Insights on the South African residential property market - It's not all bad news.

South Africa is currently going through some interesting times, both on a political front and on an economic front. The economy has been relatively stagnant since the 2008/2009 financial crisis. With annual GDP growth rates now hovering around the 1% mark, a low figure, especially for a developing country. Sentiment towards the market, in general, has been somewhat negative, but what has happened in the residential property market and how property prices held up, this article will explore the residential property index and suggest some reasons for the current price behaviour.

Although there is a clear positive correlation between GDP growth and residential property prices the story is not as simple as that. The 2019 year rounded out with 1.7% nominal growth across the residential property market, which indicates a generally contracting property market. When looking at nominal growth figures it should be kept in mind that currently, the inflation rate is 4%, meaning in real terms there is no growth at all, and the market is still consolidating.

Positive factors also need to be considered, earlier in January the Monetary Policy Committee announced a reduced prime lending rate, lowered by 25 basis points down to 6.25%, this is certainly good news for buyers as it would make access to loans considerably cheaper. However, the reduction in the benchmark lending rate is just about the only positive news in terms of influencing the demand for property.

The reduced lending rate will certainly increase the number of able buyers and active buyers in the market, which would naturally lead to increased demand and one would expect a positive effect on property prices from this. The issue is however that there is a lot offsetting positive factors like the lowered prime lending rate, such as a rise in basic utility rates, fuel costs and electricity which somewhat nullify the potential for increased demand.

Further, looking at certain bands of property, for example, luxury property, sellers are willing to accept prices well below what would be considered market-related. This elastic supply regardless of price has an additional offsetting effect in the market.

Historically, the property prices in certain regions of South Africa, like the Western Cape and Cape Town, in particular, have gone against the trend of stagnant and declining property prices, but even the Western Cape has lost some of its positive growth momentum through 2019. A look at a graph from the Lightstone Residential Property Indices illustrates the Property price over time in different provinces.

Lightstone Residential Property Indices 1

To conclude, there are positive factors like the reduced lending rate that works in favour of the current state of the property market, but there are also offsetting factors like rising utility costs and fuel costs, as well as more elastic supply. The net effect leaves the property market in a somewhat similar state, with little to no growth, indicating a market that is still in a phase of consolidation. Sellers should not expect substantial real growth if they have bought within the last 5 years. The news is not all bad though, it is a stable position and remains a solid buyers' market with great investment opportunities widely available.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)