The impact of affordability on house price dynamics in South Africa

Abstract

Lately, the residential property market in South Africa has experienced much turbulence. Some perceived growth as a ‘property bubble’, while others considered it a healthy investment opportunity. This article considers the fundamental drive behind residential property demand and analyses the recent property cycle compared to the past. It also considers the effects of residential property demand on the construction industry. The study investigates the variables that drive property demand and uses methods of statistical fit of historical macro-economic variables to apply to a South African context and to explain recent residential property activity. Research found that residential property demand and subsequent market prices are to a large extent influenced by affordability, which is indicated by capitalising rent as part of disposable income with the prime lending rate of banks. Gross domestic product, as the main indicator of growth within the country, is the main driver of disposable income for households, and can subsequently be used to foresee growth and its effect on affordability and residential property values. The article provides insight into the spending behaviour of households, and shows how that behaviour flows over into spending on housing, and the subsequent influence on residential property values.