South Africa's housing market weakens after FIFA World Cup

August 08, 2011


The average price for mid-sized houses in South Africa rose 0.23% during the year to Q2 2011. When adjusted for inflation, prices actually dropped 4.65%.  The property market started to weaken after the 19th FIFA World Cup, held in South Africa from June to July 2010.

The average price of medium-sized houses rose slightly by 0.72% during Q2 (but fell -0.65% in real terms) to ZAR973,400 (US$141,553), according to ABSA, one of South Africa’s largest financial services companies.

ABSA forecasts that house prices will rise slightly in 2011 and 2012, but the small rise in fact means a fall when adjusted for inflation (see latest ABSA Housing Review (Q3 2011)). 

“The (property) market is moving slowly and prices are under pressure, but there is still activity,” said Samuel Seeff of Seeff Property Services.

South Africa enjoyed astonishing house price increases during the years 2000 to 2007 (with house price rises of 253.7%). The boom ended in Q1 2008, after the global financial crisis. But house prices were quick to recover as the Reserve Bank cut interest rates twelve times beginning in December 2008, to 6% in September 2009. By early 2010 house prices were surging again, encouraged by South Africa hosting the World Cup. Property price growth has since slowed, together with the waning of football fever.

From January to May 2011, new housing approvals were up 1.7% on the same period last year, to 19,603 units. But building completions fell 0.8%.

The South African economy grew by a modest 2.8% 2010, after experiencing a 1.7% contraction in 2009. The economy is projected to grow by around 3.5% in 2011. However, the old problem of high unemployment continues to pose a challenge. The unemployment rate was 24.8% in 2010, from 24.3% in 2009 and 21.9% in 2008.

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

Fundamentals at work

Four main forces have been driving South African house prices up. The first was emergence of a financially stable black middle class. Since the end of Apartheid, blacks have found new opportunities and new financial strength. This development has had a tremendous impact on housing demand and the economy.

The strong growth of households’ real disposable income was 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 raised from ZAR1 million (US$127,129) to ZAR1.5million (US$190,694). Transfer duties on properties have been lowered too. For example, no transfer duty is payable on properties valued at ZAR500, 000 (US$63,565) or less.

The second factor was 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 have helped. 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 was reflected in rising business confidence indicators, and in the significant strengthening of the South African rand.

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.

From ZAR 332 billion (US$ 43.1 million) in 2003, the value of total mortgage extended to the domestic private sector has grown to ZAR 853 billion (US$ 110.8 million) in 2007.

Housing market slowdown

The recent slowdown of house price growth can be attributed to two factors - namely, the full implementation of the National Credit Act, and interest rate hikes.

The National Credit Act aims to protect borrowers from over-indebtedness. It requires lenders to disclose every term in the contract. It also limits the amount of funds that can be borrowed. Furthermore, the Act gives the borrowers the right to request their credit report, and to challenge the report if there are inaccuracies. Lastly, the law requires every lender to assess borrowers’ credit-worthiness. The act has tended to reduce the supply of mortgage loans.

In line with global trends, surging oil and food prices have led to increased inflationary pressures since 2006, with inflation reaching 11.1% in April 2008. This is higher than the inflation rate in previous years - 7.1% in 2007 and 4.7% in 2006.

Interest rate hikes were implemented to quell inflationary pressure. Mortgage rates on new loans have risen to 15% in May 2008 from its historical low of 10.5%, in effect from May 2005 to May 2006. Concurrently, the growth of mortgage advances has slowed. From an annual average growth of 30% in April of 2006, annual mortgage loan growth has fallen to 22% in April 2008.


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