professionals. So the property valuation in Cape Town and even the rest of the Western Cape could start being a problem, especially for lower income professionals," said Loos.
"We are not convinced that the region has it all its own way with regard to skills migration, and suspect that a significant portion of its younger skilled inhabitants head inland to start their careers in the larger Gauteng Province economy."
He added that, naturally, one cannot measure this view, as many of these people would be aspirant first time home buyers, and as such not yet appearing on the deeds database.
"What we do know, though, is that the Western Cape has, since 2009, had a noticeably lower level of first time buying than the national average, according to our FNB Estate Agent Survey. The National Average first time buyer estimate hovers above 20% of total buying. The Western Cape was at 11% in the first quarter of 2016, and has been noticeably lower than the national average percentage for most of the time since 2009," explained Loos.
"However, we believe it is safe to say that, within the SA context, the province is doing very well in the 'war for skills', and that this may well lead to the region showing one of the strongest long term economic growth rates of the nine provinces in the years to come - something of a virtuous cycle."
In his view, the Western Cape is unlikely to escape the global and domestic economic slowdown, however. Some of the sources of residential demand in the Western Cape have already showed signs of slowing.
"The FNB Estate Agent Survey, for instance, points to a year-on-year decline in residential activity levels recently, as one would expect in this credit-dependent residential market when interest rates are rising," said Loos.
