Emerging Black middle-class powers house prices

Riding on the back of an empowered black middle class, house prices have been rising strongly for the past six years in South Africa (pop. 45.3 million, GDP/cap US$5,400).

The double digit growth rate of house prices in the middle segment continued in 2005 with a nominal house price growth of 21.9%, lower than 2004’s growth of 32.2%. However, the luxury residential segment continues to perform poorly compared to other segments and prices have started to fall.

The Cape region at the south-western tip of Africa is the safest place for an investment in property. There is still a strong influx of buyers from the Johannesburg area, which keeps prices up. Spectacular sea and mountain scenery, a pleasant year-round Mediterranean climate, coupled with beautiful and vibrant working waterfront, have pushed Cape Town into the fore as a tourist Mecca.

Cape Town, Johannesburg
Cape Town properties are being purchased by foreigners, with the top-end of the housing market increasingly driven by these international purchasers. Many South Africans, too, are choosing Cape Town as their home base, generating much business activity.

While Cape Town is more tourist friendly, there is interest in Johannesburg (pop. 3.2 million) as well. Johannesburg is South Africa’s largest city and the center of manufacturing, financial and economic activities. Although mining is no longer done within its city limits, the headquarters of mining companies are still there.

Johannesburg is also home to Africa’s largest stock exchange. It also has one of the most expensive property markets in South Africa.

Often mistakenly thought of as the country’s capital, Johannesburg is actually not even one of the three capitals; Pretoria which is quite near is the national and executive capital, Cape Town is the legislative capital and Bloemfontein is the judicial capital.

House price movement
The national house price index, published by ABSA, has registered double digit growth rates since 2000. An average annual growth of 23% was registered in 2005, following an impressive 32% rise in 2004. House price growth is expected to moderate in 2006, and May 2006 saw price rises on a year earlier of only a 12.3%.

All segments of the property market have experienced a slowdown in 2006 compared to the previous two years. The average price of middle-segment houses (80-400 sq. m.) in March 2006 is about ZAR7,034 (US$106,950), up by 14.5% from a year earlier. Large middle-segment houses (221 – 400 sq. m.) experienced the highest rate of y-o-y price growth at 16.2%, to reach an average of ZAR1,049,704 (US$147,715).

Despite the strong growth in those segments, the price of luxury segment house prices (ZAR2.2m 8.2m (US$310,000 – 1.15 m) have started to fall. The average price for luxury houses dropped by 2.4% from ZAR3,286,468 (US$462,470) in Q1 2005 to ZAR3,206,640 (US$451,240). This confirms that the housing boom is primarily fuelled by strong demand for housing from the middle income population segment.

Buy-to-let investments are popular in South Africa, because returns are traditionally at 10% or higher. About 20% to 25% of all property purchases for the past two years have been intended for buy-to-let investment.

However, with rapid price appreciation and the influx of investors increasing the supply of rental units, yields have gone down. According to one rental agency administrator, investors should not now expect returns of more than 5%. Preference for ownership has increased tremendously given the rise in purchasing power over the past decade.

Doomsayers believe current house price levels represent a bubble. But in reality prices have merely recovered from the deep undervaluation of the late 1990s, which stemmed from the country’s political instability and the resulting economic uncertainty.

Of course, the ‘catch-up’ property price increases have given the impression of excessive rises, but from 1997 to 2004, property prices have expanded by an average of 16.3% annually, not enormously more than average nominal GDP growth of 10.5% (inflation has averaged 8% over the last few years).

End of Apartheid
There are four main reasons for the rise of South African house prices. The first is emergence of a financially stable black middle class. Years after the end of Apartheid, blacks are finding new opportunities and new financial strength. This development is having a tremendous impact on housing demand and the economy.

The strong growth of households’ real disposable income has also been somewhat encouraged by tax reliefs for individuals, in the context of a strongly growing economy. In 2006, the CGT exemption on a primary residence was lifted from ZAR1 million (US$138,554) to ZAR1.5million (US$207,831). Transfer duties on properties have been lowered too. For example, no transfer duty is payable on properties valued at ZAR500,000 (US$69,277) or less.

The second factor is that South Africans who had parked money offshore during the Apartheid era were allowed (and required) to bring it back by September 2004. Much of this money has gone into property.

Stability and security
Better stability and security are helping. During Apartheid and its sequel, property prices badly lagged the economy, as the security situation went from bad to worse. Now the country seems back on track. This feeling is reflected in rising business confidence indicators, and in the significant strengthening of the South African rand.

Low interest rates have given the final push to the market. Although South Africa’s 11% mortgage rate is high by international standards, it is quite low by historical standards (in 1998 the mortgage rate for new housing loans was 22.75%). With the recent drop in interest rates, 30-year flexible mortgage loans are now commonplace.

Article from: www.globalpropertyguide.com