Cape Town’s Residential Property Market Size, Activity, Performance Funded by A deliverable of Contract 7174693 Submitted to the World Bank By the Centre for Affordable Housing Finance in Africa January 2018 Acknowledgements This report was prepared by the Centre for Affordable Housing in Africa, for the World Bank as part of its technical assistance programme to the Cities Support Programme of the South African National Treasury. The project team wishes to acknowledge the assistance of City of Cape Town officials who contributed generously of their time and knowledge to enable this work. Specifically, we are grateful to the engagement of Catherine Stone (Director: Spatial planning and urban design), Claus Rabe (Metropolitan Spatial Planning), Peter Ahmad (Manager: City Growth Management), Louise Muller (Director: Valuations), Llewellyn Louw (Head: Valuations Process & Methodology) and Emeraan Ishmail (Manager: Valuations Data & Business Systems). We also wish to acknowledge Tracy Jooste (Director of Policy and Research) and Paul Whelan (Directorate of Policy and Research), both of the Western Cape Department of Human Settlements; Yasmin Coovadia, Seth Maqetuka, and David Savage of National Treasury; and Yan Zhang, Simon Walley and Qingyun Shen of the World Bank; and independent consultants, Marja Hoek-Smit and Claude Taffin who all provided valuable comments. Project Team: Kecia Rust Alfred Namponya Adelaide Steedley Kgomotso Tolamo Aqua Suliali Illana Melzer Cape Town’s Residential Property Market: January 2018 2 Cape Town’s Residential Property Market Size, Activity, Performance ACKNOWLEDGEMENTS ................................................................................................................ 2 FOREWORD ................................................................................................................................. 6 EXECUTIVE SUMMARY ................................................................................................................. 7 1 INTRODUCTION ................................................................................................................. 11 2 THE HOUSING MARKET – AN ANALYTICAL FRAMEWORK ..................................................... 12 2.1 THE HOUSING ASSET ................................................................................................................ 13 2.2 PROPERTY MARKET FILTERING ................................................................................................... 16 2.3 SEGMENTING THE HOUSING MARKET .......................................................................................... 20 3 CAPE TOWN’S RESIDENTIAL PROPERTY MARKET ................................................................. 22 3.1 MARKET SIZE AND VALUE .......................................................................................................... 22 3.2 MARKET ACTIVITY .................................................................................................................... 30 3.2.1 Supply of new housing as seen on the deeds registry ..................................................... 30 3.2.2 Resale market activity ..................................................................................................... 33 3.2.3 Lending activity ............................................................................................................... 37 3.2.4 Housing prices ................................................................................................................. 38 4 PROPERTY MARKET PERFORMANCE IN CAPE TOWN ........................................................... 40 4.1 HOUSING AFFORDABILITY AND ACCESS ........................................................................................ 43 4.2 ECONOMIC AND SPATIAL TRANSFORMATION ................................................................................. 48 4.2.1 Economic Transformation ............................................................................................... 48 4.2.2 Spatial Transformation.................................................................................................... 52 4.3 SUSTAINABLE HUMAN SETTLEMENTS........................................................................................... 57 4.4 MARKET RESPONSIVENESS ......................................................................................................... 59 4.5 TARGETED MARKET PERFORMANCE ............................................................................................. 61 4.5.1 Voortrekker Corridor ....................................................................................................... 62 4.5.2 Metro South-East Integration Zone................................................................................. 63 5 CAPE TOWN BY COMPARISON: HIGH LEVEL VIEW ............................................................... 64 6 BUILDING AN INCLUSIVE RESIDENTIAL PROPERTY MARKET IN CAPE TOWN ......................... 69 6.1 GROWING CAPE TOWN’S RATES BASE .......................................................................................... 70 6.2 CREATING OPPORTUNITIES FOR INCLUSIVE HOUSING AND DEALING WITH GENTRIFICATION .................... 71 6.3 UNDERSTANDING AND WORKING WITH INFORMALITY ..................................................................... 72 6.4 CONSIDERING THE DYNAMICS AND POTENTIAL OF THE RENTAL MARKET ............................................. 74 6.5 REALISING PRIORITIES WITH DATA-SUPPORTED DEVELOPMENT DECISIONS .......................................... 75 7 METHODOLOGY ................................................................................................................. 76 7.1 MARKET SIZE AND VALUE ........................................................................................................... 77 7.2 MARKET ACTIVITY .................................................................................................................... 79 7.3 MARKET PERFORMANCE ............................................................................................................ 81 Cape Town’s Residential Property Market: January 2018 3 Tables Table 1 Total Residential Properties by property type, Cape Town, 2015 .............................................................................. 26 Table 2 Total repeat transactions: all and government sponsored ........................................................................................ 35 Table 3 Churn by property type, Cape Town 2010-2015 ........................................................................................................ 36 Table 4 Cape Town population income distribution ................................................................................................................ 43 Table 5 Churn rates by market segment, Cape Town 2010-2015 ............................................................................................ 46 Table 6 Freehold Suburb Metrics, Cape Town 2012, 2015 ..................................................................................................... 54 Table 7 Sectional Title Suburb Metrics, Cape Town 2012, 2015 ............................................................................................. 54 Table 8 RDP Suburb Metrics, Cape Town 2012, 2015 ............................................................................................................. 54 Table 9 Churn rates in high performing suburbs, Cape Town 2015 ........................................................................................ 55 Table 10 Suburbs with mortgaged financed transactions under R300 000, Cape Town 2015 ................................................ 56 Table 11 Key residential market indicators: properties, transactions and bonds, all metros, 2015 ....................................... 66 Table 12 Indicators used to consider Market Size & Value ..................................................................................................... 78 Table 13 Indicators used to consider market activity ............................................................................................................. 79 Table 14 Indicators used to consider market performance .................................................................................................... 81 Figures Figure 1 The Housing Asset ..................................................................................................................................................... 14 Figure 2 Pools and flows to enable property market filtering ................................................................................................ 17 Figure 3 Blocked pools and flows undermine property market filtering ................................................................................ 18 Figure 4 A Property Ladder in Cape Town............................................................................................................................... 19 Figure 5 Distribution of residential property in Cape Town by number and value, 2015 ....................................................... 23 Figure 6 Cape Town's most and least expensive suburbs ....................................................................................................... 23 Figure 7 Distribution of residential properties by market segment, Cape Town 2015 ........................................................... 24 Figure 8 Neighbourhoods with higher levels of property value diversity, Cape Town 2015................................................... 25 Figure 9 Number of properties with an outstanding mortgage, Cape Town, 2015 ................................................................ 27 Figure 10 Cape Town's informal settlements, Code4SA ......................................................................................................... 28 Figure 12 Estimated market values for shacks not in backyards, NIDS, Wave 4 data ............................................................. 29 Figure 11 Distribution of government-sponsored properties, and informal settlements, Cape Town, 2015 ......................... 29 Figure 13 Percent change in total residential properties since 2010, Cape Town, 2015 ........................................................ 30 Figure 14 Percent change in total residential properties since 2010, by property type: Freehold, estate & sectional title ... 31 Figure 15 Number of new transactions, properties above R300 000, by property type: Freehold, estate & sectional title, Cape Town..................................................................................................................................................................... 31 Figure 16 New registrations of government-sponsored properties, Cape Town 2010-2015 .................................................. 32 Figure 17 Total repeat transactions and repeat bonded transactions, Cape Town 2010-2015 .............................................. 34 Figure 18 Government sponsored properties resale transactions, financed with a mortgage, Cape Town 2010-2015 ......... 35 Figure 19 Government sponsored resale transactions, Cape Town 2010-2015 ...................................................................... 35 Figure 20 Transactions financed with a mortgage: number and value by lender, Cape Town 2010-2015 ............................. 36 Figure 21 Total mortgage loans: number by lender, 2007-2015............................................................................................. 37 Figure 22 Percent bonded transactions, Cape town 2015 ...................................................................................................... 38 Figure 23 Aggregate House Price index by market quartiles: Freehold properties (excluding RDP) by quarter ..................... 39 Figure 24 Aggregate House Price Index by market quartiles: Sectional Title by quarter ........................................................ 39 Figure 25 Key performance indicators, all residential properties: Cape Town, 2010-2015 .................................................... 41 Figure 26 Key performance indicators, properties under R600 000, Cape Town 2010-2015 ................................................. 42 Figure 27 New and repeat transactions by market segment, Cape Town 2010-2015 ............................................................ 45 Figure 28 Number of transactions financed with a mortgage bond, Cape Town, 2007-2015 ................................................ 47 Figure 29 Government-sponsored properties by market segment: value, Cape Town 2015 ................................................. 48 Figure 30 Percent resale transactions of government-sponsored properties financed with a mortgage, Cape Town 2010- 2015 .............................................................................................................................................................................. 48 Figure 31 Number of bonded transactions to government-sponsored properties. Cape Town 2007-2015, by lender, by market segment ............................................................................................................................................................ 49 Figure 32 Value of bonded transactions to government-sponsored properties. Cape Town 2007-2015, by lender, by market segment ............................................................................................................................................................ 50 Figure 33 Average price of resale transactions for government sponsored properties, Cape Town 2007-2015, by market segment, with and without a mortgage ........................................................................................................................ 50 Figure 34 Estimated monthly rentals for shacks not in backyards, NIDS, Wave 4 data (entire country) ............................... 51 Figure 35 Rental yields on shacks not in backyards, NIDS, Wave 4 data (entire country) ...................................................... 52 Figure 36 Percent change in total value, Cape Town, 2012-2015 ........................................................................................... 53 Cape Town’s Residential Property Market: January 2018 4 Figure 37 Total residential properties by market segment, Cape Town valuations data 2015 ............................................... 58 Figure 38 Building permit plans approved and completed, Cape Town 2012-June 2015 ....................................................... 60 Figure 39 Building permits completed: Value, City of Cape Town 2012-June 2015, by region ............................................... 61 Figure 40 Location of the Strategic Zones in Cape Town ........................................................................................................ 61 Figure 41 Key Performance Indicators, Targeted Zones in Cape Town 2010-2015................................................................. 62 Figure 42 Average price of resale transactions per year, Voortrekker Corridor, by market segment, with and without a mortgage, 2007-2015 .................................................................................................................................................... 63 Figure 43 Average price of resale transactions by year, Metro South East Integration Zone, with and without a mortgage, 2007-2015 ..................................................................................................................................................................... 64 Figure 44 Market size: households and properties, all metros, 2015 ..................................................................................... 65 Figure 45 Total new & repeat transactions, all properties, all metros 2015 ........................................................................... 66 Figure 46 Total new & repeat transactions, properties under R600 000, all metros 2015 ..................................................... 67 Figure 47 Total number of mortgaged financed transactions by lender, all metros, 2007-2015............................................ 67 Figure 48 Total value of mortgage financed transactions by lender, all metros, 2007-2015 .................................................. 68 Cape Town’s Residential Property Market: January 2018 5 Foreword Cape Town’s residential property market is a major asset for the city. At the end of 2015, Cape Town’s 703 8011 residential properties were worth R807 billion. The bulk of this value (77%) was held by property owners of houses worth more than R1,2m: one third of the properties in Cape Town at the end of 2015 represented just over three-quarters of the value. The ratio is reversed for the property owners of the city’s lowest value properties. In this case, properties worth less than R300 000 comprised about a third of total stock, but only 3% of total value. This imbalance is a major challenge for city government as we work to build inclusive property markets that serve all our residents and the city as a whole. Our city is fortunate to have a vibrant and well-functioning luxury property market, and significant land values that make it one of the most sought-after property markets in the country. And yet, this market serves only a small proportion of our population, and creates very real challenges in terms of our goals for housing affordability and inclusive growth. We would like to extend our locational benefits – the value that our sea and mountains create - to all of our residents, so that we not only achieve our constitutional obligation to ensure access to adequate housing on a progressive basis, but also leverage the value of the property asset for the benefit of all our residents, and to support our goals for economic and spatial transformation. This report sets out our current analysis of housing market dynamics in Cape Town, and draws on data and analysis provided by the Centre for Affordable Housing Finance in Africa, as well as our own data from the City of Cape Town. The report explores the size, activity and performance of Cape Town’s residential property market, on a segmented basis, highlighting areas of opportunity, points of challenge, and options for maximizing the performance of housing for the benefit of all residents, wherever they live in our city. The breadth of analysis possible is extensive – this report is a first step, an introduction, to Cape Town’s residential property market. Over time, we will continue to track the metrics set out in this report – and develop new ones – to monitor and guide the interventions that we make towards creating a city that is sustainable and inclusive, with a well-performing property market that meets the needs of all of its residents. As we move forward, our ability to track and monitor property market performance across all of our properties, from the highest to the lowest value, including both formal and informal market activity, ownership and rental, will enhance our ability as a city to provide support. This is a fundamental role of municipal government: to support the productive performance of the housing asset for both individual households and the society at large, so that the homes we live in contribute substantially to the breadth of our goals for our democracy and growth as a city and its residents. Understanding what is going on, and for whom different aspects of the market are working or are under performing, is the first step. 1 These figures are derived from municipal valuations property records, and thus by definition do not include unregistered informal settlements or unregistered backyard dwelling units. Cape Town’s Residential Property Market: January 2018 6 Executive Summary Cape Town’s residential property market comprises 703 801 properties 2 , spread across 770 neighbourhoods (also known as sub-places), with prices ranging from as much as R25 million and higher, to as little as no value at all. In 2015, the total value of the entire residential property market was estimated to be R807,5 billion. Owned primarily by individual households, this represents a significant component of household wealth in the city. While the City is best known for its luxury property market, almost half (47%) of the entire residential property market is ‘affordable’. This includes the 329 319 properties valued at less than R600 000 and serving many first-time homeowners. Within this market segment, it looks like there are 191 887 government-sponsored properties that were allocated to qualifying beneficiaries since 1994. These might include old township stock built before 1994 but transferred to residents as part of the Discount Benefit Scheme in the mid-1990’s, as well as RDP and later BNG houses delivered as part of the national housing subsidy programme. They might also include properties that began as serviced sites through the Integrated Serviced Land Project, or earlier, through the IDT’s subsidized housing programme in the very early 1990’s, that later were awarded consolidation subsidies. Cape Town’s valuations roll has recognized 82 009 RDP properties, and the Housing Subsidy System database retained by the Western Cape Department of Human Settlements has recorded 109 249 RDP properties. The potential for property appreciation in this market is significant, especially given overall property market dynamics in Cape Town. In addition to the 703 801 residential properties that comprise Cape Town’s property market, the 2011 Census identified 143 823 households (13% of the city’s household population) living in informal structures in 216 informal settlements. Many of these properties are not recognised on the deeds registry or on the valuations roll. 2011 was a slight improvement on 2001 when 14,5% of households lived in informal houses in informal settlements – however, it has been suggested that an additional 97 settlements were not included in the Census count. The percentage of informal dwellings in settlements in the City has increased, from between 31-40% in 2001 to between 41-50% in 2011. Between the Census 2011 and 2013, it is estimated that the number of informal settlements has grown by a further 23 settlements. The 2011 Census estimated that 74 800 households (7% of the population, up from 4,3% in 2001) live in backyard shacks, including about 45 000 who live in backyard dwellings on council property. On the whole, Cape Town’s property market has been growing steadily, with a moderate rise in average property values and in transaction prices every year. Transaction prices (the prices that are achieved in sales) have been slightly higher than property values (the estimated value of properties based on trends), suggesting that demand is pushing prices up above actual values, and indicating an opportunity for more supply (on the other hand, it could also suggest that valuations are incorrect). The number of transactions has risen very gradually, with 32 000 transactions in 2010 to about 37 700 transactions in 2015, with a brief dip in 2011 and 2012. The majority of these transactions have been in the resale market; new build has been dominated by the delivery of government subsidized housing. A key challenge, however, is that the rate of new build has not matched the population growth rate – 2 These figures are derived from municipal valuations property records, and thus by definition do not include unregistered informal settlements or unregistered backyard dwelling units. Cape Town’s Residential Property Market: January 2018 7 suggesting a growing rather than declining housing backlog. Lender participation as a proportion of total transactions has also been relatively consistent overall: about half of all transactions have been financed with a mortgage. This has contributed to the relatively stable (albeit insufficient) delivery of new housing and annual turnover (or churn) of existing housing. Cape Town’s property market dynamics present City management with a set of challenges that are complex and diverse. The various segments that comprise Cape Town’s property market perform differently, in some cases for the benefit of residents, and in others exacerbating inequality. In some areas, informal transactions, and informal housing activity more broadly, is significant, and may well be crowding out formal markets, norms and mechanisms. In these areas, the available data indicates that markets underperform, with low rates of churn and properties trading below replacement cost, some informally. This reflects a context in which households struggle to access and navigate administrative systems to access funding, obtain information and transact formally. This discount of market value on replacement cost itself reflects poor governance, with high crime and poor connectivity. Often city management is limited, and competes with alternative governance structures. Secured lending is minimal, as lenders avoid additional risks - both financial and reputational – of operating in these areas. At the other extreme, some property market activity appears irrationally exuberant, with buyer participation quite possibly encouraged by a belief that prices will continue to rise indefinitely. While data reflected in this report captures the market until the end of 2015, there has been visible activity since then that suggests substantial development activity in high value areas, with properties subdividing or sectionalizing. While this may be positive in the sense that it densifies key areas and contributes to the city’s growing rates base, it should be monitored closely to ensure that the city is not inadvertently encouraging a speculative bubble. To add to this there are some well-located areas that have historically underperformed, that are now beginning to correct. As they do, affordability is constrained, and some households are displaced, leading to social and political instability. The question of gentrification and displacement is a key issue for attention. The overall goal for building an inclusive residential property market in Cape Town suggests five broad areas of attention for the city: 1. Growing Cape Town’s rates base: This would involve exploring how the city levies rates on residential properties and reconsidering how certain properties are exempted from paying property tax. Beyond this, it is recommended that the city grow its rates base through various ‘value creation’ measures that stimulate property market growth at the local level. On the one hand, property prices reflect underlying supply conditions, which the City can influence through the management of its development controls. Increasing prices might indicate limitations in the supply zoned or serviced land. On the other hand, prices will reflect the success or failure of city- led strategies designed to make some areas more habitable or to improve the quality of life of residents. The simple implementation of development controls in support of quality home improvements can also have an important impact. The city must also be awake to the risk of a property bubble and the impact this has on housing affordability and access. The city should monitor its property market to identify areas that are under- or over-performing in terms of value, and actively support targeted household investments or value capture on these particular metrics. Cape Town’s Residential Property Market: January 2018 8 The key goal for City management must be to see Cape Town’s property market as a single property market, with high and low values that all have investment potential and worth. The rates policy itself can assist in shifting the approach in this way – by focusing on the twin goals of maximizing both financial and social value of the housing asset and using the strengths of one to support the growth of the other. 2. Creating opportunities for inclusive housing and dealing with gentrification: The city needs to better understand demand for and investment interest in housing across the income and property spectrum, in order to understand how it might support inclusive housing and protect lower income households from displacement. This report provides a first step, but there is much more analysis that could be done, and the depth of analysis could be much richer with the City’s own data that captures behaviour such as the usage of infrastructure services, and household investment. With an understanding of areas at risk of displacement, for example, the analysis can then dig deep into local area dynamics and seek opportunities on the boundary. Understanding housing market dynamics would also put the city in a position to address the second challenge – ensuring that the breadth of supply matches the diversity of demand in the various market segments that together comprise the city’s population. Towards this goal, the city could identify specific land parcels with a strong social value that might not have yet been noticed by the private market; or from its own portfolio, those land parcels that should be protected into the future. Gentrification is feared because it appears to be about a curtailing of opportunity, as wealth squeezes out the poor and neighbourhoods homogenize around class. Cities can use their own development levers, however, to stimulate and broaden opportunity in those very same places – if they know where the deficit lies, and if they know how to capture land values for the benefit of their target. 3. Understanding and working with informality: Informal market activity is often an expression of formal systems not working as the market requires. The city should explore strategies to improve household compliance with requirements regarding planning approval. Access to simple building plans and active support of in situ home improvements, through expedited and supported development approvals would also contribute to households own efforts to improve their housing situations. Similarly, given that informal transactions effectively remove housing assets from the pool of formal, titled properties in the City and undermine the performance of the property market in many areas in which the State has invested significantly, it should be a matter worthy of urgent attention by City management. 4. Considering the dynamics and potential of the rental market: Special attention should be given to exploring the existence, functioning and potential of the rental market, not limited to social housing, but also including privately provided rental, both formal and informal. By understanding this breadth and how it functions, and applying its various development levers, Cape Town can influence the rental sector and how it meets this diversity of demand, and the extent of private investment that it attracts. In the immediate term, the city should consider which of its datasets offer an indication of rental activity, such as building permits data, utility hookups and account information for distribution of units and usage. A focused analysis on the supply of and demand for rental in the city, with particular attention on certain nodes, would be very useful. Cape Town’s Residential Property Market: January 2018 9 5. Realising priorities with data-supported development decisions: A key aspect of a city’s ability to track the property market is its ability to count it. The central source of reference must be the National Deeds Registry, on which the entire property market depends. The extent to which it represents the full property market, however, is complicated by the delayed titling process in the government-sponsored market, and other factors that affect low value properties in particular. Cape Town’s Valuations Roll is a separate database that enables the city’s property taxation regime – a critical component of its revenue base. At the moment, these two databases do not fully align. Understanding and addressing the anomalies must be a priority going forward. The ability to track specific markets and characteristics allows municipalities to appropriately manage resource allocations in terms of infrastructure investment, while monitoring any economic disequilibrium in property prices. This would assist Mangaung tremendously in understanding particular neighbourhood or area-based property market dynamics, which would both contribute to a more refined application of rates against property values, and to greater precision in the implementation of particular policy measures such as infrastructure investment or area-based management. The realization of government’s commitment to access to adequate housing for all depends on well- functioning housing markets, and not just the delivery of new housing. This report quantifies Cape Town’s residential property market, exploring market size and value, and market activity, paying attention to both formal and (where possible) informal market activity. It further explores property market performance, specifically in terms of key metrics that are important to the city at this stage in its growth and development, and given the population that it serves. Cities play a critical role in the performance of the residential property market, through the various development levers they apply and their overall management and governance of the neighbourhoods in which their residents reside. Cities must therefore extend their attention to how housing markets, highly complex systems, perform, and use this knowledge to support their overall human settlements goals. Cape Town’s Residential Property Market: January 2018 10 1 Introduction South Africa’s residential property market is the largest component of the South African property market, comprising the majority of property assets within the country, and an important component of household wealth. The South African deeds registry comprises seven million properties, worth almost R6 trillion.3 Of this, about 6,1 million registered properties, or 87%, are considered residential, ranging from sectional title to freehold properties and estates; including government-sponsored homes, homes occupied by their owners or rented to others, and holiday homes; and found across the country, from rural areas (with formal title), to mining towns, to small and secondary cities, to metro municipalities. The majority of the residential property market – 62% in 2015 – includes homes valued at less than R600,000 4 . Of this, two thirds (or 43% of all properties) are homes that are valued at less than R300,000, of which the majority are estimated to be government sponsored homes: clear evidence of the significance of government’s subsidised housing programme and the sheer volume of property assets transferred to qualifying beneficiaries since 1994.5 Almost two thirds (about 57%) of the total formal residential property market is found in the eight metro municipalities. Almost one fifth (just over one million properties) is found in the Western Cape. With about 700 000 residential properties on the national deeds registry, Cape Town’s property market comprises roughly 11% of the total residential property market in South Africa, and 65% of the property market in the Western Cape. Residential property is the largest and most differentiated asset within any city, and a significant part of a city’s economy, especially insofar as it relates to household wealth, livelihoods, and the prospect of inclusive growth. As the property market grows and develops, housing can be an instrument of economic transformation, with property values growing faster than inflation and offering leapfrog opportunities to lower income households as they benefit from the appreciation of their housing asset. This creates further opportunities to leverage property with finance, supporting the development of small businesses, so important in the context of low employment. At the same time, this activity contributes to a growing revenue base for the city, and improves its ability to invest in further growth and deliver appropriate services to the breadth of its population. Understanding housing markets is a key first step in maximising the power of the housing asset for all residents and for the city itself. Cities have a myriad of tools with which to stabilise and grow housing markets, including policy, programmes and legislative oversight and management; financial resource redistribution including the ability to collect taxes and distribute subsidies; and property asset redistribution, including the acquisition and disposal of land and buildings. With a more detailed understanding of housing markets, the City can better implement a robust, supportive and coordinated housing market regime. Metro administrators can: 3 The data analysed in this report has been provided by the Centre for Affordable Housing Finance in Africa (CAHF), which draws its data from the National Deeds Registry, as provided by Lightstone. Additionally, some of the data is drawn from the City itself – this is clearly indicated. The data in this report reflects Cape Town’s property market as it stood at end 2015. 4 These market segments have been established by CAHF using Lightstone’s valuation methodology. 5 This includes housing delivered as part of the national housing subsidy scheme since 1994, as well as housing delivered prior to 1994 but transferred within the democratic administration to occupants as part of the Discount Benefit Scheme. Counting the number of government-sponsored properties in the city is surprisingly difficult, as no database is conclusive, each having been compiled for different reasons. The approach to this is clarified in the section on methodology. Cape Town’s Residential Property Market: January 2018 11 • Better meet demand – identify housing affordability challenges and more efficiently provide well- located housing options, identify, capture or create momentum in as yet unrecognised areas of growth and development, better connecting employment and housing; • Better stimulate supply – identify, measure, and incentivize supply gaps (in price or location) that prevent an otherwise willing and able market to achieve their housing goals; • Invest scarce public funds more effectively and more efficiently - to reinforce and influence better connections between supply and demand; • Support sustainable livelihoods – through promotion of housing asset performance, providing the means for lower income families to move up and out of poverty; and • Build local economic viability at the neighbourhood level – through the creation of investment- worthy areas in which private individuals and businesses place their own resources, further leveraging the city’s investment, and contributing to a growing rates base. This report provides an analysis of Cape Town’s residential property market in terms of its size and value, activity, and performance. Market size, value and activity are status quo analyses, setting out the shape and dynamics of Cape Town’s property market. Market performance then considers these dynamics against specific performance objectives. Following this introduction, Section 2 provides the analytical framework for looking the market. It considers the role of the housing asset, how property market filtering happens, and how the housing market can be segmented to develop appropriate responses that are relevant to all of the City’s residents. In Section 3, the size and value of Cape Town’s residential property market is set out, together with an analysis of current activity in terms of supply of new housing, the resale market, lending and house prices. Section 4 then considers the actual performance of Cape Town’s property market and whether it is responding to the City’s goals for affordable and accessible housing, economic transformation and inclusive growth, and sustainable human settlements. The report then considers how responsive the market is to the demand pressures that exist, and looks in some detail at performance in the Voortrekker Corridor and the Metro South-East Integration Zone. In Section 5, Cape Town’s property market is compared with those in the other major metros in South Africa. Section 6 concludes with considerations towards the realization of an inclusive residential property market in the city. The methodology for the analysis is summarized in Section 7. 2 The Housing Market – An Analytical Framework Housing exists in a market: housing is produced, owned, rented, maintained and sold in a complex system involving buyers and tenants (individuals, households, companies and governments), suppliers and sellers (developers, builders, homeowners, landlords and governments), market facilitators (financiers, estate agents, conveyancers) and regulators (the City, the province, national government, and various public agencies and regulatory bodies). Like other economic goods, housing supply is influenced by an expression of demand, which itself is influenced by affordability – the ability and willingness of the buyer or tenant to invest in or pay for the housing product. In Cape Town, demand is substantially constrained by affordability. What the supply side delivers is too expensive for what the demand side can afford to pay. This is the case for a number of reasons, but ultimately, what it results in, is a widening and diversifying of the housing market to include both formal and informal housing supply. Formal housing, delivered or improved according to city building regulations with approved building plans, on regularized land, and by registered builders, targets higher income earners. Informal housing, often escaping observation without plan approval, built or improved by Cape Town’s Residential Property Market: January 2018 12 informal builders, in backyards or on unregistered land, targets lower income earners and the poor. To bridge the affordability gap and assist poor households to access the formal housing market, the national government offers a state-subsidised housing programme. But as is evident across the country, this is not delivering enough housing, and inadequate housing circumstances persist. There is a further dimension. Unlike other economic goods, housing exists on land, a finite resource that has value relative to its location and access to services and amenities. The value of land often interferes with the value of housing: a fabulous, three-bedroom unit with a state-of-the-art kitchen, on a piece of land on the edge of the city, or where the government fails to deliver its services, may have cost more to build, but is likely to sell for less than a tiny bachelor flat in the city centre where the homeowner can have a view of the ocean and enjoy uninterrupted services supply. This is because households with affordability will compete to buy the well-located and well-serviced housing, and may be willing to pay more for these benefits. House prices are determined by the trade-offs that buyers make in choosing where and how to live, and as a result, housing markets are all about location. At the same time, the city has an important role to play in influencing housing supply and demand dynamics. Essentially, cities can influence market behavior through providing information (including outreach to external audiences as well as its own planning needs), regulation (zoning and land use restrictions and incentives), and finance (investment in infrastructure and service delivery, including subsidized housing). Cities play a significant role in place making and value creation, including managing the effects of social exclusion precipitated by gentrification, or in creating inclusionary housing opportunities. These all influence (and sometimes directly drive) housing demand and supply dynamics and create opportunities to leverage both public and private resources towards meeting housing needs and making markets perform in the interests of all residents and the city as a whole. 2.1 The Housing Asset The question of market performance – the value that housing realises for both the household and the city as a whole – is important. Housing is an asset. For households, it is likely to be the most significant investment that they will make in their lifetimes. With the national housing subsidy programme, it is also a significant investment for the State. Beyond the subsidy programme, housing markets also offer the city substantial revenue opportunities that create the budget that makes the city function. Cities want to make sure that they get the best value out of their investment. To understand housing market performance, it is useful to think about the housing unit as an individual, private asset, and to think of a functioning housing sector as a “national asset” of sorts, that contributes to the overall economy. Cape Town’s Residential Property Market: January 2018 13 Figure 1 The Housing Asset Source: CAHF As a private asset, the house brings value to the household, whether they own or rent, in three main ways. First, there is a social value. The house sits within a neighbourhood and is the place to which family and friends come to celebrate and share life experiences, and from which the household goes to find work or otherwise engage in society. The house itself is the site from which the household accesses infrastructure services – water, sanitation, electricity and refuse collection. In the neighbourhood, the household can also access social services – schools, clinics, community centres – that profoundly impact on their quality of life. Enhancing the social asset performance of housing is about improving the quality of the neighbourhood and creating spaces for families to come together. The house also has a financial value: it is worth something and can be traded for money. It can also be used to leverage a loan from a bank – the home owner can secure a mortgage loan by using the house as collateral. This can be used to invest further in the house, to start a business, to pay for education, or to make other significant investments. The house can also be passed on as an inheritance to children or other family members, and in this, operates as a form of savings that contributes towards household wealth. Enhancing the financial asset performance of housing is about enabling incremental home improvements, improving property values, increasing access to loan finance, and improving transaction support to ensure that households can access the financial value of their properties when they need to. Lastly, the house can also function as an economic asset for the household. In this, the house becomes the base from which a household might run a small business, offer accommodation for rent, or otherwise earn an income. In the context of high unemployment, this creates an especially important opportunity for households to realise sustainable livelihoods. The establishment of home based Cape Town’s Residential Property Market: January 2018 14 enterprises also diversifies land uses and creates more sustainable human settlements. A spaza shop operating from a home in a residential neighbourhood saves neighbours from taking the bus to buy milk, while creating an income stream for the shop owner. The formality of the household’s rights over the property, and whether or not the housing unit itself is a formal structure, impacts substantially on the performance of housing as a private asset. It is obvious that formally titled or leased properties that are well-placed within the urban context and constructed out of durable building materials that protect their inhabitants from the elements, offer stronger social, financial and economic potential than informal housing. Informal housing also has value, however. A shack in a well-located settlement may offer the household better income earning opportunities than a formal structure that is outside an area of economic activity, or may provide better access to economic opportunity. Similarly, an informal transaction may be worth more to the transacting parties, even if it realises less financial value, simply because it can be concluded more quickly. Cities need to understand these dynamics if they are to improve housing asset performance for their residents, whether they live in formal or informal settlements. While housing and private property is in many ways the quintessential private good, the housing sector as a whole performs a vital role in an economy, and can therefore be thought of as a sort of “national asset”. All supply chains associated with products and services create jobs and contribute to the economy, and housing is no exception. Add data. But beyond this, housing impacts on the economy in some unique ways. By understanding what makes housing different from other products and services we can explore the critical role for cities in shaping housing markets. There are three dimensions to this. First, the construction, maintenance and transacting of housing (which includes both sales and leases) contributes substantially to economic growth and job creation, which can have very tangible local benefits. CAHF has estimated that the housing construction and rental sectors contribute about 2.4% to Gross Value Added at the national level, equivalent in the economy to the agriculture, forestry and fishing sectors, and to the food sector.6 The reason for this contribution has to do with the economic activity that housing stimulates – upstream demand for building materials and labour, and downstream demand for furniture, home improvements, and other housing services. All of this economic activity also contributes towards employment. CAHF estimates that in 2014, the housing construction sector created approximately 242 000 full time equivalent jobs (formal and informal) across the country. The rental housing sector created a further 226 000 full time equivalent jobs across the country in 2014. 7 Cities that promote housing construction and rental can use this to stimulate job creation in their areas, further contributing to economic growth. Second, housing constitutes a vital component of the financial system, and plays a critical role in financial intermediation, assisting the flow of money through the economy. This is because housing is a leverage-able asset that can be used as collateral for other loans, thereby enabling private investment. In many developed economies, housing underpins a sizeable proportion of the assets of the financial sector through the mortgage instrument. This in turn underpins the efficacy of the money transmission mechanism in the household sector, enabling monetary authorities to manage 6 See http://housingfinanceafrica.org/what-role-does-housing-play-in-african-economies/ and http://housingfinanceafrica.org/story- housing-economy-exploring-south-africas-housing-value-chains/ 7 Centre for Affordable Housing Finance in Africa (2017) Housing Economic Model: South Africa. See http://housingfinanceafrica.org/what-role-does-housing-play-in-african-economies/ and http://housingfinanceafrica.org/story-housing- economy-exploring-south-africas-housing-value-chains/ Cape Town’s Residential Property Market: January 2018 15 economic growth cycles. Mortgages are also useful as an investment class, given their long-term nature. In addition, housing consumption is in most cases, the largest share of household consumption, and often the most significant asset a household will ever have. The house is then a fulcrum around which a household’s financial and investment decisions are made, both influencing and enabling further financial activity. In South Africa, while the mortgage market is well developed relative to the rest of the economy, it serves a minority of households. This is unsurprising given the high levels of inequality that characterise the country. However, there has been significant investment in housing by the State, and a significant transfer of wealth through the housing subsidy programme directly to poorer households. The failure of these assets to translate into performing financial assets through mortgage instruments is not only disappointing for low income home owners themselves, but it also fails society in doing little to reduce wealth disparities. Despite the formalisation of housing, many RDP properties transact below replacement cost and owners fail to realise value, and grow their wealth through housing. While several factors contribute to poorly performing housing markets, local government and urban management have a significant impact on the value of housing, its market performance, and therefore its contribution to the overall financial system. Finally, the housing sector contributes to the sustainability of human settlements in a number of ways. Housing and settlement patterns fundamentally shape the experience of households who live in a city as well as the capacity they contribute and the resources they draw. Households located far away from jobs in areas poorly served by public transport are unlikely to be able to participate in the labour market even to the limited extent that the economy currently allows. The sheer distances require increased public investment transport and on-going subsidisation. Segregation also limits opportunities for social interaction and undermines critical social objectives. A further contribution to the city sustainability is through the rates and taxes generated by property and the ability of the city to capture this value to serve its broader development goals. As properties appreciate in value, they increase a city’s rates base, and this contributes to the growth in city budgets that enable them to invest in further infrastructure and services delivery, which further supports growth. A key point of focus for the city is to understand how the two asset triangles – housing as an individual asset and the housing sector as a sort of “national asset”– interact, and the impact that the informal housing sector has on both. Ultimately, the goal is to maximise housing market performance for the benefit of City residents, as well as for the city itself. This requires careful attention to the extent to which households can maximise the social, economic and financial performance of their housing – and implementing measures that support them in this effort – while also enhancing the impact that the City’s work in human settlements has on its local economy, its labour market, and its overall sustainability as a city. 2.2 Property Market Filtering Beyond the asset value of the stock itself, new housing supply, and functional resale markets (including finance, market information) enable filtering: households moving from one housing Cape Town’s Residential Property Market: January 2018 16 circumstance (or pool, in the diagram below) into another to meet their particular housing needs to the extent they can afford.8 For example, in South Africa’s current policy context, if there is sufficient supply, a household in an informal settlement may access government-sponsored housing, may buy an existing RDP house on the resale market, or may move directly into entry-level or starter housing, depending on their affordability – their income and the availability of finance. As their incomes improve or their circumstances change, they may find the opportunity to further improve their housing, moving into something larger to accommodate a growing family, or to a better neighbourhood. As they proceed through the housing ladder, they may find that rental housing is more appropriate for a time. Housing needs are not static; housing circumstances must change to meet the changing needs of the household. Figure 2 Pools and flows to enable property market filtering Sub-optimal rental (informal, inadequate, backyard shack, etc.) Informal living, poor quality housing squatting, etc. Affordable rental / social housing Subsidised housing Adequate, quality, market rental Entry-level, formal housing When filtering works, there is sufficient supply of affordable housing for ownership and rental, enabling household mobility and the leveraging of the housing asset. Next housing opportunity for ownership or rental H H H H H The right home, for rental or ownership As households move up the housing ladder, and existing housing becomes available for low income households who do not qualify for subsidies, or indeed also for subsidy beneficiaries, the demand for state production of new housing is replaced by available supply in the resale market. Private sector supply then meets the needs of the sellers who use the equity from the sale of their homes to invest in higher value housing up the ladder. That is the ideal scenario, and what the nation is trying to achieve with its policy. The property market does not always work this smoothly, however: there are far many more households needing housing at the bottom end (subsidised housing, social housing or entry level housing for ownership), than there is supply of new housing that they can afford. This means that the number of households living informally, whether in backyard shacks or in informal settlements, or overcrowding in existing housing, is growing, and the filtering pathways are blocked. 8Rosenthal, S (2013) Are private markets and filtering a viable source of low-income housing? Estimates from a “repeat income” model. Forthcoming: American Economic Review http://faculty.maxwell.syr.edu/rosenthal/recent%20papers/Is_Filtering_a_Viable_Source_of_Low-Income_Housing_%206_18_13.pdf Cape Town’s Residential Property Market: January 2018 17 Figure 3 Blocked pools and flows undermine property market filtering When filtering doesn’t work, household mobility is constrained, Sub-optimal rental (informal, the value of the housing asset declines, and poor households inadequate, backyard shack, etc.) cannot access the property market. This also depresses household affordability for entry-level housing, and widens the housing gap, as first time buyers come without equity. Insufficient affordable rental / social housing Informal living Insufficient subsidised housing Rental Entry-level housing Next housing opportunity for own or rent H H H H H The right home, for rent or ownership Cape Town’s property market has very little churn, or resale market activity, at the bottom end. In part, this is because the Housing Act has placed an 8-year pre-emptive clause on government sponsored housing, which means that a homeowner is only able to sell their home after eight years. However, sales levels among older properties are also very low. On average, transactions of existing homes (resales) under R300 000 -whether government-sponsored or not- are about one-half to two- thirds of the total number of new sales. What this means is that filtering from subsidised housing into entry-level housing is not happening and people are not moving up the property ladder in the way we expect. This creates three problems. First, it means that residents of subsidised housing are not realising the financial asset value of their stock and using this to leapfrog into better housing. This then means that the only housing that can pull residents from informal living conditions into formal will be new housing – housing that in South Africa’s policy context must therefore be built by the state. And third, it means that potential buyers into entry-level housing are likely to be first time homebuyers, and therefore without equity from a previous sale, and likely without savings. This means that they will need to borrow possibly the entire purchase price, severely limiting their affordability. Developers and financiers respond to this limitation of effective demand, and reduce the amount of housing they deliver into this market. When households in lower value housing move into higher value housing, they free up their old homes as supply on the resale market. In South Africa, at the moment, this creates an important opportunity for housing affordability for lower income earners. Houses on the resale market in some areas are often more affordable than the entry level new build houses currently being built by developers. Finance enhances affordability because it means the buyer doesn’t have to have cash for the purchase – they can pay for the house over the period of the loan, usually up to twenty years – and this means that the seller can get a better price. At the same time, the sale of the house creates new demand for housing, higher up the housing ladder, as the seller now has equity that they can use, together with finance to buy another home. In Cape Town, today, the filtering process might look like this: Cape Town’s Residential Property Market: January 2018 18 Figure 4 A Property Ladder in Cape Town Household 1 lives in a shack in Household 2 lives in an RDP Household 3 lives in an RDP Household 4 lives an RDP Meway, Cape Town house in Delft South, that they house in Delft, Roosendal that house in Khayelitsha received in the early 1990 ’s they received in the early 1990 ’s Household 1 sells the rights to their shack for R10 000 and buys a home for R125 000 in Delft South. With that purchase, they are nolonger part of the housing backlog, and they have helped Household 2 sells their home for Household 3 sells their home Household 4 sells theirhome Household 2 realise the R125 000 andbuys a home for for R280 000 andbuys a home for R450 000, and so on... financial asset value of their R280 000. for R450 000 . home. Household 3 has R280 000 Household 1 has R10 000 equity Household 2 has R125 000 equity from the sale of their RDP from the sale of their shack. They equity from the sale of their RDP house. This means they need a need a loan of R115 000 to buy house. This means they need a loan of R170 000. this house. loan of R155 000. Sources: At 13,5% interest over 20 years, At 13,5% interest over 20 years, At 13,5% interest over 20 years, and with a monthly repayment https://www.privateproperty.co.za/fo and with a repayment of and with a repayment of of R2100/m, this is affordable to r-sale/western-cape/cape- R1400/m, this would be accessible R1900/m, this is affordable to a a household earning R10 500. town/bellville/delft/T1225789 to a household earning R7000. household earning R9500. https://www.privateproperty.co.za/fo They receive no further support Or, a household earning earning They receive no further support from the state. r-sale/western-cape/cape- town/bellville/delft/T1297382 R3500 could afford the R125 000 from the state, and their home house If they accessed the full has been bought by a non- https://www.privateproperty.co.za/fo FLISP subsidyand a mortgage loan qualifier in the gap market. r-sale/western-cape/cape-town/cape- of R38 000. This would involve a flats/khayelitsha/2-khayelitsha- loan repayment of R600/m over sections-street/T1331209 10 years at 13,5%. In the example above, a household living in Delft has put their property up for sale for R125 000. At current mortgage rates9, and with a R10 000 deposit, this would be affordable to a household earning about R7000 per month. If a FLISP subsidy10 were available for such a purchase, the house might be affordable to a household earning R3500 – just outside the eligibility for a government subsidised house, who could then service a ten-year mortgage with a monthly payment of R600 to cover the difference. Meanwhile, the seller of the Delft house now has equity which he or she can use to buy the next house. And so the housing ladder works with households climbing up and houses filtering down.11 The critical opportunity from the City’s perspective is that the buyer of the Delft house is no longer part of the housing backlog – and this has been achieved without the City or Province building another house. At the same time, the filtering process also stimulates the market in other ways: the mortgage lender will be much happier to give a smaller loan that doesn’t cover the full purchase price – they 9 A R115 000 mortgage calculated at 13,5% in this market segment, would imply a monthly repayment of R1400. 10 The Finance Linked Individual Subsidy Programme (FLISP) is offered to first time home buyers earning between R3501 – R15 000 household income per month and accessing mortgage finance to buy a home. The subsidy applies both in the new and resale markets, and offers qualifying beneficiaries a subsidy amount relative to their income: households with an income of R3501 per month get the maximum of R87 000, while households with an income of R15 000 get the minimum, a subsidy of R20 000, to go towards the purchase price of their home, thereby reducing the size of the mortgage that they need to access. There is a clause in the FLISP policy that suggests that households earning between R3501 and R7000 can access rather a serviced site for free, on which they are then required to construct a dwelling. See https://www.nhfc.co.za/Products-and-Services/flisp-overview.html 11 See http://housingfinanceafrica.org/documents/note-understanding-the-challenges-in-south-africas-gap-housing-market-and- opportunities-for-the-rdp-resale-market/ Cape Town’s Residential Property Market: January 2018 19 always want the borrower to put in a deposit to demonstrate their commitment. This could mean that the interest rate could come down, making the loan more affordable. And, a buyer with equity demonstrates to the developer that there is a market to which more housing can be developed. Developers use this expression of demand to apply to banks for construction finance, which enables them to build more housing in this particular target market. Cities can support the filtering process by making and maintaining neighbourhoods as “investment grade” for all market participants: resident households, buyers, lenders, developers. This would involve a focused undertaking of its normal urban management functions at scale, in targeted neighbourhoods and precincts. Focused and effective service delivery, investment in infrastructure and connecting neighbourhoods to developing transport linkages are all prioritised in Cape Town’s Transport Oriented Development strategy. It also involves facilitating households’ efficient and cost- effective engagement with the City around their property, enabling them to participate on the supply side through the resale market, the delivery of backyard rental accommodation, or incrementally upgrading serviced sites. In a functional property market, which cities can support through the strategic application of their development controls and other levers local contexts, the private sector supplies more and more of the required housing for a wider spectrum of the population, while the government then focuses increasingly, on the most poor. 2.3 Segmenting the Housing Market Such an approach, however, requires targeting, and this requires market segmentation. South Africa’s housing market is not homogenous. It comprises a wide variety of housing, available for rent or for sale, on single plots, on farms, or in buildings, in different locations, and of a variety of values. Cities have high and low value neighbourhoods, that are more or less well located for their residents, responding to and driving city and private investments made over time. A focus on Cape Town’s high value market is not surprising: the city is well known for its luxury estates and seaboard penthouses. These properties drive the rates base of the city and give it the financial capital to operate, delivering local services to residents. And yet, just under half (47%) of properties in Cape Town are valued at less than R600 000, and a further 22% are valued at between R600 000 and R1,2 million. These properties serve the majority of the population – low income, working class people; beneficiaries of government’s subsidized housing programme; established residents; and new migrants. It is the City’s challenge to maximize the performance of these lower value market segments in particular, so that the asset potential of property can be enjoyed by all of the City’s residents, while supporting the capacity of the City itself to improve and broaden the services it delivers. To do this, the nuance of what is happening in the property market needs to be understood, especially among those properties worth less than R1,2 million, and worth less than R600 000 – market segments not commonly exposed in the press or in conventional property market analyses. This data is available. Cape Town’s valuations roll for 2015 includes approximately 738 328 residential properties, including 581 846 freehold records and 156 482 sectional title records.12 Of the sectional title records, 116 558 properties record a dwelling on the property, bringing the list of residential 12 Cape Town Valuations Roll, 2015 Cape Town’s Residential Property Market: January 2018 20 properties with dwellings on the valuations roll to 698 404. Of these, just over one quarter are properties worth more than R1,2m, reflecting the high value of Cape Town’s property market. The remaining three-quarters however, are worth less than R1,2m – a significant part of the City’s property market and warranting our attention. One fifth of the properties on Cape Town’s valuation roll are defined as being worth less than R200 000, and therefore benefit from a rebate on property taxes13 – and by implication, do not earn a revenue for the city. If the property market were working effectively, however, many of these might well be valued at above the threshold, creating a revenue opportunity for the city. At the same time, an analysis of National Deeds Registry data can consider it in market segments that suit a policy interest in improving performance at the bottom end. According to that national database, Cape Town’s residential property market comprises 703 801 properties.14 This report tracks Cape Town’s residential property market along four value bands: • The entry market—properties worth R300 000 or less, including government-sponsored housing; • The affordable market—properties worth between R300 000 and R600 000; • The conventional market —properties worth between R600 000 and R1.2 million; • The high-end market—properties worth over R1.2 million. Throughout the report, these are colour-coded in graphs and maps: cool colours represent the entry- level and affordable market; warm colours represent the conventional and high-end market. The analysis is especially interested in the government-sponsored property sub-market and how this performs in relation to the wider market. This submarket cuts across the value bands. In principle, all new government-sponsored properties enter the market valued at below R300 000. Over time, however, they may appreciate into higher value bands. This is a success: policy wants its subsidy beneficiaries to see the value of their properties grow over time so that their asset wealth improves similar to all of Cape Town’s property owners. This report explores whether and where this is happening, and considers how this performance might be better supported. A further dimension to the segmentation is place. While South Africa’s cities still reflect the segregation of their apartheid past, there is evidence of, or opportunities for integration, as households, businesses and the City itself, make investment choices. Public investment in roads, infrastructure, and services, along transport routes or at specific nodes, can contribute to property price appreciation as the city works towards making neighbourhoods “investment grade”. Similarly, failure to make such investments or to adequately manage urban areas can lead to property price depreciation. This further supports household investment decisions, and one by one, neighbourhoods reflect a stronger sense of value as maintained by residents. By looking back at investments made and tracking local property market dynamics going forward, City officials can better understand cause and effect, and plan future investments accordingly. 13 Cape Town Property Rates Policy 2016-17: “1.2 For all residential properties as described in the Rates Policy, the first R200 000 of property value will be rebated by an amount up to the rates payable on R200 000 value.” 14 The differences between the National Deeds Registry (703 801 properties) and Cape Town’s Valuations Roll (698 404 properties), and how these relate to the analysis undertaken in this report, are outlined in a report entitled “Understanding Municipal Housing Markets: A process guide for Cape Town” submitted to the World Bank as part of the programme enabling this report. Cape Town’s Residential Property Market: January 2018 21 3 Cape Town’s Residential Property Market A coastal city, Cape Town is the capital of the Western Cape Province and the seat of the South African Parliament. Long treasured for its natural beauty, it has a vibrant and keenly sought after property market, by locals and international investors alike. Cape Town’s property market is not homogenous, however, and while some market segments perform exceptionally well for investors and the City, others underperform, contributing to a widening inequality that threatens to undermine many of the City’s efforts towards growth and development. About 30% of properties registered on the deeds registry are valued at more than R1.2 million. This market is well serviced by mortgage lenders with approximately 58% of transactions in the segment secured through a mortgage. The proportion of properties that transact each year (the churn rate) is 7.6%. At the same time, 29% of all registered properties are valued at less than R300 000. In this segment of the market, mortgage lending, at 12% of transactions is far lower than in higher priced segments of the market and churn rates as per the deeds registry are at 3%. This section provides a snapshot of Cape Town’s residential property market as at the end of 2015, considering the size and value of the market, and its activity. 3.1 Market Size and Value Cape Town’s residential property market comprises 703 801 properties 15 , spread across 770 neighbourhoods (also known as sub-places16), with prices ranging from as much as R25 million and higher, to as little as no value at all. In 2015, the total value of the entire residential property market was estimated to be R807,5 billion. Owned primarily by individual households, this represents a significant component of household wealth in the city. 15 By CAHF’s Citymark count, using data sourced from Lightstone, Cape Town’s residential property market includes 703 801 properties, as at the end of 2015. This differs from the city’s valuation roll (comprising an estimated 698 404 properties) by just over 5000 properties, so the match is relatively close. A number of these properties, however, lack key information required to geo-locate the properties, and so CAHF’s analysis of the City’s valuation data is limited to 605 338 properties – a difference of 15% from the national deeds registry figure. The most significant difference is found in markets over R600 000, where CAHF data has 92 000 more properties. CAHF’s analysis of national deeds registry data is based on formal residential properties, worth at least R15 000, and with a minimum size of 32 square metres. The dataset excludes non-residential properties, vacant land (which is not considered currently residential), properties worth less than R15 000 or smaller than 32 sqm. Informal properties are also not recognized by the deeds registry, nor informal properties not on the deeds registry. 16 The National Deeds Registry identifies a total of 920 sub-places with properties, of which 770 have residential properties. Cape Town’s Residential Property Market: January 2018 22 Figure 5 Distribution of residential property in Cape Town by number and value, 2015 With seven of the ten richest suburbs in Figure 6 Cape Town's most and least expensive suburbs South Africa located in Cape Town17, it is Cape Town, 2015 not surprising that the City’s residential Top 10 Most Expensive Suburbs Top 10 Least expensive Suburbs property market is predominantly a high Suburb Average Price Suburb Average Price value market. About a third of all Goedehoop Estate R25 000 000 Belhar 15 R19 764 Llandudno R16 244 091 Wallacedene R25 486 residential properties (31 percent in Nova Constantia R13 583 333 Nomzamo SP R27 446 2015) are worth more than R1,2 million, Bishopscourt R13 513 214 Klein Begin informal R30 000 and a further 22 percent are worth Bellvue R13 500 000 Bloekombos R30 361 Bantry Bay R13 010 294 Browns Farms R35 118 between R600 000 – R1,2 million. Forty- Constantia R12 008 425 Kraaifontein East 2 R36 500 seven percent of all properties are worth Huis-In-Bos R11 386 250 Fairdale R39 000 less than R600 000, and 30 percent are Steenberg Estate R11 134 416 Lwandle R39 189 Fresnaye R11 053 869 Kraaifontein East Informal R42 967 worth less than R300 000. This means that only 17% of Cape Town’s housing is in the crucial middle-class market segment of properties valued between R300 000 – R600 000: a key indication that there is a very real gap market in the City. Cape Town’s property wealth is concentrated in the highest value properties: almost three quarters of the total value of the property market is found in the 218 982 properties that are worth over R1,2 million. By comparison, the 329 319 properties valued at less than R600 000 are collectively worth only about 11 percent of the total residential market, or R87,1 billion. The total value of government sponsored housing (an estimated 191 887 units by the end of 2015) was about R31 billion in 2015. The challenge facing the city is how to support the growth in value of the affordable market – 17 https://businesstech.co.za/news/wealth/104433/south-africas-top-10-richest-suburbs/ Cape Town’s Residential Property Market: January 2018 23 properties valued less than R600 000 – while continuing to support supply of lower value properties, through new build and resale, to meet the needs of its residents. Cape Town’s property market is clearly segregated by value: lower value properties are found in the Cape Flats, south east of the city centre, in particular around the airport and in the south) and in the area of Kraaifontein East, to the east. Higher value properties are found in the far north, north west, and south of the City Bowl. A key integration challenge for the city, therefore, is the creation of effective transport linkages between these areas, while over the longer term investing in the public infrastructure in lower value areas and diversifying the stock that is delivered in these areas. Figure 7 Distribution of residential properties by market segment, Cape Town 2015 Some areas, however, show a fairly high level of property value diversity. Saxonsea, Pelikan Park, and Scottsdene all have high numbers of properties valued at less than R300 000 but at least 40% of properties worth more than that. This creates important filtering opportunities for residents wishing to improve their housing circumstances but stay in the neighbourhood. A key challenge in such areas is maintaining affordability for new entrants, while enabling value creation for existing residents. Belville South Ext 14, Parrow SP and Maitland show higher values but diversity nonetheless with property values split fairly evenly between the R300 000 – R600 000 and R600 000 – R1,2m categories. Interestingly, some are also areas where significant city investment has been underway. The Cape Town’s Residential Property Market: January 2018 24 performance of these property markets in particular should offer the City some indication of the impact of their investments, and is something that should be monitored carefully over time. The two maps below compare the locations of local housing markets in subplaces where those homes under R300 000 are greater than 20% of the properties (left) and less than 20% (right). As the maps show, there are neighbourhoods in which filtering opportunities can be found, and should be encouraged. Many of these areas are adjacent to each other, showing very fluid housing opportunities, although housing closer to the city centre becomes more valuable, and thus more expensive. Policies such as inclusionary housing and first-time homebuyer assistance can protect affordability, and offset rising house prices. Figure 8 Neighbourhoods with higher levels of property value diversity, Cape Town 2015 The City is less well known for its affordable property market, although this is almost half (47%) of the entire residential property market. This includes the 329 319 properties valued at less than R600 000 and serving many first-time homeowners. Within this market segment, it looks like there are 191 887 government-sponsored properties that were allocated to qualifying beneficiaries since 1994.18 These might include old township stock built before 1994 but transferred to residents as part of the Discount Benefit Scheme in the mid-1990’s, as well as RDP and later BNG houses delivered as part of the national housing subsidy programme. They might also include properties that began as serviced sites through the Integrated Serviced Land Project, or earlier, through the IDT’s subsidized housing programme in the very early 1990’s, that later were awarded consolidation subsidies. 19 Our 18 A review of deeds registry data suggests that Cape Town’s property market includes somewhere in the region of 191 887 government sponsored properties. Cape Town’s valuations roll has recognized 82 009 RDP properties, and the Housing Subsidy System database retained by the Western Cape Department of Human Settlements has recorded 109 249 RDP properties. The discrepancies between the data sets need to be explored further. 19 For an overview of national housing programmes and subsidies, see http://www.dhs.gov.za/sites/default/files/documents/publications/human_settlements_programmes_and_subsidies.pdf Cape Town’s Residential Property Market: January 2018 25 valuations roll has recognized 82 009 RDP properties, and the Housing Subsidy System database retained by the Western Cape Department of Human Settlements has recorded 109 249 RDP properties. The potential for property appreciation in this market is significant, especially given overall property market dynamics in Cape Town. Of the 703 801 residential properties, about 563 000 (80%) are freehold; about 90 000 (13%) are Sectional Title, and the remaining 50 000 (7%) are Estate properties.20 The character of these market segments differs, however, with freehold properties spread across all market segments, 37 percent of which are valued at below R300 000. The Sectional Title market involves higher valued properties, with about 38 percent of all ST properties valued at above R1,2m, another 39 percent between R600 000 – R1,2 million, and 22% between R300 000 – R600 000. Cape Town’s valuations roll suggests that about 80% of all freehold properties are single residential dwellings. In contrast, the sectional title market is mostly flats (about 58%). Townhouses and penthouses are together less than 1% of the sectional title market.21 Unsurprisingly, the Sectional Title market in Cape Town is concentrated in Sea Point (6 400 properties), Table View (3 400 properties) and Kenilworth (2 850 properties). In these areas, the construction of multiple unit sectional title buildings on formerly single-unit freehold properties is evident. The activity is contributing towards the densification of the city as property owners respond to rising land values. The Estate market is dominated by high value properties with 51% worth more than R1,2 million, and another 40% worth between R600 000 – R1,2m. Table 1 Total Residential Properties by property type, Cape Town, 2015 Most residential properties in Cape Town were financed privately by households themselves, with their savings and also with loans. In 2015, about 58% of properties still had a loan outstanding, the highest among all eight metro municipalities. Twenty-seven percent (or 191 887 properties in 2015) of properties, however, were financed by government and allocated to qualifying, low income beneficiaries as part of the government’s housing subsidy programme. This is worth repeating: over one quarter of Cape Town’s residential property market comprises housing built as part of the government’s Reconstruction and Development Programme since 1994 – an indication of a very 20 There are two legal forms of residential property ownership in South Africa: freehold and sectional title. Freehold is when the owner owns the entire property directly. Sectional title is when the owner has exclusive ownership of a section of a larger development, and shares in the ownership of the common property in the development with the other sectional title owners. In recent years, cluster housing, or “Estate” has also become common, although not as a legal form. This is freehold housing delivered in a development that is bound by an external wall. 21 Definitions matter. Cape Town’s valuations roll includes six categories of freehold property, from properties with one or two residential dwellings, to guesthouses. The sectional title roll includes 18 different categories, including flat, garage, living unit, parking, storeroom, maid’s room, and so on. An exercise to clean the valuations roll and reassign definitions, would be a worthwhile exercise. Cape Town’s Residential Property Market: January 2018 26 substantial wealth transfer, in 2015 worth about R31 billion, to previously disadvantaged, low income households. As this market matures and integrates with the wider residential property market, the very real benefits of this wealth transfer will become evident. Some of Cape Town’s 703 801 residential properties are Figure 9 Number of properties with an part of the rental market: 2011 Census reports that 31% outstanding mortgage, Cape Town, 2015 of the 1,2m households in Cape Town rent.22 Cape Town’s rental properties are found in high rise buildings, multi- storey walkups, backyard rentals, peoples’ homes, and in other configurations. Some are formally rented and managed by a property letting agency, while others are let by households or small scale landlords. As of March 2017, Cape Town also has two fully accredited social housing institution (Communicare and Sohco), and eight partially accredited social housing institutions that provide social housing to households earning less than about R7500 per month.23 The City of Cape Town is the largest landlord in the city, with 43 500 rental units under management. In addition to the 703 801 residential properties that comprise Cape Town’s property market, the 2011 Census identified 143 823 households (13% of the city’s household population) living in informal structures in 216 informal settlements.24 Many of these properties are not recognised on the deeds registry or on the valuations roll. 2011 was a slight improvement on 2001 when 14,5% of households lived in informal houses in informal settlements – however, it has been suggested that an additional 97 settlements were not included in the Census count.25 The percentage of informal dwellings in settlements in the City has increased, from between 31-40% in 2001 to between 41-50% in 2011. Between the Census 2011 and 2013, it is estimated that the number of informal settlements has grown by a further 23 settlements. 22 There is no comprehensive dataset of rental properties available – the only indication of the scale of rental in Cape Town is through the Census which asks households whether they own or rent. The City of Cape Town has a register of city rental properties, which suggests a total stock of 30 155 flats and 3112 houses; however, this data is not geo-referenced. Other reports suggest that City owned rental stock includes 43 500 units. A study done in 2011 and published by the Social Housing Regulatory Authority scopes the rental market in the Western Cape, but this is due for an update. See http://www.shra.org.za/images/stories/2011/pdfs/rent_rep_WC.pdf 23 Cape Town’s eight social housing institutions with conditional accreditation are Cape Town Community Housing Company, Agri Ho using, Daheko Care, DCI, Ikusasa, Liyema Nolita, Mother city Housing Co., Povicom, an Urban Status Rentals (Devmark). See http://www.shra.org.za/images/2017/8-MARCH-2017--SHRA-REGISTER-OF-ACCREDITED-SHIs.pdf 24 Cape Town’s Built Environment Performance Plan 2016/17 http://mfma.treasury.gov.za/Documents/02.%20Built%20Environment%20Performance%20Plans/2016- 17/Final/CPT%20Cape%20Town/CPT%20Cape%20Town%20Final%20BEPP%202016-17.pdf 25 The Weekend Argus compared data on toilet facilities, collected by the City of Cape Town, with the Census 2011 data, and found 97 uncounted settlements. See http://academy.code4sa.org/stories/the-forgotten-people Cape Town’s Residential Property Market: January 2018 27 The 2011 Census estimated that 74 800 households (7% of the population, up from 4,3% in 2001) live in backyard shacks26, including about 45 000 who live in backyard dwellings on council property.27 Work done in 2016 by the Housing Development Agency shows the concentration of informal settlements south and east of the centre city28, primarily around government-sponsored housing. This map provides a close up view of informal settlements included in the 2011 Census, those not counted (red) and those developed after 2013 (green).29 Informal settlements are dynamic, changing environments, however, which means that census data is inadequate at best for tracking their performance. How informal settlements influence, and are influenced by, their neighbouring formal neighbourhoods is a key issue for consideration that quite fundamentally shapes the City’s ability to deliver its services effectively to those most in need. It is well accepted that informal settlements have value. What is not clear however, is the extent of that value. Recently, the National Income Dynamic Survey 30 (NIDS) released data on occupant estimated market values of the dwelling, as well as characteristics of the dwelling and the neighbourhood in which it is located. Occupants were asked “what is a reasonable market value for which this property could be sold?” Responses from occupants of shacks not in backyards varied significantly, with clusters around the R2 000, R5 000, R10 000, R15 000 and R20 000 price points.31 Figure 10 Cape Town's informal settlements, Code4SA 26 Cape Town’s Built Environment Performance Plan 2016/17 http://mfma.treasury.gov.za/Documents/02.%20Built%20Environment%20Performance%20Plans/2016- 17/Final/CPT%20Cape%20Town/CPT%20Cape%20Town%20Final%20BEPP%202016-17.pdf 27 GHS Series Volume VII Housing from a human settlement perspective. In-depth analysis of the General Household Survey data 2002 – 2014. http://www.statssa.gov.za/publications/Report-03-18-06/Report-03-18-062014.pdf 28 Data provided by the Housing Development Agency of the National Department of Human Settlements, 2016 29 See http://academy.code4sa.org/stories/the-forgotten-people 30 The National Income Dynamics Survey (NIDS) is a nationally representative panel-based survey. It was launched in 2008 with a sample of 28,000 individuals in 7,300 households. The survey is repeated with these same individuals every two years and to date, four waves of the survey have been conducted. The survey includes the same categorisation of dwelling types used by Statistics South Africa in the Census and other household surveys. 31 Eighty20(2017) A House Price Index methodology based on municipal data. Prepared for the Centre for Affordable Housing Finance in Africa. Cape Town’s Residential Property Market: January 2018 28 Figure 11 Distribution of government-sponsored properties, and informal settlements, Cape Town, 2015 Figure 12 Estimated market values for shacks not in backyards, NIDS, Wave 4 data32 There is one further group of properties that cannot be tracked with deeds registry data: households living in government-subsidised housing that has not yet been formally registered. As of May 2017, the backlog in registrations in the Western Cape sat at about 31 929 units. To date, about 46 942 title deeds have already been delivered in the province as part of the national title deeds restoration 32Source: Wave 4 Data: Southern Africa Labour and Development Research Unit. National Income Dynamics Study 2014 - 2015, Wave 4 [dataset]. Version 1.1. Cape Town: Southern Africa Labour and Development Research Unit [producer], 2016. Cape Town: DataFirst [distributor], 2016. Pretoria: Department of Planning Monitoring and Evaluation [commissioner], 2014 Cape Town’s Residential Property Market: January 2018 29 project33. It is estimated that about 65% of all properties that comprise the backlog are located in the major metros. While these 31 929 properties sit without title deeds, they escape valuation, cannot be formally transacted, and generally underperform as assets for both their occupant households and the city itself. 3.2 Market Activity Cape Town’s property market activity is regularly reported on in the press. It can be tracked by analyzing deeds registry data, or the City’s own valuations and other data, to understand the supply of new housing, resale market activity, lending activity and the growth of house prices in each of the four market segments and across the city’s 770 neighbourhoods, or sub-places. 3.2.1 Supply of new housing as seen on the deeds registry In the six years between 2010 and Figure 13 Percent change in total residential properties since 2010, Cape 2015, Cape Town’s property market Town, 2015 grew by 50 586 units. In that time, 55 373 new units were added to the market.34 The majority of these (53%) have been in the sub-R300 000 market segment. Government has been the primary deliverer of the City’s housing in the period, and virtually the only deliverer in the sub-R300 000 market segment, with new registrations for about 29 090 government sponsored properties appearing on the deeds registry. 35 By 2015, government- sponsored housing comprised 27,3 percent of the city’s residential property market. It is now well understood that this represents only a portion of the actual government- sponsored stock in the city. The backlog in title deeds registration for government-sponsored properties, plus the city’s and province’s expenditure on subsidized housing suggests that there are more properties that have been built and which accommodate our residents, 33 Email correspondence with Anton Arendse, Estate Agency Affairs Board, 29 May 2017. 34 The difference between the absolute growth of 50 586 units and the 55 373 new registrations suggests that some residential properties were also ‘lost’ to the city – converted to business or otherwise no longer counted as residential property. This is a fairly common anomaly in the data when analyzing the size of the market over time. 35 National deeds registry data suggests that between 2010 and 2015, a total of 27 735 government sponsored properties were delivered in the sub-R300 000 category (95% of the total). The data suggests that a further 1355 government sponsored properties were delivered in market segments above R300 000. Of course, this should not be possible, as this far exceeds the value expected for government sponsored properties. This is an issue that needs to be investigated further. Cape Town’s Residential Property Market: January 2018 30 than are visible on the deeds registry. This poses a problem for the city – not only can it not track the performance of these housing units, it is also unable to apply property rates. Notwithstanding a construction focus on the sub-R300 000 market, it is in the high-end Figure 14 Percent change in total residential properties since 2010, by property type: Freehold, estate & sectional title market segment of properties worth more than R1,2m that Cape Town has seen the most growth (60% in number) since 2010, while other market segments have gotten smaller. This is due, primarily, to property price appreciation which has seen properties move from one market segment into the next. For example, in the six years from the end of 2009 to 2015, while the overall City grew by about 50 586 units, the high value market segment of properties above R1,2m increased by about 93 000 units in that period – largely due to appreciation of existing housing from the lower value market segments. At the same time, the absolute size of the sub-R300 000 market segment got smaller by about 25 000 units, as properties appreciated into higher value segments and were not replaced by increased delivery in this segment (this would be subsidized housing delivery, given current market Figure 15 Number of new transactions, properties above R300 000, by property type: Freehold, estate & sectional title, Cape Town conditions). While property appreciation benefits existing owners, it means that access to affordable housing by lower income earners who have not yet climbed on the property ladder is becoming more difficult over time. Freehold continues to be the dominant form of new housing construction, but increasingly, such housing is delivered in enclosed estates. The freehold and sectional title markets have grown similarly, the estate market has grown much more rapidly. It is useful to consider the three tenure categories for new registrations above R300 000, so that the analysis isn’t influenced by the dominance of government-sponsored properties in the bottom category. Looked at in this way, the significance of estate development in Cape Town is clear, just under Sectional Title development. While freehold (including estate) still dominates the Cape Town’s Residential Property Market: January 2018 31 market, sectional title is significant and growing. This is worth considering, both in terms of the contribution that estate and sectional title living arrangements might make to goals for densification, and the focus of new housing delivery taking place in the City. A critical issue is the valuation of Sectional Title stock, and the extent to which the City is able to realise revenue from this investment interest. The delivery of government sponsored Figure 16 New registrations of government-sponsored properties, Cape housing has dominated the new build Town 2010-2015 market, with about half of all new registrations (all freehold) each year falling into that category. In 2010, government-sponsored delivery was as high as 68% of all new registrations; the low was in 2014 when government- sponsored delivery was 41% of all new registrations. Certainly, however, the delivery of government-sponsored housing as evident through its registration on the deeds registry is insufficient to meet the potential demand for such housing in the City. In 2015, only 4 083 government-sponsored houses were registered on the deeds registry.36 As noted, it is likely that many more were built. The ability of these units to function as housing assets for their beneficiaries, however, is undermined if title is not transferred and they do not appear on the deeds registry. New transactions may be financed with cash, financed with a mortgage loan (also known as a bond), or paid for by the government (this is government-sponsored housing). The majority of new transactions (29 090 transactions or 53%) between 2010-2015 were financed by the government as part of the national housing subsidy programme. Of the 25 830 remaining new transactions extended in those six years, 68% were financed with 17 511 mortgage bonds. Interestingly, the 17 511 mortgage bonds originated on new properties between 2010 and 2015 were evenly spread across the upper three categories, with 31% of bonds in the market segment R300 000 – R600 000; 31% in the segment R600 000 – R1,2m; and 31% in the segment above R1,2m. Looked at another way, two thirds (66%) of new transactions in the segment R300 000 – R600 000 were financed with a mortgage bond; 69% in the segment R600 000 – R1,2m; and 57% in the segment of properties worth more than R1,2m. That there was very little lending in the sub-R300 000 market is not necessarily an indication of a lack of market interest: the market of properties worth less than R300 000 is dominated by government-sponsored new build for which mortgages are not required, and there are a number of other factors that constrain the resale market. This is an important area of 36 Housing backlog figures are notoriously difficult to pin down, however it is well known that many households have been on the housing waiting list for years. Cape Town’s Residential Property Market: January 2018 32 opportunity for the city to consider, however, as it is in this market segment that the opportunities to be found in property market filtering can be leveraged. 3.2.2 Resale market activity The resale market is inverse to the new build, with far many more transactions in the higher value market segments, and fewer in the lower value market segments. In the six years between 2010 and 2015, a total of 145 394 properties changed hands in the resale market; an average of about 24 000 annually. About 60% of these were financed with a mortgage, involving about 87 551 loans. Resales also were registered in the government-sponsored housing market: over 16 000 resales in the period, or an average of 2 700 annually. Just under half of these transactions were financed with 7 006 mortgages. Cape Town’s Residential Property Market: January 2018 33 Figure 17 Total repeat transactions and repeat bonded transactions, Cape Town 2010-2015 Cape Town’s Residential Property Market: January 2018 34 Over the course of the six years between 2010 and 2015, resale market activity grew marginally, though mostly in the highest market segment of properties over R1,2m. Resales in the R300 000 – R600 000 market segment came down, as did the percent bonded, from 66% in 2010 to 59% in 2015. While 44% of all resales in the sub-R300k market were financed with a mortgage in 2010, this had come down to 28%, involving 642 transactions in 2015. Table 2 Total repeat transactions: all and government sponsored Formal resale market activity in the government-sponsored market should not be surprising, although it is constrained by the eight-year resale restriction imposed by the Housing Act. While anecdotes highlight informal transaction activity, this remains to be quantified. Meanwhile, formal resale registrations of between 2 500 and 3 000 government-sponsored properties annually, are evident on the deeds registry since at least 2010. Also worth noting is the value bands in which these resale properties fit. The majority are, as expected, in the sub-R300k market. However, a significant number (about a fifth of annual resales) are in the R300 000 – R600 000 market segment, and by 2013, a few started appearing also in the higher value segments. Figure 19 Government sponsored resale transactions, Figure 18 Government sponsored properties resale Cape Town 2010-2015 transactions, financed with a mortgage, Cape Town 2010- 2015 Cape Town’s Residential Property Market: January 2018 35 Banks are also financing these Figure 20 Transactions financed with a mortgage: number and value by transactions. About 70% of all resale lender, Cape Town 2010-2015 transactions in the government- sponsored, R300 000 – R600 000, and R600 000 – R1,2m market segments were financed with a mortgage; in the bottom market segment, just under an average of 30% of annual transactions were financed with a mortgage. Resale market transaction rates (or churn) vary significantly by property type. Sectional title and estate properties have relatively high levels of turnover – more than double the average for all properties combined, showing a more vibrant market with more participation and opportunity for investment. A challenge for the city would be to use the interest in the sectional title market to stimulate opportunity further down the property ladder with lower priced homes that are affordable to the bulk of Table 3 Churn by property type, Cape Town 2010-2015 Cape Town’s demand side. All of this relates to formal resales, recorded by a conveyancer on the national deeds registry. However, it is understood that there are not an insignificant number of informal transactions that also occur. A recent survey by the Development Action Group (DAG) of a project they completed in Khayelitsha in 2015 indicated that 300 of the 1500 households had sold their properties informally within 11 months of project completion.37 These sales would typically be cash sales that are not recorded on the deeds registry, and not recognised by the City – and as such, do not represent a legal transaction. Of course, this puts both parties at risk as their understanding of the ownership status of the property differs from how it is understood legally. At the same time, the transactions represent a very real expression of value and market interest on the part of the buyers and sellers. The challenge to the City is how to incorporate this invisible market activity into our understanding of the wider property market, and ultimately, how to facilitate legal transactions that better protect the interests of the parties. This will also contribute towards growing the City’s rates base – a critical priority as it works to deliver more and better services to our residents. 37 Email communication between Illana Melzer of Eighty20 and Adi Kumar of DAG, November 13, 2016 Cape Town’s Residential Property Market: January 2018 36 3.2.3 Lending activity Overall, residential lending has grown in Cape Town since 2010 – with both the number and the value of loans increasing, suffering only a marginal slump in 2012. Over the six years from 2010 to 2015, the number of transactions financed with a mortgage increased by 25%, from 15 806 mortgage financed transactions across all market segments in 2010 to a high of 19 662 mortgage financed transactions across all market segments in 2015, showing greater activity and somewhat of a recovery from the pre-2010 slump.38 In this time, lending focus has shifted upmarket, with 32% of bonded transactions being in the R1,2 million market segment in 2010, and almost half (49%) in that segment in 2015. By contrast, over that same period, the share of lending in all other segments dropped. While the big four banks maintained their dominance, it is worth noting that the “other lenders” category, which includes lenders such as SA Homeloans, Investec, as well as employers, and other smaller lenders held 15% of total market share in 2015. Between 2010 and 2015, Standard Bank’s portfolio grew the most by both number and value, followed by FNB. Absa and Nedbank’s rate of origination has remained relatively constant. By market segment, Standard Bank has Figure 21 Total mortgage loans: number by lender, 2007-2015 been the most active in the affordable market, with about 23 000 loans between 2007 and 2015, almost double the next lender in that segment, Absa, with 12 898 loans in that period. Of course, across the board, there was more lending in the R600 000 market and above. The activity in the affordable market areas, however, is noteworthy. In the map, the percent of transactions which were bonded, by suburb, are highlighted. The total number of transactions is illustrated by the size of the bubble, while the percent bonded is illustrated by its colour, with darker bubbles showing a higher percentage of transactions having been financed with a mortgage. High income areas are shaded in dark green while lower income areas are shaded in light green. 38This data only records primary mortgages that were registered within three months of the sale transaction – that is property transactions financed by a mortgage. It does not include secondary mortgage registrations - properties for which there was no transaction and a second mortgage was raised on the property. Nor does it include the incidence where borrowers switch their mortgage from one lender to another. Cape Town’s Residential Property Market: January 2018 37 On the whole, a higher percentage of Figure 22 Percent bonded transactions, Cape town 2015 bonded transactions aligns with higher income areas. However, mortgage lending is clearly visible also in some low income neighbourhoods, such as Pelikan Park (31% of 914 transactions in 2015 were bonded, with the average transaction price being R310 216); Tafelsig (26% of 268 transactions were bonded, with the average transaction price being R125 120); Woodlands, in Mitchell’s Plain (44% of 208 transactions, with an average price of R231 967, were bonded); and Mandalay (87% of 207 transactions, with an average transaction price of R345 374, were bonded). Other areas with high numbers of transactions (Langa SP, Browns Farms and Delft SP, the large beige dots in the middle) had fewer than 5% bonded transactions in 2015, primarily because most of these transactions were the delivery of new subsidized housing. It is worth noting, however, that 14% of resale market transactions in Delft were bonded. 3.2.4 Housing prices Cape Town’s property market is well known for rising prices. Since 2012, prices have increased at 13% per annum to the end of 2015. However, this City average hides significant differences in performance across specific market segments, and also does not include property market dynamics in 2016 and the early part of 2017, which have been dramatic. A hedonic House Price Index (HPI) model39 shows an upward price trend for all freehold properties by quartile. The highest value quartiles are rising at a faster rate than the lower value quartiles, with the sub-R330k quartile demonstrating erratic performance, in part due to limitations in the data. 39 A House Price Index has been developed and piloted by Eighty20, using municipal data for Cape Town. This was part of a wider initiative exploring the use of city data to track and understand property market performance in Cape Town and two other metro municipalities, undertaken by CAHF for the World Bank, under the auspices of the Cities Support Programme, run by National Treasury. A separate report (A House Price Index methodology based on municipal data) sets out the details of that exercise, the results of which are reported here. Cape Town’s Residential Property Market: January 2018 38 Figure 23 Aggregate House Price index by market quartiles: Freehold properties (excluding RDP) by quarter INDEX INDEX SMOOTHED 180 180 160 160 140 140 Index Value 120 120 100 100 80 80 60 60 40 40 20 20 - - 2012-1 2012-2 2012-3 2012-4 2013-1 2013-2 2013-3 2013-4 2014-1 2014-2 2014-3 2014-4 2015-1 2015-2 2015-3 2015-4 2012-1 2012-2 2012-3 2012-4 2013-1 2013-2 2013-3 2013-4 2014-1 2014-2 2014-3 2014-4 2015-1 2015-2 2015-3 Price segment A (Less than R330 000) 2015-4 Price segment B (R330 000 - R700 000) Price segment C (R700 000 - R1 350 000) Price segment D (More than R1 350 000) For sectional title, while the HPI model shows much more variation, growth is still evident for each of the market quartiles, with the most growth in the middle quartile of properties priced between R860 000 – R1 520 000, and more recently, in the lowest quartile of properties priced at less than R580 000. The variation is, in part, due to fewer properties in the sectional title market and a lower number of transactions. Figure 24 Aggregate House Price Index by market quartiles: Sectional Title by quarter INDEX INDEX SMOOTHED 180 180 160 160 140 140 Index Value 120 120 100 100 80 80 60 60 40 40 20 20 0 0 2011-2 2011-3 2011-4 2012-1 2012-2 2012-3 2012-4 2013-1 2013-2 2013-3 2013-4 2014-1 2014-2 2014-3 2014-4 2015-1 2015-2 2015-3 2015-4 2011-2 2011-3 2011-4 2012-1 2012-2 2012-3 2012-4 2013-1 2013-2 2013-3 2013-4 2014-1 2014-2 2014-3 2014-4 2015-1 2015-2 2015-3 2015-4 Price segment A (Less than R580 000) Price segment B (R580 0000 - R860 000) Price segment C (R860 000 - R1 520 000) Price segment D (More than R1 520 000) A preliminary effort to develop an index specifically for government sponsored housing – using the City’s valuation roll identification of RDP, has found price appreciation of about 8% per annum Cape Town’s Residential Property Market: January 2018 39 between 2012 and 2015. This is not insignificant, and shows the potential of RDP or otherwise government sponsored properties contributing to the asset wealth of their beneficiaries. A key component of this value growth, however, is the extent to which it can be realised through resale market transactions. This is a critical area of opportunity for the City to support as properties in government sponsored settlements cross over the 8-year resale restriction threshold. Enabling filtering in the government sponsored market will substantially impact on the City’s ability to support the housing aspirations also of its residents in the so-called gap market. 4 Property Market Performance in Cape Town On the whole, Cape Town’s property market has been growing steadily, with a moderate rise in average property values and in transaction prices every year. Transaction prices (the prices that are achieved in sales) have been slightly higher than property values (the estimated value of properties based on trends), suggesting that demand is pushing prices up above actual values, and indicating an opportunity for more supply (on the other hand, it could also suggest that valuations are incorrect). The number of transactions has risen very gradually, with 32 000 transactions in 2010 to about 37 700 transactions in 2015, with a brief dip in 2011 and 2012. The majority of these transactions have been in the resale market; new build has been dominated by the delivery of government subsidized housing. A key challenge, however, is that the rate of new build has not matched the population growth rate – suggesting a growing rather than declining housing backlog. Lender participation as a proportion of total transactions has also been relatively consistent overall: about half of all transactions have been financed with a mortgage. This has contributed to the relatively stable (albeit insufficient) delivery of new housing and annual turnover (or churn) of existing housing. Cape Town’s Residential Property Market: January 2018 40 Figure 25 Key performance indicators, all residential properties: Cape Town, 2010-2015 Cape Town’s market is diverse, however, and the broad performance set out above hides very real variation from one market segment to another. In the affordable market segment of properties valued at less than R600 000, property values have been consistently higher than transaction prices. This may be explained by the lower level of mortgage penetration, with only about a third of all transactions financed with a mortgage bond. Notwithstanding that the affordability of the majority of Capetonians is likely to be found in this market segment (and towards the bottom end), the number Cape Town’s Residential Property Market: January 2018 41 of transactions (both new and resale) has declined per annum. Possibly as a result of depressed prices, or declining mortgage availability, churn rates are low. Figure 26 Key performance indicators, properties under R600 000, Cape Town 2010-2015 Cape Town’s Residential Property Market: January 2018 42 4.1 Housing Affordability and Access Housing affordability is a function of household incomes, the price of property, and the availability of finance. Incomes are notoriously difficult to determine; however, there are some indications. The following table sets out household incomes as defined by the 2011 Census, the 2014/15 NIDS survey40, and the 2015 AMPs survey. Depending on the survey used, the highest income households, earning above R20 000 per month, comprise between 13-20% of the population; middle income households earning between about R7000 – R20 000 comprise between 25-40% of the population; and low income households earning less than about R7000 comprise between about 41-61% of the population. Table 4 Cape Town population income distribution41 CENSUS 2011 HOUSEHOLDS NIDS 2014/15 HOUSEHOLDS AMPS 2015B HOUSEHOLDS Total MONTHLY HOUSEHOLD Montly GROSS Monthly Income (before Household Household NET tax & other income Total income Total deductions) Total No income 146 517 14% R1 - R3183 355 892 33%