Gauteng most affordable housing market of 'Big 4' provinces

Cape Town - Among the so-called Big 4 provinces, Gauteng has the most affordable housing market, according to John Loos, household and property sector strategist at FNB.

This is despite Gauteng having the second highest average house price of the major regions - namely Gauteng, Western Cape, KwaZulu-Natal and the Eastern Cape.

"I still think Gauteng is the most affordable for its residents. Gauteng has managed to keep itself affordable and that is very important as it is a crucial aspect in attracting young skills. That is Gauteng's competitive advantage at the moment. Cape Town could possibly be running into problems in that regard," Loos told Fin24.

At the same time he cautioned that one cannot just look at house prices when it comes to housing market affordability for residents in a given region.

Using the average house price/per capita income ratio as a measure of home affordability, Gauteng is the most affordable compared to the Western Cape, KwaZulu Natal and the Eastern Cape with a ratio of 13.94, according to the most recent data available to Loos, which is for 2015.

After Gauteng, the Western Cape is the second most affordable of the Big 4 provinces with an average house price/per capita income ratio of 17.81, KZN is third on 23.17 and the Eastern Cape the least affordable by this measure with a ratio of 24.12.

READ: Property affordability a challenge in Western Cape

Different structural characteristics

Loos pointed out that many comparisons between regions are flawed, because they simply don’t take into account the different structural characteristics.

"Analysing affordability between regions even within the same currency area is an inexact science. Average price levels alone say little about comparative home affordability between regions, or about whether a specific market is more 'overvalued' or 'undervalued' than another," explained Loos.

"House prices, in relation to some form of purchasing power measure - such as income - is required. But due to structural differences between regions, even this doesn’t prove anything about the extent of 'over' - or 'under valuation' in a region."

For example, the Western Cape is not the least affordable housing market for its own inhabitants. This is because, despite having the highest regional average house price, the province also has the second highest per capita income after Gauteng.

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'Most over-heated'

In the Western Cape, however, from 2010 to the present, Loos is of the opinion that the housing market in the province has become the most “over-heated” relative to the other major South African regions. This is despite its house price/per capita income ratio being the second lowest of the major provinces.

Loos looked at non-house price-related indicators for further signs of the Western Cape’s possible home affordability deterioration. The FNB first time buying survey, for instance, appears to reflect more significant affordability deterioration for local residents of Cape Town, compared to other major cities.

Loos, however, does not think there is a bubble in the Western Cape like before 2008. There is, in his opinion, an impact due to buyers from outside the province putting upward pressure on the Western Cape market, which is more land scarce. These buyers are often people from other parts of the country - or foreigners - with higher incomes or nearing retirement.

Gauteng, on the other hand, has had the highest first time buyer estimates in recent times and continues to have the youngest estimated average age of home buyers too.

"This relatively good affordability situation in Gauteng is one important factor in attracting the young skilled labour that is required to maintain the region’s status as the number one economy, in terms of both sheer size as well as long term growth," said Loos.

Loos explained that KZN and the Eastern Cape have significantly worse affordability measures than Gauteng and the Western Cape. This is due to their low per capita incomes rather than due to high house prices.

At the same time, cautioned Loos, this does not mean there is a "bubble", for instance. One cannot draw the conclusion that the Eastern Cape is the most “overvalued” and most at risk of a price “correction”, for instance. Loos said it probably rather reflects a larger portion of the Eastern Cape’s households living outside of the highly-traded “mainstream” formal housing market, due to their incomes being too low.

And these households can live outside of the formally traded housing market on an indefinite basis without needing to suffer a major correction in prices.