Focus article - Residential land in South Africa

Residential land in South Africa – Trends and developments (In a nutshell)

• Over the past few years since 2000, suitable vacant and fully-serviced land for residential development has become increasingly scarce in South Africa on the back of a range of demographic, economic, socio-economic and new housing construction factors.
• Population density, especially in the metropolitan areas, increased significantly over the past seven years, mainly driven by the process of urbanisation. Real economic growth of 4% per annum, coupled with higher levels of formal sector employment, low inflation and substantial personal tax relief, caused strong growth in real household disposable income between 2000 and 2006.
• The abovementioned factors led to a sharp escalation in new residential developments because of the strong demand for housing, which exacerbated urban sprawl and increased pressure on the availability of suitable vacant development land serviced with water, sewage, electricity and road infrastructure. This was especially the case in the country’s rapidly growing urban areas.
• These trends resulted in residential land values rising significantly, causing land to become less affordable, and the average stand size dropping to levels not seen in the past. It also caused an increase in the number of “brownfield” developments, subdivisions of large stands in older neighbourhoods, and higher-density housing developments such as multi-storey apartment buildings.

Recent house price trends

• The average price of affordable housing increased by a nominal 18,0% year-on-year (y/y) in the second quarter of 2007 (10,3% y/y in real terms).
• Nominal year-on-year price growth of 15,3% was recorded in middlesegment housing in the second quarter of the year, causing the average price of a house in this market segment to increase to about R919 000. In real terms, house price growth was 7,8% y/y in the second quarter.
• In the second quarter of 2007, house prices in the luxury segment of the market increased by a nominal 9,2% y/y and a real 2,1% y/y.

Outlook

• Inflationary pressures in the economy increased in recent months, with producer price inflation increasing to above 11% and CPIX inflation breaching the upper limit of the inflation target range in April and May this year – the first time since August 2003 that this has happened. In view of these inflation trends as well as wage settlement rates averaging above inflation in various sectors of the economy, the upward pressure on inflation is expected to continue in the short to medium term.
• Further interest rate hikes, together with the possible effect of the National Credit Act on credit extension, which will only be seen in relevant economic data released in coming months, may have a dampening effect on the residential property market towards the end of the year.
• Nominal house price growth of 13,3% (6,4% in real terms) is forecast for 2007, compared with a growth rate of 15,2% (10,1% in real terms) recorded in 2006.

Courtesy Jacques du Toit Senior Economist ABSA Bank

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