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Report confirms inverse relationship between property prices, unemployment

Report confirms inverse relationship between property prices, unemployment

Photo by Bloomberg

28th April 2015

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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The “robust” inverse relationship between the rate of unemployment and housing prices continues to confirm that the average price of homes is largely driven by the performance of the local economy, the latest ‘Rode’s Report on the South African Property Market’ has revealed.

According to the report, released on Tuesday, house prices in Cape Town, in the Western Cape, accelerated towards the end of last year, where a comparatively low average unemployment rate was maintained.

In contrast, the average price of homes in Port Elizabeth, in the Eastern Cape – which had the highest unemployment rate of any metropole – retreated towards the end of 2014.

An exception to this trend was Bloemfontein, added publisher Rode & Associates CEO and editor Erwin Rode. Despite having a higher unemployment rate, the city was able to grow average house prices at the same rate as Cape Town.

Bloemfontein property specialist Mike Spencer added that strong demand for housing in Bloemfontein was likely the result of growth in the number of public-sector employees, as well as their unsustainably high salary increases.

Meanwhile, in terms of office rentals, the report found that rentals in Sandton – the country’s financial hub and premier office node – were shrinking.

“The current poor performance of rentals in Sandton comes as no surprise, given office vacancy rates that have been ballooning in recent years,” commented Rode.

In the fourth quarter of last year, market rentals for grade-A multitenanted office property in Sandton were down by roughly 4%.

Of concern, mentioned Rode, was the fact that committed new office developments continued to grow.

“The square metreage of committed new office developments in Sandton has now moved past the highs of the period 2006 to 2008. This was when the economy was booming while office vacancy rates were low and declining,” he cautioned.

Similarly to Sandton, the performance of rentals in other top suburban office nodes in Johannesburg was also “poor to modest”.

Office space in the decentralised portions of Johannesburg recorded growth of 2%, while rentals in Pretoria increased 5% and office rentals in decentralised areas of Durban increased 4%.

“The best performance, however, came from decentralised office space, in Cape Town. Thanks to office vacancy rates that were able to move south, the growth in market rentals in Cape Town accelerated to 10%,” said Rode.

Moreover, as a knock-on effect of a depressed manufacturing sector, growth in industrial market rentals stayed well below the growth in replacement costs.

In the fourth quarter of last year, the best growth in nominal rentals came from Durban and the Cape Peninsula, where rentals were up by 7%.

In Gauteng’s Central Witwatersrand and the East Rand, rentals showed slightly lower growth of 5%, while, over the same period, building-cost inflation came in with growth of roughly 9%, implying that industrial rentals again contracted in real terms.

“The implication of this is that the development of new industrial space is becoming more and more uneconomical, unless a long lease can be signed with a tenant at rentals that reflect a return on building construction costs,” said the report.

Flat rentals were, meanwhile, gaining momentum, with an 8% increase recorded in Pretoria, a 7% increase in the East Rand, a 5% increase in Durban and a 5% increase in rentals in Johannesburg and Cape Town.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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