At 1.2% y/y in 1Q19, the city thus experienced the slowest house price growth since the global financial crisis (end of 2009), and has recorded a second consecutive quarter of a real house price decline.

Using price-to-income ratio as a proxy we find that affordability had not yet improved in the city. If experience is anything to go by, then there is reason to believe that this ratio will soon normalise, which means there is scope for further downward price adjustments.

Normalisation continues in the City of Cape Town

We compiled a set of house price indices for the main sub-regions in the City of Cape Town, then aggregated these into an overall City of Cape Town Metro House Price Index. The 1Q19 data showed the city’s estimated average house price growth to have softened further to 1.2% y/y, from 3.2% in 4Q18. This marks the slowest growth rate since the end of 2009 (end of global financial crisis), and is the second consecutive quarter of a real house price decline (i.e. below inflation growth). We read this as a continuation of the normalisation process, to align prices with economic fundamentals in the region.

Can we expect more downward adjustment?

To help answer this, we estimate the ratio of average purchase price in Cape Town to average household income (gross income) in the Western Cape (price-to-income ratio) as a proxy for affordability in the city. As expected, the ratio had been rising since 2012 and reached 6.6 by 2018, the highest it has ever been in the period for which we have data (since 2000). This means the average priced house in Cape Town was roughly 6.6 times the average household income in the province. Furthermore, the fact that the trend is upwards means that affordability had not really improved by the end of 2018, despite slowing growth in prices since 2Q16. We note, however, that the rate at which affordability was deteriorating slowed as a result.

In the previous housing market cycle, the ratio peaked at 6.2 in 2007, then gradually declined until 2012. Over this five-year normalisation period, prices in the city declined by an average 3% y/y between 3Q08 and 3Q09. If this experience is anything to go by, and assuming that prices and income will converge at some point, then there is reason expensive sub-region in the City of Cape Town Metro, the Atlantic Seaboard, has seen its average house price growth plunge from a multi-year high of 25.5% y/y in 1Q16 to an all-time low of -5.1% by 1Q19. The sub-region was the first to slide into contraction, with -0.08% y/y growth in 3Q18. 

The deflation appears to have spilled over to the rest of the regions near Table Mountain.

The deflation appears to have spilled over to the rest of the regions near Table Mountain. The City Bowl, the economic hub of the region, slid deeper into contraction in 1Q19, registering -2.0% y/y from a mild contraction of 0.2% in the previous quarter. The Southern Suburbs(incorporating suburbs such as Claremont, Newlands and Observatory) followed suit and contracted by 2.4% y/y in 1Q19, from a peak of 15.4% y/y in mid-2015. In the same vein, the Eastern Suburbs (incorporating suburbs such as Woodstock, Maitland and Pinelands), which for some time held up better than the rest of the regions surrounding Table Mountain, declined by 4.2% y/y in 1Q19.

Middle priced sub-regions still holding better

Moving down the price ladder and away from the mountain, sub-regions in the Northern Suburbs (generally in the middle of the price spectrum) are holding up relatively better, but showing a sharp deceleration in house price growth. For some time, these regions were perceived as offering more affordable housing opportunities, as affordability deteriorated rapidly nearer the mountain. Ultimately, prices overshot and completely counteracted their initial attractiveness. Unsurprisingly, as demand slowed, price growth slowed. To this end, the Western Seaboard sub-region registered 1.8% y/y in 1Q19 from 3.8% y/y in 4Q18, the and Surroundings (including Goodwood) and Durbanville-Kraaifontein-Brackenfell sub-regions slowed to 4.0% and 2.9% y/y from 6.1% y/y and 4.2% respectively.

Lower priced regions holding the fort

The more affordable sub-regions in the city, which incorporate township areas, are performing well above the city’s average and remain in the double digits. The Cape Flats region has held relatively steady around the 12% mark over the past year, although it retreated to 11.3% y/y in 1Q19 from 12.1% in 4Q18. Elsewhere, while growth has been cooling in the Elsies River/Blue Downs/Macassar region over the past year or so, it now appears to be stabilising around the 10% y/y mark and is the only region that did not experience slowing prices in 1Q19. Average house price growth ticked up to 10.5% y/y in 1Q19, from 10.1% in 4Q18.

In conclusion

Our 1Q19 City of Cape Town Sub-Regional House Price Indices showed that most subregions are experiencing slowing house price growth, with the most expensive regions now experiencing house price deflation following years of strong affordability deterioration. We find that affordability has not improved sufficiently in the region, despite a sharp deceleration in house price growth over the past 18 months or so. This suggests there is scope for further downward adjustment in Cape Town house prices, and a nominal decline in prices is conceivable at this point.