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Property in Cape Town - South Africa

In 1999 the average house price in SA was R218 000. Five years later, it is close to R500 000 and rising at 22,3% per year – according to the Absa House price index for March 2004.

There are so many different rumours and opinions about the future of the real estate market in SA that it is difficult for one to get the real facts. There are for instance people who see conspirancy theories about greedy capitalists manipulating the market and foreigners pushing prices out of the reach of locals. On the other hand there are banks being worried about a bubble that may burst.
And there are many owners selling their properties because they “heard” that prices are at their peak and will start falling when interest rates rise later this year.

But according to fundamental local and international data they are all wrong. It is expected that somewhere between 2008 and 2010 the average house price is likely to reach R1 000 000 – and that won’t be the end.

SA’s house prices are still the lowest in the world. An average two-bedroomed flat in London cost R6m last year; in Toronto it was R 2,4m; and in Madrid R2,7m. But it was only R360 000 in Johannesburg (see table below):

The Economist and Viruly Consulting in Financial Mail, April 16 2004

Some might argue that this is not the right comparison if you leave local purchasing power out of sight. But if we do so, the results are even more convincing.

PE Corporate Services SA in Financial Mail, April 16 2004 (All figures in SAR)

The latest PE Corporate Services survey shows that a marketing director in SA earns R670 000/year, compared with a belgian – R1.05m and a french – R940 000. The average Brussels two-bedroom flat, is at (US)$149 000 (R970 000), and is 92% of his salary. At R3m, the Parsian’s is 320%.

But the Johannesburger’s, at R360000 is just more than 52%.

These data also show that SA is the only country were executives of medium-sized companies have disposable incomes that 109% exceed their essential living costs, including housing.

Executive purchasing power in the compared countries is less that half of South Africans except Australia (70%). In summary, SA has higher absolute net disposable incomes than the Belgian, French, Dutch and US executives.

“The Financial Mail is unable to find a single indicator that does not show that South Africans have the means to go on pushing up prices for years. Home owners can even shrug off the forecast interest rate rises from the current 11,5%/year prime overdraft rate to a possible 13% early next year.”
(Financial Mail, April 16 2004, Pg 48)

There has been no relaxation in demands since warnings of interest rate increases started last year. This consistency of demand indicates the market has a long way to go.

But how long and how high will prices go?

Experts forsee an 8-year ralley lying ahead of us which won’t be strongly affected by the rand or rising interest rates. Some even see some positive effects coming from the possible Soccer-Worldcup in 2010.
If the property prices continue to rise at the current 20% plus annually, the average house price will be R1m by 2008. And it will still be the cheapest in the world!

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