MAIN IMAGE: John Loos – independent economist
Senior writer
Over-valued. Speculative. Unsustainable. Distorted. These are the words that are being used in conversations about the Western Cape property market, and all are synonymous with a property bubble. But all is not as it seems, says John Loos, independent well-being and property economist.
“Understand first that a ‘true’ property bubble is typically characterised by rapid, speculative price growth, often far removed from underlying fundamentals, be that the interest rate, supply-and-demand, semigration, foreign buyer activity, etc. Let’s put this in perspective…
“South Africa experienced such speculative price growth in the lead-up to the 2008 financial crisis, when national house price inflation surged to between 25% and 30% annually. Today’s market looks very different for the Western Cape. It is currently growing at around 9% to 10%, which is nowhere near the levels we saw pre-2008,” explains Loos. “At those levels, the conditions required for speculative excess simply aren’t as pronounced.”
The Western Cape is, therefore, not experiencing a broad-based speculative bubble akin to 2008; however, certain high-demand nodes may exhibit signs of localised overheating. “For the Western Cape as a whole, I doubt it’s unsustainably inflated,” says Loos. “But it is possible that certain parts, like the Atlantic Seaboard or City Bowl, could get ahead of themselves, where foreign buying, semigration, and short-term rental demand have combined to drive pricing beyond the reach of many local buyers.
“At some point, all markets slow. The key is that this one hasn’t reached the extremes of past bubbles.”
So what would actually create a property bubble?
Loos identifies three primary drivers:
1. Short-term speculation
“You need strong short-term speculative activity to create a bubble. At current growth rates, it’s difficult to speculate profitably and widely, especially with interest rates above 10%.”
2. Buyer panic (and FOMO)
“In the pre-2008 boom, there was a real fear—‘buy now or be priced out forever.’ That drove prices too far.”
3. The unseasoned investor
“These are investors who chase recent price growth and ignore weakening rental yields. They often enter at the peak of the cycle.”
Loos suspects there will be some of these activities in the Western Cape market, “but I don’t feel that it is at extreme levels on a province-wide basis.”
Counterbalance: Affordability
Affordability acts as a balancing force in moderating property cycles. Many commentators are hinting that South Africa’s property market no longer appears to be moving in a single direction. Instead, it is fragmenting—geographically (semigration), economically (income and job opportunities), and psychologically (lifestyle choice), all of which can inflate property values.
“At some point, affordability takes its toll,” says Loos. “It doesn’t necessarily cause prices to fall, but it slows the pace of growth. As prices rise, demand begins to shift geographically rather than disappearing altogether.
“Semigration from inland to coast doesn’t necessarily stop; rather, it spreads out and perhaps slows down,” he explains. “This is evident in the growing appeal of alternative coastal regions, including the Southern Cape, parts of the West Coast, and even sections of the Eastern Cape. These areas are benefiting from the same lifestyle-driven demand, but at more accessible price points.”
This may also benefit regions like KZN, which, says Myles Wakefield, CEO of Wakefields Real Estate, is gaining an almost ‘silent’ grip over other more dominant regions from an affordability perspective.
“There is a growing sense that affordability pressures in the Western Cape are redirecting attention towards KZN. Whilst the Western Cape is appealing on many levels, its high residential home pricing is not feasible for many. That’s where KZN starts to make a lot of sense,” explains Wakefield. He mentions that investor activity in KZN has more than doubled, from around 5% of buyers to 12% in the past year.
“This upward trend signals growing confidence in the province, which, if you factor in the strong rental demand, is creating many opportunities for buy-to-let investors.
“Right now you can still get good value in KZN’s residential space. How long that will last is anybody’s guess given macroeconomic factors like higher cost-of-living increases, inflation, and the interest rate. I am certain though, that even those factors make a case for choosing KZN as the perfect property investment destination.”
National drivers
Despite regional differences in house growth rates and levels, Loos reminds us that South Africa’s regional economies, and thus their property markets, remain highly integrated. “You still have the same interest rate policy, the same currency, and many centralised economic and other policies. While you can have very different price levels between and within regions, this does not necessarily mean each has different cycles. So the Western Cape may be outperforming right now, but it does not operate in isolation.”
Market correction
While it is true that Western Cape locals are experiencing difficulties in securing long-term rentals, the reality is that pricing certain people out of certain markets is not unique to Cape Town. “It happens everywhere,” says Loos. “The majority of people are priced out of premium areas in any city, be that Sandton or Cape Town. The difference is that it is more acute in the City Bowl and Atlantic Seaboard, but it’s not unique.”
Timing a correction is difficult, though. “We’re notoriously bad at predicting turning points, and price growth often slows, but it does not necessarily turn negative. Growth in the Western Cape is currently above the national average for a while but could normalise over the next year or two.”
