The Western Cape property market – both commercial and residential – while unable to escape the impacts of a weak national economy and the most recent interest rate hikes, has come through its drought period in relatively good shape, says FNB economist John Loos.
Loos says from IHSMarkit economic growth estimates as well as certain property market data there are signs the region has improved mildly, that its economy has recovered somewhat in recent quarters, and that its property market has not been too badly affected.
However, like the other regions, the Western Cape’s emigration estimate appears to be rising, arguably more a reflection of the broader South African economic weakness and policy uncertainty.
The severe drought, necessitating major water saving measures, would have had a negative impact on agriculture, tourism and sentiment in general.
But as drought pressure alleviates in the Western Cape, “the state of the Western Cape’s property market compared to the other major regions is still in reasonably good shape”.
However, the province, which is used to experiencing different fortunes to the rest of the country over recent years, cannot entirely escape the national economic and property downturn nor the interest rate hikes, he says.
The province has, in certain ways, in the recent past been “economically different” to the country’s other major economic regions.
For one, it experienced a strong migration to it from other local regions. This migration, says Loos, is believed to have greatly contributed to “a very strong housing market in the region for some years, until a slowing not long ago”.
The strong inward migration of repeat home buyers, many highly skilled and many affluent, was fuelled by perceptions of a great lifestyle and good management and contributed to the region’s economy by bringing skills or purchasing power, or both.
In 2017 there was a slowdown in the net inflow of repeat home buyers into the Western Cape, compared with 2016, possibly “a partial result of deteriorating home affordability in the region, but probably also because of the unappealing nature of drought along with its economic impact on the region”.
The major provinces all experienced a year-on-year growth dip in early 2017 before a subsequent mini-recovery, but the Western Cape’s dip was a little worse, according to IHSMarkit, which produces quarterly seasonally adjusted gross domestic product (GDP) estimates by province.
Its year-on-year GDP growth went negative, bottoming at -0.5% in the second quarter of 2017 before starting its own “mini-recovery”.
By comparison, Gauteng bottomed at positive growth of +0.7% in the same quarter and KwaZulu-Natal at +0.2%, says Loos.
Since then, however, the Western Cape has become the strongest of the major three provinces, growing by +2.3% and +1.7% for the first two quarters of 2018 respectively.
“This is not wonderfully strong growth, but outpaces Gauteng’s +1.4% and +0.8% for the respective quarters, and KwaZulu-Natal’s +1.9% and +1.0%.”
One of the drivers of this relative recovery in the Western Cape was a strong recovery in Agriculture Value-Added growth in the first half of 2018 off a very low 2017 base, says Loos.
The mini-economic recovery of late 2017 appeared insufficient, however, to boost housing market activity in the Western Cape.
“This is not a surprise because despite estimates of a mildly stronger economy in the region in 2018, its housing market had become relatively unaffordable in recent years and this has continued to dampen activity.”
According to the FNB Estate Agent Survey, in which respondents rate market activity on a scale of 1 to 10, Cape Town had the lowest activity rating of the major metropolitan regions.
Despite the agent experience of slowing market activity, Cape Town’s balance between housing supply and demand does not appear to be the weakest, says Loos.
He says the Cape Town Metro does seem to maintain significantly better household financial health than the other major regions.
Added to this, despite a weakening housing market in Cape Town, the financial strength of home-owning households in the region appears significantly better than other major regions.
Agents in the region estimate that 10.54% of sellers are selling to downscale due to financial pressure. While this percentage has risen from 6% just two quarters earlier, it remains well below eThekwini’s estimate of 20.09% and Gauteng’s 17.02%.
“This suggests there has been some financial deterioration for households as a group in the Western Cape, but the damage through the drought and economic contraction period in 2017 was not severe.”
There has also been an estimated percentage of sellers selling to semigrate returning to being the lowest of the major metro regions after a brief earlier spike possibly driven by 2017 economic weakness and drought. This suggests relatively good sentiment among Western Cape inhabitants towards the region, relative to others, is returning.