Q3 for 2023 has come and gone! This is a great opportunity to take stock of what the property market has done this year and think about where it might be going as we move into the New Year.
Apart from the general market overview for this core part of the Southern Suburbs of Cape Town, there are a couple of interesting drivers of the market that are worth taking a look at.
In this article, I’ll look at:
2. How have the freehold and sectional title sub-markets fared?
3. What has the impact of interest rates been on prices?
In fact, interest rates have been a significant factor in how the market has moved over the last 3 years. So, when I review this, I’ll also give a quick overview of how interest rates actually affect property prices - this is an important concept!
And if you prefer watching the market review in video, hit the thumbnail above!
General Market Overview for Q3 2023
Let’s get to the good stuff and dive into what the property market in Claremont, Harfield Village and Kenilworth has been up to.
And by the way, this isn’t too dissimilar to other markets in Cape Town. But, be aware that there are local factors that influence each area. If you want to know more about somewhere outside of these suburbs, whether it’s in Cape Town or South Africa, I would be happy to connect you with someone who has a deep understanding of those neighbourhoods. Click here to send me a WhatsApp message so that we can connect.
This part of Cape Town has a large variety of property options that will meet many needs including those buying for the first time, parents looking to house their kids when they go to university, investors seeking a rental return, families wanting a great environment for their children and people looking to right-size for their stage of life.
The community within the Southern Suburbs is excellent and there is very easy access to lifestyle activities like the mountain and sea, some of the best schooling in the country and all the amenities, shops and restaurants you need. Given what’s on offer here, it is a very popular part of Cape Town, reflected in the fact that the average tenure is just over 12 years - people buy and stay!
The Property Market Numbers
| Property Market Indicators | ||
| Indicator | Year on Year (YoY) | Quarter on Quarter (QoQ) |
| Average Sold Price | ⇧ 2.9% | ⇩ 6.8% |
| Average Days on Market | ⇩ 41.4% | ⇧ 20.0% |
| New Listings | ⇩ 23.7% | ⇩ 5.5% |
In general, over the last year, property price growth has been decent up to Q3 of this year when prices started to drop off. At first glance, a 6.8% drop in the market overall seems like a lot!
What has caused this? Are alarm bells ringing?
A few things have happened here. To understand what has impacted the price, we need to look at some of the other numbers, with an explanation where necessary.
Average days on market has seen some fairly large movements. I’ll take a moment to give context to what this means and then look at how this relates to the market.
Days on market is how long a property takes to sell after it is listed and is a good indication of supply and demand in the market. Supply is the number of listings available to buy and demand is the number of buyers available to buy them.
If the number of buyers increases but the number of properties doesn’t you end up with many buyers competing for 1 property. As an example, the first buyer may offer X amount for a property, the second buyer may offer X plus R50k and the third buyer may offer X plus R100k. Sellers also clock onto this and up the price when they list with the overall result being price escalation, or what we term a seller’s market. Usually, when this happens, properties sell quickly and days on market comes down.
The exact opposite happens if the number of buyers decreases but the number of properties doesn’t. In this scenario, there are many properties available to one buyer - they have their pick of the bunch. In order to sell, sellers compete against each other for buyers to present an offer for their property and they end up accepting less than what they otherwise would have. You tend to see property prices come down slightly when this happens, otherwise known as a buyer’s market. Usually, when this is the case, buyers take their time to find the right property at the best price meaning properties take longer to sell with days on market increasing.
The fact that average days on market is significantly down on last year (properties are selling quicker) indicates that there is still demand in the market but, with the increase over the last quarter (properties are taking longer to sell), the market has started shifting along the continuum towards a buyers market. Although, in my assessment, we’re not deep into a buyers market - there is still reasonably strong demand with properties still selling reasonably quickly.
Something else that is very important to look at are market sub-segments. In this case, I’m specifically talking about what’s happening to the Sectional Title market and the Freehold market. I’ll go into a little more detail about these markets in a second, what’s key for the purposes of this overview is how the number of sales in each sub-segment has shifted.
Last year Sectional Title made up 39% of total property sales. This year that has changed and Sectional Title makes up 46% of total sales, 7% more! Given that Sectional Title sells for far less than Freehold (on average almost R1,7m less), the fact that far more Sectional Title properties have sold this year compared to last year has brought the overall average selling price down more than it otherwise would have.
Lastly, we know that interest rates have been on the rise. These are 21% up on where they ended in Q3 of 2022 (9.75%) and a whopping 68% up on the lows we reached in 2021 (7%). As a rule of thumb, when interest rates go up significantly, prices will typically start to go down - more on this later - and that’s certainly what we’re seeing here. The increased interest rate and increases in the cost of living is leading to a decrease in prices and an increase in the time it takes to sell properties.
CLICK HERE TO SEE MY PROPERTY MARKET REPORT WITH ALL THE LOVELY NUMBERS AND GRAPHS
Is this all doom and gloom?
Well, the good news is that it seems we have hit the top of the interest rate-rising cycle. Inflation is looking better and interest rates haven’t risen for a little while. If things remain stable, I expect interest rates to stay steady or even drop over the next 3-6 months. And this may well make the market far busier again!
And if you need to sell in the interim? We don’t have a crystal ball, and while my experience gives me an indication of where things may be headed, it can all change in an instant. My advice would be not to try and time the market. Most markets and areas are being impacted by the same factors meaning if prices have taken a step back here, it’s happening elsewhere. If you’re selling now and want to buy again, then buy now as well and you shouldn’t lose out. If you decide to sell and then wait, you may find the market has moved on and the price you pay in the future is more than you would have paid today resulting in needing to pay the difference and losing money.
Freehold vs. Sectional Title
What’s the difference between these two property types?
Freehold
Sectional Title
Since COVID in 2020 and the subsequent interest rate drops the freehold property market really took off, we saw a huge increase in activity and people purchasing houses. On the other hand, Sectional Title really struggled and didn’t return to where it was before 2020.
The last year has been different. Sectional Title has made a big comeback with investors returning, parents buying for students again and people generally looking at these properties as a good option.
| Freehold vs. Sectional Title Market Indicators | ||||
| Indicator | Freehold | Sectional Title | ||
| YoY | QoQ | YoY | QoQ | |
| Ave. Sold Price | ⇧ 7% | ⇩ 3% | ⇧ 10% | ☐ 0.0% |
| Ave. Days on Market | ⇩ 3% | ⇧ 27% | ⇩ 63% | ⇧ 12% |
As can be seen by the table above, both sub-markets have grown nicely over the last year but Sectional Title has outstripped Freehold by 3% and, while Sectional Title has been flat from last quarter to this one, Freehold has dropped back by 3%. We see the same situation playing out for days on market with Sectional Title being stronger than Freehold. However, while both sub-markets have seen days on market increase over the last quarter, properties are still selling relatively quickly at 34 days for Sectional Title and 40 days for freehold. This shows that demand has still been there, it would be worrying if days on market was approaching 80 days.
Interest Rates and Prices
As noted previously, interest rates have been a significant driver of prices over the last 3 years.
But how does this work, how do interest rates affect prices?
In a nutshell, lower interest rates make buying more attractive leading to increased demand, buyers competing for properties and prices escalating. Higher interest rates may lead to decreased affordability, causing some buyers to exit the market meaning sellers compete for fewer buyers which leads to prices decreasing.
What Happens When Interest Rates Drop?
I’ll illustrate this using an example. Let’s say in 2019 a person could afford a R2m property at a 10.25% interest rate meaning they would need to pay R19,600 a month for the home loan. Maybe in this scenario, the person can’t find the property to suit their needs at this price or they can find a rental that offers them more at a lower price so they decide not to buy.
COVID comes along, disrupts everything and interest rates drop to 7%. Now the same home loan of R2m costs R15,500 per month, making buying more appealing. Or if the buyer is still able to afford the R19,600 payment per month, the home loan they can get goes to just over R2,5m meaning they can afford the house that meets their needs. The result is that more buyers enter the market and, as we noted before, when there are more buyers they compete on price for the same properties which can lead to price escalation.
What Happens When Interest Rates Increase?
The reverse happens when interest rates go up. To continue with our example, in 2021 the interest rate was 7% and our buyer could afford a property of R2m with home loan repayments of R15,500 per month.
Interest rates then increased to 11.75%, where they are now, and that R2m property costs R21,700 per month. At R4,200 more per month, this is unaffordable for some buyers and they decide not to buy.
Alternatively, they look at what they can buy for R15,500 per month and find that they can afford a property that costs just over R1,4m. At this price, they can’t find something that suits their needs and also decide not to buy.
The result is that buyers exit the market and, with fewer people looking to buy homes, sellers compete against each other to sell their property dropping their price to do so and we see property prices start to come down.
These are simplified explanations and a number of other dynamics are at play. But, there have been fairly significant shifts in interest rates over a relatively short period of time and this certainly has had an important effect on the property market.
To Round All This Up
While the market has taken a backward step over the last quarter, it’s not all doom and gloom. It feels as if it’s taking a pause, drawing breath and waiting to see what happens in the next 2-3 months.
Given how interest rates have played a big role in what property prices have been doing, it’s important to keep an eye on this number. Right now, we seem to have reached the top of the interest rate-raising cycle and, if interest rates remain steady or come down, I suspect we could see far more activity moving into the New Year - at least, I certainly hope so!
The real estate market is dynamic, and individual circumstances vary. If you have questions, need more information or are thinking of buying or selling then reach out!