South Africa: Price History

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Emerging middle-class fuels house price boom

Riding on the back of an empowered middle class, house prices have been rising strongly since 2000 in South Africa.

The double digit growth rate of house prices in the middle segment continued in early 2007 with a nominal house price growth of 18% y-o-y to Q2 2007 (10.3% in real terms). However, this was lower compared to previous years’ growth. House prices rose 32.2% y-o-y to end-2004 and 22.8% to end-2005.

In line with global trends, increased inflationary pressures were observed in 2006 with headline inflation reaching 4.6%, higher than in previous years, 3.4 in 2005 and 1.4% in 2004. Interest rate hikes were implemented to quell inflationary pressure. Mortgage rate on new loans has been increased five times to its current level of 12.5% (as of April 2007) from its historical low of 10.5%, in effect from May 2005 to May 2006.

House price movement

The national house price index, published by ABSA, has registered double digit annual growth rates since 2000. An annual growth of 15% was registered in end-2006, following impressive rises in end-2004 at 33.3% and end-2005 at 23%. House price growth is expected to moderate further in 2007 with a price rise of 14.8% y-o-y to end-June 2007.

The average price of middle-segment houses (80-400 sq. m.) in Q2 2007 was ZAR919,046 (US$130,600), up by 15.3% from a year earlier. Large middle-segment houses (221 – 400 sq. m.) experienced the highest rate of y-o-y price growth at 18.1%, to reach an average of ZAR1,289,837 (US$183,300).

Luxury housing registered the lowest house price growth rate. The average price for luxury houses rose 9.2% to ZAR 4,093,241 (US$581,735) in Q2 2007 from a year earlier. On the other hand, average price of affordable housing rose 18% to ZAR249,714 (US$35,490) over the same period. This confirms that the housing boom is primarily fuelled by strong demand for housing from the middle income population segment.

Cape Town, Johannesburg

In terms of metropolitan area, average house prices were still highest in Central and South Johannesburg at ZAR1,212,553 (US$172,330) in Q2 2007, up by 15.3% from a year earlier. Average house prices in Pretoria and Cape Town also exceed ZAR1 million.

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.

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

Property prices rose by more than 10% y-o-y to end-Q2 2007 in all metropolitan areas, except in Cape Town. Bloemfontein registered the highest y-o-y price growth 20%, slightly lower than previous year’s growth in the same quarter.

Average house price in Cape Town rose by 9.9% y-o-y to end Q2 2007, significantly lower compared to 17.6% price growth y-o-y to end Q2 2006.

Strong fundamentals

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. Average real GDP growth was 4% from 2000 to 2006, with real disposable income rising by an average of 4.7% over the same period.

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.

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 12.5% 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 financial innovations and relatively low interest rates, 30-year flexible mortgage loans are now commonplace.

South Africa - more data and information

• South African house prices, rents, and letting income - real data!
• How expensive are houses in South Africa, compared to the rest of Africa?
• How much rent can be earned from South African property, compared to the rest of Africa?

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