The Western Cape residential property sector appears to have outperformed the national residential market, having recorded average house price inflation of 13.8% year-on-year for the 2nd quarter of 2010. This rate is a further acceleration from the 8.7% achieved in the 1st quarter.
The best performing price segment has been the so-called affordable segment. The Affordable Areas House Price Index, with an average price of R396,932, showed estimated year-on-year price inflation of 18.2% in the 2nd quarter. By comparison, the Middle Income Area grouping (average price=R817,478) inflated by 14.5%, the High Income Area Index (average price=R1,233,840) rose by 10.7%, while the so-called Top End grouping (average price=R1,820,104) had the weakest inflation rate at 7.7%. However, examining growth rates in house prices on a quarter-on-quarter basis, it would appear that the province's market is losing growth momentum, and the 2nd half of 2010 is expected to bring slowing price inflation back into single-digit year-on-year rates. Indeed, the FNB Estate Agent Survey for the 2nd quarter has already indicated a slowing in demand activity, with the average demand activity rating (on a scale of 1 to 10) by a sample of agents having declined from 6.75 in the 1st quarter to 5.71 in the 2nd quarter. The estimated average time of a property on the market rose sharply from 10 weeks and 1 day in the 1st quarter to 16 weeks and 4 days in the 2nd quarter, while the percentage of sellers being required to drop their asking price also rose. The FNB Estate Agent Survey for the Western Cape also continues to show how fragile the household situation is, with 15.5% of total sellers still being those downscaling due to financial pressure. Although this percentage has improved, it remains high. In addition, the survey points to a very weak buy-to-let and holiday buying market, further reflection of high degrees of financial pressure, which puts non-essential property buying on the backburner. We have anticipated a residential slowdown from around mid-2010 for a while, with the SARB Leading Business Cycle Indicator having pointed to a national economic slowdown in recent times, while there has been a lack of interest rate stimulus since August 2009, and the positive effect of the big rate cuts of 2009 must surely be wearing thin on the residential market by now. While the FirstRand base case is for a mild slowdown in economic growth, but positive growth nevertheless continuing, we nevertheless believe that the risk of a so-called "double-dip" recession remains high, given the vulnerability of some highly-indebted developed economies as well as a high level of indebtedness in our own household sector. This implies that, at best, we see house price inflation continuing in the coming years, but receding back into single-digit territory towards 2011. This scenario would, however, assume no recession. Given the fragile nature of our household sector, due to having made little progress in reducing its high debt-todisposable income ratio, along with an already unbalanced (demand versus supply) residential market, we believe that any recessionary conditions would bring about another bout of house price decline in the region. On the commercial property side, we have yet to see any visible signs of slowdown in the market, after the recent min-recovery, either at a national or Western Cape level. Cap rates have declined mildly in recent quarters, and vacancy rates have also turned the corner for the better, according to FNB's Commercial Property Indices. However, the commercial sector follows a cycle not too dissimilar from that of the residential market, and we would expect a slowing economy to have the same cooling effect on this segment of the Western Cape market too.