South Africa’s house prices rising, amidst sluggish economic growth

January 29, 2015


South Africa house pricesSouth Africa’s house prices are now rising again, after six lacklustre years.

The house price index for medium-sized houses rose by 8.8% during the year to November 2014, according to ABSA. However when adjusted for inflation, the average house price increased only 2.8%. Yet this was an improvement on the 3.2% y-o-y rise in house prices (-2% decline in real terms) during the same period last year.

The house price index for small-sized houses rose by 11.4% (5.3% in real terms) y-o-y in November 2014. The large-sized houses index increased 6.2% (0.4% in real terms).
During the housing boom (from 2000 to 2006), house prices rose by an average of 20% annually. Riding on the back of an empowered middle class, house price rises peaked in October 2004 with 35.7% annual growth (32.5% in real terms). However in Q1 2008 the boom ground to a halt, following the global financial crisis.

  • In 2008, house prices fell by 0.5% (-9% in real terms)
  • In 2009, house prices rose 0.3% (-5.4% in real terms)
  • In 2010, house prices increased by 2.3% (-1% in real terms), encouraged by South Africa hosting the 19th FIFA World Cup
  • In 2011, house prices rose by just 1% (-5. 1% in real terms), due to lower economic growth, rising inflation, and political corruption concerns
  • In 2012, the housing market bounced back with house prices rising by 9% (3.2% in real terms)
  • In 2013, house prices rose by 3.9% (-1.3% in real terms)

In November 2014:

  • the average price of small homes (80-140 sq. m) was ZAR852,000 (US$73,710)
  • the average price of medium-sized homes (141-220 sq. m) was ZAR1,191,000 (US$103,038)
  • the average price of large homes (221-400 sq. m) was ZAR1,814,000 (US$156,937)

“In view of the…house price growth in the first eleven months of the year, nominal price growth of around 9% is forecast for the full year. The expectation is for house prices to rise by a nominal 7.5% in 2015, with real price growth to come in at about 2%,” says ABSA.

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.

South Africa´s economy was estimated to have grown by just 1.4% in 2014, after growth of 1.9% in 2013, 2.5% in 2012, 3.6% in 2011, and 3.1% in 2010, according to the IMF.

Will inflation prompt interest rate hikes, killing house-price appreciation?

The country´s inflation was 6.3% in 2014, up from 5.8% in 2013, 5.7% in 2012, 5% in 2011, and 4.3% in 2010, according to the IMF.  However inflation fell slightly to 5.8% in November 2014 from 5.9% in the previous month, according to Statistics South Africa.  As a result, the South African Reserve Bank (SARB), the country’s central bank, kept the repo rate unchanged at 5.75% in November 2014 — its last meeting for the year.

The central bank’s decision to hold rates stable was influenced by the slight downward in inflation, impacted by sharply lower international oil prices.

Prime and variable mortgage rates also remained stable at 9.25% in November 2014, up slightly from 9% in January 2014.

The repo rate was last increased in July 2014, amid concern over inflation. The SABOR (South African Benchmark Overnight Rate) stood at 5.67% in November 28, 2014, up from 4.83% during the same period last year.

Mortgage market expanding modestly

South Africa mortgages

Outstanding mortgages rose 3.4% by value in October 2014 from the same period last year, to about ZAR1.15 trillion (US$99.5 billion), according to SARB. Of which, 71.7% were household mortgages.

 “The household sector is expected to continue to experience some financial pressure over the next twelve months as interest rates are forecast to rise further during the course of 2015,” says ABSA. “As a result, growth in household credit, including mortgage advances, is forecast to remain largely subdued in the remainder of the year-end and in 2015,” added ABSA.

Looking back at the glory days

During the glory period from 2000 to 2006, South Africa’s housing market boomed, driven by 4 main factors:

  • The emergence of a financially stable black middle class had a tremendous impact on housing demand, encouraged by tax reliefs for individuals, 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 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$5.45 million) of housing finance to the low income market. Then in 2006, the CGT exemption on primary residences was raised from ZAR1 million (US$127,129) to ZAR1.5 million (US$190,694). Transfer duties on properties were lowered too. For example, no transfer duty is payable on properties valued at ZAR500, 000 (US$63,565) or less.

The subsequent slowdown of house prices in 2008 can be attributed to the full implementation of the National Credit Act in mid-2007, interest rate hikes, and to the global financial crisis.

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.

Foreign homebuyers boost the property market

south africa exchanges rates

Foreign homebuyers are a rising force in South Africa. During the first 11 months of 2014, foreigners bought about ZAR9.7 billion (US$867 million) of luxury properties in South Africa.  

The peaceful May elections played a role in maintaining foreign investor confidence.   The African National Congress led by Jacob Zuma again won an overwhelming majority.  Given the mixed reputation of the government this is maybe not great news, but at least the elections were peaceful.

In addition, the depreciation of the South African rand (ZAR) over the past two years has also made South African property more attractive. From an average exchange rate of US$1=ZAR7.5744 in March 2012, the South African rand has weakened against the US dollar to US$1=ZAR11.4764 in December 2014.

About 7% of land in South Africa is owned by foreigners, mostly from Europe. The number of buyers from countries such as Cameroon, Nigeria, Zimbabwe, Angola and Mozambique is also increasing significantly.

Residential building plans up, completions down

south africa residential construction

Residential building approvals rose by 13.4% to 43,350 units in the first three quarters of 2014, according to Statistics South Africa, with the biggest surge being for small houses measuring less than 80 sq. m. (up 19.7%), and flats and townhouses (up 15.6%).  The total area of residential plans approved rose 10.7%.

Yet residential completions dropped 13.3% by number, and 9.5% by area, in the first three quarters of 2014.

Sluggish economic growth, high unemployment

south africa gdp inflation

The current pace of growth will not be enough to reduce unemployment. South Africa had real GDP growth of just 1.4% in the third quarter of 2014, an improvement from the meager growth of 0.5% in Q2 2014 and a contraction of 1.6% in Q1 2014 but far lower than the robust 5.1% growth seen in Q4 2013, based on figures from Statistics South Africa.

In September 2014, unemployment stood at 25.4% (Statistics South Africa). From 2000 to 2012 average unemployment was persistently high, at 25%, according to the IMF.

To cut the high jobless rate to 14% by 2020, real GDP would need to grow an annual average of 5.4%, according to the government’s National Development Plan. However, this is unlikely to happen.

The South African economy was estimated to have grown by just 1.4% in 2014, after expanding by 1.9% in 2013, 2.5% in 2012, 3.6% in 2011, and 3.1% in 2010, according to the IMF. 

Average monthly nominal earnings increased 4.6% in May 2014 from a year earlier, to ZAR 15,169 (US$1,312). In contrast, monthly real earnings actually dropped 1.93% over the same period, to an average of ZAR6,874 (US$595). 

South Africa is Africa’s biggest economy, with an estimated population of 53.7 million and a GDP per capita of US$6,354 in 2014. 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.

Jacob Zuma – a worrying figure

ANC leader Jacob Zuma became president of South Africa in 2009, despite corruption charges. Zuma is an economic leftist who supports wealth redistribution, but has assured foreign investors that their interests will be protected. Corruption charges persist unabated. He has been more critical of Zimbabwe´s dictator Robert Mugabe than was his predecessor Thabo Mbeki. Zuma is a polygamist who has married 6 times and is reported to have 20 children, including one "love-child".

He has pledged to create 5 million jobs by 2020, but that target looks increasingly unrealistic.

Critics claim that Zuma is indecisive, appeases factions within the party, while safeguarding his own position. Yet African National Congress support seems only to fall slightly, and in the recent elections the A NC vote (65.9%) crushed the liberal Democratic Alliance (16.66%) and the newly-formed radical leftist Economic Freedom Fighters (6.35%).  

Populist measures are not out of the question. Zuma told a ruling-party rally in the northern town of Polokwane in January 2014 that foreigners might face restrictions on buying landed property, and be limited to leasing land. Foreigners can now own immovable property without restriction.

Land redistribution is an ongoing issue. Farmland is still mostly white-owned. Officials have signalled that large-scale expropriation is on the cards, with the government aiming to transfer 30% of farmland to black South Africans.

With the opposition Democratic Alliance somewhat gaining strength, the National Assembly has approved an information bill to “safeguard national security” (formal title: Protection of State Information Bill). The law is said by critics to pose a threat to freedom of speech. However in September 2013 President Zuma refused to sign the bill into law and instead sent it back to the National Assembly for reconsideration.


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