South Africa’s housing market is improving

Lalaine C. Delmendo | July 05, 2021

South Africa’s housing market is showing signs of improvement, after being depressed for the past five years. The price index for medium-sized apartments rose by 4.61% in April 2021 from a year earlier, an improvement from the previous year’s 1.2% rise, according to the First National Bank (FNB). In fact, it was the biggest y-o-y growth in four years.

Yet when adjusted for inflation, prices increased by a minuscule 0.1% y-o-y in April.

South Africa’s housing market has been sluggish over the past several years, mainly due to high unemployment, weak household finances, and an underdeveloped mortgage market. From 2007 to 2020, house prices rose by about 62% but when adjusted for inflation, real prices actually fell 18%.

South Africa house prices

But with inflation moderating, the gap between nominal and real prices has noticeably narrowed in the past three years.

Demand continues to rise this year, albeit at a more modest pace following a strong surge in the second half of last year, according to FNB’s June 2021 report.

“Our proprietary market strength indicators show that demand is now moderating, following a strong rebound in 2H20 and into 2021. However, these remain above pre-pandemic levels, in part reflecting the positive effect of lower interest rates on market activity,” said the FNB.

“Liquidity remains intact: mortgage extension continues to grow at a faster pace, and loan-to-price (LTP) ratios remain high. Our investigations show that much of this credit is funding purchases in the middle- to upper-priced segments,” the FNB added.

South Africa’s economy contracted by 7% in 2020, following minuscule growth of 0.2% in 2019. It was the steepest decline for over a century. The coronavirus outbreak has deepened the country’s debt crisis, aggravated food insecurity, and weakened already fragile health systems. The economy is projected to expand by a modest 3.1% this year, according to IMF estimates - still not enough to offset the huge contraction last year.

South Africa is Africa’s second biggest economy. With a population of 59.6 million and US$ 5,067 GDP per capita in 2020, it has formidable manufacturing and financial sectors. It is the world’s largest exporter of gold and platinum. Tourism is also a key source of foreign exchange.

Foreigners can own immovable property in South Africa without restriction. However, all foreign funds remitted to the country must be declared and documented. The property must also be endorsed ‘non-resident’, as a condition for repatriation of funds.

Non-resident investors have to pay Capital Gains Tax when they later sell their properties. The purchaser of the property is required to deduct a prescribed percentage from the proceeds of the sale and remit it directly to the South African Revenue Service before paying the balance to the seller.

Recalling the boom years

During South Africa’s housing boom (from 2000 to 2006), house prices rose by an average of 20% annually. These price rises peaked in October 2004 with 35.7% annual growth (32.5% in real terms), according to ABSA.

The boom was driven by 4 main factors:

  • The emergence of a financially stable black middle class, which had a tremendous impact on housing demand, encouraged by individual tax reliefs, in the context of a growing economy.
  • 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 went into property.
  • Better stability and security helped. During Apartheid and its sequel, property prices had badly lagged the economy, as the security situation went from bad to worse.
  • Lastly, the Financial Sector Charter in 2003 boosted mortgage loan growth. Financial institutions committed to provide ZAR 42 billion (US$3.1 billion) of housing finance to the low-income market. Then in 2006, the CGT exemption on primary residences was raised from ZAR 1 million (US$ 72,934) to ZAR1.5 million (US$ 109,402). Transfer duties on properties were lowered too. For example, no transfer duty is payable on properties valued at ZAR500,000 (US$ 36,467) or less.

However the boom ground to a halt following the global financial crisis. From 2008 to 2009 house prices fell by 3.2% (-16.5% in real terms). Aside from the global crisis and rising interest rates, the decline in prices was prompted by the implementation of the National Credit Act in mid-2007, which aimed to protect borrowers from over-indebtedness, by limiting the amount of funds that can be borrowed, and requiring every lender to assess borrowers’ credit-worthiness. It requires lenders to disclose every term in the contract and gives the borrowers the right to request their credit report, and to challenge the report if there are inaccuracies. The act has tended to reduce the supply of mortgage loans.

The housing market rose a little in 2010, encouraged by South Africa hosting the 19th FIFA World Cup, and from 2011 to 2019, house prices have risen by almost 51%. But after the ravages of inflation are deducted, that works out at a meagre 0.4% growth in real terms.

In 2020, house prices rose by 3.7% from a year earlier, amidst the pandemic. Yet when adjusted for inflation, prices rose only 0.6%.


Year Nominal Inflation-adjusted
2010 3.10 -0.23
2011 4.36 -1.84
2012 5.77 -0.04
2013 7.72 2.35
2014 6.20 0.82
2015 6.32 1.08
2016 4.75 -2.16
2017 3.85 -0.62
2018 4.12 -0.27
2019 3.10 -0.90
2020 3.70 0.60
Sources: FNB, Global Property Guide

Residential construction activity mixed

In Q1 2021, residential completions rose by 9% to 7,055 units, from a year earlier, following y-o-y rises of 9.4% in 2020 and 9.6% in 2019, with strong growth in construction of flats and townhouses, according to Statistics South Africa (Stats SA).

  • For houses measuring less than 80 sq. m, completions plummeted by 40.9% y-o-y to 1,379 in Q1 2021.
  • For houses measuring 80 sq. m and above, completions were down by 14.5% y-o-y to 1,613 in Q1 2021.
  • For flats and townhouses, completions surged by 80.4% y-o-y to 4,063 over the same period.

South Africa residential construction

However building approvals fell by 16.6% y-o-y to 11,020 units in Q1 2021,1 following declines of 3.8% in 2020 and 5.1% in 2019, according to Stats SA.  Most of the decline in approvals was at the low end:

  • For houses measuring less than 80 sq. m, approvals plunged by 74.2% y-o-y to 1,283 units in Q1 2021.
  • For houses measuring 80 sq. m and above, approvals rose by 25.5% y-o-y to 3,514 units.
  • For flats and townhouses, approvals rose by 16.6% y-o-y to 6,223 units in Q1 2021.

Activity remains robust

Residential market activity continued to improve in Q4 2020. According to FNB’s agents’ rating of activity (with ratings from 0 to 10), activity edged up to 7.08 in Q4 2020, from 6.86 in Q3 and 3.36 in Q2. This can be attributed to lower interest rates and improved lending conditions.

“The improved affordability has made buying property more attractive than renting,” said the FNB.

Time on market shortened to 67 days in Q4 2020, from 76 days in the previous quarter.

Foreign homebuying still subdued

Given South Africa’s economic stagnation, it is maybe not surprising that home-buying by foreigners has declined in recent years, according to the FNB, even though property in South Africa is now dramatically less expensive for foreign buyers than a decade ago.

Even taking into account the recent appreciation of the rand on the back of higher metals prices, the value of the local currency remains 51.2% lower against the US dollar from May 2011 to May 2021, falling from US$ 1 = ZAR 6.85 to US$ 1 = ZAR 14.05. Yet foreign homebuyers represented only 3.74% of total home buying in South Africa before the pandemic, significantly down from its peak of 6.5% in 2008.

south africa exchanges rates

“Inbound demand (i.e. from foreigners buying property in South Africa as well as from South African expats buying property locally) remains comparatively subdued,” said the FNB.

FNB attributed this to:

  • Weak investor sentiment towards South Africa, due to the country’s multi-year economic stagnation
  • Uncertainty about the country’s future economic policy
  • Negative news, such as credit rating downgrades to “junk status”
  • Pandemic-related lockdowns and travel restrictions

Most foreign owners are based in Europe, mostly in the United Kingdom, as well as Germany, Italy, Holland, and France. There are also buyers from African countries such as Mozambique, Zimbabwe, Angola, Cameroon, and Nigeria. An increasing number of buyers from China and Dubai are also eyeing properties in the KwaZulu-Natal and the Durban area, according to Craig Hutchison, chief executive of Engel &Völkers Southern Africa.

Record-low interest rates

The key interest rate is now at its lowest level since 1973.  In May 2021, the South African Reserve Bank (SARB), the country’s central bank, kept its benchmark repo rate unchanged at a record low of 3.5%, following four consecutive rate cuts at a total of 275 basis points since March 2020, amidst the fallout from the COVID-19 pandemic.

South Africa mortgage advances growth interest rates

“Monetary policy continues to be accommodative, keeping financial conditions supportive of credit demand as the economy recovers from the pandemic and associated lockdowns,” said the central bank. “The Bank has ensured adequate liquidity in domestic markets and will continue to closely monitor funding markets for stress. In addition, regulatory relief provided to banks continues to support lending to households and firms.”

Prime and variable mortgage rates are falling. They were 7% in May 2021, down from 7.75% in the previous year and 10.25% two years ago.

Mortgage market improving

Housing loans continue to rise, amid an increased willingness of banks to provide loans to prospective borrowers. During 2020, total mortgage advances rose 4.4% to about ZAR 1.6 trillion (US$ 113.93 billion), slightly up from its annual average growth of 4.1% in 2009-19.

“Loan-to-price ratios, a proxy for loan-to-value, have continued to rise, suggesting willingness by lenders to finance a bigger proportion of the purchase price,” said the FNB. “....the surge in LTPs predates the pandemic  – it began in 2017 – and is largely attributed to intense competition among lenders in a thin volume market.”

This is supported by other local market experts.

“Property ownership is now more accessible...Potentially renters may be able to buy a home at a lower monthly cost than their current rental payment,” said Rhys Dyer, chief executive of home loan comparison service firm, Ooba.

South Africa mortgage advances growth interest rates

The size of the mortgage market stood at 31.5% of GDP in 2020, up from 29.5% of GDP in 2019 but still down from an average of 38% of GDP in 2009-2011.

Household finances troublingly weak, unemployment at record-high

Many households in South Africa are under financial strain, because of slow economic growth and low employment levels.  The net savings rate stood at 0.5% of disposable income last year and the ratio of household debt to disposable income increased from 72.9% in 2019 to 77.1% last year, amidst the COVID-19 pandemic, according to SARB’s Quarterly Bulletin March 2021..

On the positive side, debt-service cost to disposable income fell to 8.5% in 2020 from 9.4% in 2019, reflecting the substantial decline in interest rates last year.

The very high unemployment rate has been aggravated by the health crisis. In Q1 2021, the official unemployment soared to a record high of 32.6%, according to SARB.

South Africa net house hold savings

“Although household-surveyed employment increased slightly in the fourth quarter of 2020, the level of total employment was still about 1.4 million (8.5%) below that of a year earlier,” said the SARB.

“The labour force increased further as job searching picked up following the further easing of the COVID19-related lockdown restrictions. Unfortunately, the quarterly increase in employment was surpassed by the increase in unemployment, which brought the number of officially unemployed persons to 7.2 million – the highest number on record.”

Rental yields are good

Despite all this, from one perspective property owners should be happy. In Johannesburg, gross rental yields for apartments, i.e., the gross rental return on a property if fully rented out, are good, ranging from 6.5% to 9.3%, according to Global Property Guide research.

The most desirable neighborhoods in Johannesburg are in the north of the city, including suburbs like Dunkeld, Hyde Park, Houghton, Illovo, Inanda, Melrose, Parkhurst, Parktown, Parkview, Sandhurst, Saxonwold and Westcliff. Nelson Mandela has a house in Houghton.

In Cape Town, gross rental yields on apartments are slightly lower, ranging from 5% to 8.3%.

Cape Town is the most popular tourist destination in Africa. Its amazing beaches and weather are ideal for retirees and foreign property buyers. Atlantic Seaboard properties are among the most sought-after because of the beaches and cliffs - upscale neighbourhoods like Bakoven, Bantry Bay, Camps, Clifton, Fresnaye, Green Point and Mouille Point. Some houses nestled on cliffs have sweeping views of the Atlantic Ocean. City Bowl, which includes the central business district of Cape Town, is another upscale residential suburb. It is one of the most stable residential markets in Cape Town, because of its prime central location and vibrant cosmopolitan lifestyle.

A typical Johannesburg apartment rents for around US$ 9 to US$12 per sq. m. per month, while the same property in Cape Town is offered for a monthly rent of about US$ 15 to US$ 17 per sq. m.

COVID-19 crisis puts SA’s already struggling economy into deeper recession

The coronavirus outbreak has deepened the country’s debt crisis, aggravated food insecurity, and weakened the already fragile health systems. The economy is projected to expand by a modest 3.1% this year, according to IMF estimates, but still not enough to offset the 7% contraction last year.

In Q1 2021, the nationwide unemployment rate rose to 32.6% - the highest jobless rate since data began in 2008. Unemployment averaged 25.5% from 2000 to 2020.

south africa gdp inflation

In April 2021, annual headline inflation jumped to 4.4%, the highest level since before the pandemic, mainly driven by rising transport and food prices, according to Stats SA.

Public finances worsening

A fiscal stimulus package worth ZAR 500 billion (US$ 36.4 billion), or a tenth of the economy, was announced in April by President Cyril Ramaphosa - the largest ever spending plan in the country’s history.

As a result, this has aggravated the country’s already strained public finances. The budget deficit soared to about 12.3% of GDP in 2020, sharply up from 6.7% in 2019, and the biggest in South Africa’s history.

Likewise, the country’s debt burden increased sharply t0 83% of GDP last year, from 62.2% in 2019 and 56.7% in 2018, according to SARB.

South Africa unemployment

In November 2020, Moody’s downgraded South Africa’s sovereign credit rating further to “junk” status, moving the grade down to Ba2, from Ba1 in March 2020 and Baa3 in November 2019. Then in May 2021, credit rating agencies S&P and Fitch Ratings affirmed the country sovereign rating at BB-, or three notches below investment grade, but Fitch maintained its negative outlook.

“The ‘BB-‘ rating is constrained by high and rising government debt, low trend growth and exceptionally high inequality that will complicate consolidation efforts,” said Fitch Ratings.

“We assume that the economic fall-out of any new waves will be more limited than last year, as policy-makers have containment measures will be more targeted and the economy has adapted, but it could still weigh on public finances,” noted Fitch Ratings.

Public frustration grows over Ramaphosa’s handling of economy, pandemic

Cyril Ramaphosa was elected president by parliament in February 2018 after his predecessor, Jacob Zuma, resigned over corruption allegations.

Ramaphosa was Nelson Mandela’s choice for future president. He is a trade union leader, MP, long-time ANC stalwart, and successful businessman, with a fortune of US$675 million (Forbes estimate).

His business career has not been without controversy, with several accusations of bribery and corruption, but nothing on the scale of the accusations against Zuma. He was also implicated in the August 2012 Marikana massacre, when 34 striking miners were shot dead. Previously he was Deputy President under Zuma.

Ramaphosa passed his first test when the African National Congress (ANC) won the May 2019 parliamentary elections, although its 57.5% share of the vote was its lowest margin of victory since apartheid was overturned 25 years ago.

However, many are now dismayed by Ramaphosa’s overly cautious handling of the country’s struggling economy, the seemingly slow implementation of reforms, as well as his failure to rein in corruption. Public frustration grew in December 2019 when the beleaguered power utility, Eskom, left South Africans facing the worst blackouts in the country’s history.

Ramaphosa’s government has also come under fire for its handling of the health crisis, and for delays in acquiring and rolling out vaccines.


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