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How provinces weigh up in terms of house price growth

Cape Town - The Western Cape continued to have, by a significant margin, the fastest average house price growth in the second quarter of 2017, compared to the rest of the country’s major residential regions, according to John Loos, household and property sector strategist at FNB.

The Western Cape housing market is the most expensive in SA, with an average transaction price estimated at R1.437m in the second quarter of 2017, the next highest average price was that of Gauteng at an estimated R1.050m.

The relatively strong house price growth differential between the Western Cape and the rest of the major regions can be in part, but not fully, be explained by the province having the second highest economic growth rate of the nine provinces, according to Loos.

"In 2016, IHS Markit estimates Gross Domestic Product (GDP) growth for the Western Cape of 0.9%, above the national average of 0.3% and second only to Gauteng’s 1% estimate. But Gauteng is arguably a better supplied housing market, being landlocked, whereas the City of Cape Town region, which drives the Western Cape, has a far greater land constraint," he explains.

READ: Millennials hungry for high-value property

The FNB House Price Indices for the country’s major regions show that from the beginning of 2010 to the second quarter of 2017, the Western Cape has had 79.9% cumulative house price growth, followed by 49.2% in KwaZulu Natal (KZN) and 41.7% in Gauteng. The Eastern Cape has had 38.7%, and the five smaller provinces recorded 37.2%.

Despite slowing, the Western Cape’s average house price growth for the second quarter remained well above other major regions, according to Loos. The next fastest growth rates were 2.3% for Gauteng and 2% in KZN.

The FNB Smaller Five Provinces House Price Index - Mpumalanga, North West, Limpopo, Free State and Northern Cape Provinces - showed 1.7% year-on-year growth in the second quarter, while the Eastern Cape experienced a slight decline of -0.1%.

Affordability

However, Loos points out that mounting affordability challenges in the Western Cape, caused by its noticeably superior house price growth compared to other regions in recent years, are believed to be behind the slowing in its house price growth.

The slowing average house price growth in the Western Cape started early last year, and continued into the second quarter of 2017. The year-on-year average house price growth for the Western Cape measured 5.7% in the second quarter, slower than the 6.9% revised rate of the previous quarter and now significantly slower than the 10.8% revised multi-year high recorded in the first quarter of last year.

READ: Signs of broad slowing in Cape Town house price growth

Loos said a combination of high per household income, but significantly lower house prices than in the Western Cape, makes Gauteng the most affordable major housing region, with the lowest average house price per household income.

"The greater support for the Western Cape housing market in recent years, however, is believed to have come from a very strong net inflow of repeat home buyers from elsewhere in SA, a source of support which other provinces don’t have nearly as much of," said Loos.

"However, we believe that the time has come for the Western Cape’s housing market to cool off, and indeed the gradually slowing average house price growth rate for that province appears to pointing to such a cooling off emerging."

The Western Cape has also shown significantly greater housing affordability deterioration since 2011 than any other major region.

"This mounting affordability challenge in the Western Cape is our key reason for expecting that province’s house price growth rate to taper off in the near term to low single-digit house price growth that is more in line with the low rates of the other regions," said Loos.

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