South Africa: weak economy, falling house prices, inactive government

Lalaine C. Delmendo | May 21, 2020

There has been little to celebrate for the South Africa’s homeowners for more than a decade. From 2007 to 2019, house prices rose by about 57% but when adjusted for inflation, real prices actually fell 18%.

South Africa house prices

South Africa’s house prices fell 1.22% adjusted for inflation during the year to Q1 2020 (a nominal house price rise of 2.79%, according to ABSA). Quarter-on-quarter, house prices increased by a meagre 0.11% and fell by 1.45% in real terms.

Demand remains weak, reflectingthe depressed macroeconomic environment, according to First National Bank’s analyst Siphamandla Mkhwanazi.

“Sustainable long-term improvements in affordability (and demand) will have to be driven by income growth,” said the FNB.“Concerningly, our forecasts do not suggest a strong recovery in income growth. This threatens the sustainability of thesupport offered by constructive lending on the market.”

The fallout from coronavirus will make things worse. Housing demand, and consequently house prices, are expected to fall this year.

South Africa’s economy fell into recession in Q4 2019, when real GDP contracted by 1.4%, following a decline of 0.8% in Q3, according to Statistics South Africa.  The economy grew by a minuscule 0.2% during 2019, its weakest performance since 2009. The SA economy is expected to shrink by as much as 6.4% this year, mainly due to the adverse effects of theCOVID-19 pandemic, according to Finance Minister Tito Mboweni.

South Africa is Africa’s second biggest economy. The country has an estimated population of 58.8 million and an estimated GDP per capita of US$ 6,100 in 2019. 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

The South African housing market’s present doldrums are a far cry from the previous decade’s housing boom (from 2000 to 2006), when national house prices rose by an average of 20% annually. House 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$2.83 billion) of housing finance to the low-income market. Then in 2006, the CGT exemption on primary residences was raised from ZAR 1 million (US$ 53,814) to ZAR1.5 million (US$ 80,721). Transfer duties on properties were lowered too. For example, no transfer duty is payable on properties valued at ZAR500,000 (US$ 26,907) 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.

The National Credit Act 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.


Year Nominal Inflation-adjusted
2010 3.11 -0.22
2011 4.46 -1.75
2012 5.74 -0.07
2013 7.69 2.33
2014 6.31 0.92
2015 6.24 1.01
2016 4.58 -2.33
2017 3.86 -0.61
2018 4.15 -0.24
2019 3.49 -0.52
Sources: ABSA, Global Property Guide

Residential construction activity mixed

Residential completions rose by 9.6% in 2019 to 44,055 units, following an increase of 3% in 2018, 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 15.7% y-o-y to 9,836 in 2019.
  • For houses measuring 80 sq. m and above, completions were down by 6.7% y-o-y to 9,998 last year.
  • For flats and townhouses, completions surged by 42.9% y-o-y to 25,479 units over the same period.

South Africa residential construction

However building approvals fell by 5.1% to 55,133 units in 2019, according to Stats SA.

  • For houses measuring less than 80 sq. m, approvals plunged by 16.4% y-o-y to 13,935 units in 2019.
  • For houses measuring 80 sq. m and above, approvals fell by 12.2% y-o-y to 13,220 units last year.
  • For flats and townhouses, approvals fell by 16.5% y-o-y to 24,049 units last year.

Mortgage market improving

New mortgage loans and re-advances increased 3.3% to ZAR 365.3 billion (US$ 19.66 billion) last year, following a 1% decline in 2018, according to SARB. Total mortgage advances rose 6% to almost ZAR 1.5 trillion (US$ 80.56 billion) in 2019, the highest growth in four years.

“Growth in total mortgage advances fluctuated...between 4.2% and 4.9%for 30 months, before exceeding 5.0% in July 2019 and accelerating further to 6.0% in December,” said the SARB.

South Africa mortgages loans outstanding

The size of the mortgage market stood at 29.2% of GDP in 2019, slightly up from 29% of GDP in 2018 but still down from an average of 38% of GDP in 2009-2011.

Household finances troublingly weak

Many households in South Africa are under financial strain, because of slow economic growth, low employment levels, and high interest rates.

Household debt grew by 5.7% in 2019, following 5.5% growth in 2018, according to SARB.

Debt-service cost to disposable income stood at 9.4% in Q4 2019, slightly up from 9.3% a year earlier. The net savings rate fell to -0.2% of disposable income last year and the ratio of debt-to-disposable income in South Africa rose to 73% in 2019, from just 55% in 1991.

“The pace of household debt accumulation accelerated in the fourth quarter of 2019 due to faster growth in the extension of mortgages advances (which includes mortgage securitization) as well as leasing finance and installment sale loans,” said the SARB. “Consequently, growth in household debt exceeded that in disposable income.”

South Africa house hold savings

Weak household finances result from low job opportunities and a very high unemployment rate. Last year, unemployment soared to a record high of 28.7%.

“Depressed labour marketscontinue to weigh on household finances, which poses a threat to sustained [residential property] demand growth,” said the FNB.

Foreign homebuying remains 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 First National Bank (FNB), even though property in South Africa is now dramatically less expensive for foreign buyers than nine years ago.

The rand lost 63.8% of its value against the US dollar from April 2011 to April 2020, falling from US$ 1 = ZAR 6.72 to US$ 1 = ZAR 18.58. Yet foreign homebuyers represented only 3.74% of total home buying in South Africa in Q2 2019, significantly down from its peak of 6.5% in 2008.

“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 in its January 2020 report.

FNB attributed this to:

  • Weaker 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”

south africa exchanges rates

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.

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.

Record-low interest rates

In its April 2020 emergency meeting, the South African Reserve Bank (SARB), the country’s central bank, slashed the repo rate by 100 basis points to 4.25%, following a 100-basis point rate cut in March, amidst the fallout from the COVID-19 outbreak. This brings the key rate to its lowest level since 1973.

South Africa mortgage advances growth interest rates

In line, prime and variable mortgage rates are falling. They were 9.75% in February 2020, down from 10.25% during the same month last year, according to the SARB.

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

South Africa’s economy is expected to shrink by as much as 6.4% this year, according to Finance Minister Tito Mboweni. The coronavirus outbreak has deepened the country’s debt crisis, aggravated food insecurity, and weakened the already fragile health systems.

During 2019, nationwide unemployment rose to a record 28.7%, up from 27.1% a year earlier, according to SARB. Unemployment averaged 25.2% from 2000 to 2018.

The country’s jobless rate is projected to jump to 35.3% this year, due to the coronavirus crisis, according to the International Monetary Fund (IMF).

“Just over one-third (36%) of firms indicated that they were laying off staff in the short term as a measure to cope with the COVID-19 pandemic,” said Stats SA in its COVID-19 business impact survey.

south africa gdp inflation

In March 2020, annual inflation slowed to 4.1%, from 4.6% in the previous month and 4.4% a year ago, based on figures from Stats SA.

Headline inflation is expected to average 3.6% this year, before accelerating to 4.5% in 2021, according to SARB.

Biggest stimulus aid unveiled, but public finances worsening

A fiscal stimulus package worth ZAR 500 billion (US$ 27.2 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.

This will weaken the country’s already strained public finances, according to Moody’s. The budget deficit is projected to surge to 13.5% of GDP this year, sharply up from 6.3% in 2019, and the biggest in South Africa’s history.

Likewise, the country’s debt burden is expected to rise sharply by 15 percentage points, to 84% of GDP in 2020, according to Moody’s.

South Africa unemployment

“The package is key to helping the country’s weakest households and enterprises to weather a period of lower revenue inflows amid the domestic lockdown in global trade,” Moody’s said. “However, the support measures are unlikely to prevent a sharp economic contraction this year.”

In March 2020, Moody’s downgraded South Africa’s sovereign credit rating to “junk” status, moving the grade down from Baa3 to Ba1 and maintaining a negative outlook. Both S&P and Fitch followed suit in April, sending the country’s credit rating further into non-investment grade territory.

Public frustration grows over Ramaphosa’s handling of economy

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 against his name, 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. Since 2014 he had been 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 and the seemingly slow implementation of reforms. Public frustration grew in December 2019 when the beleaguered power utility, Eskom, left South Africans facing the worst blackouts in the country’s history.

“A more decisive approach to reform is urgently needed,” said the International Monetary Fund in its November 2019 preliminary findings. “Expediting structural reform implementation is the only way to sustainably boost private investment and inclusion.”


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