According to Standard Bank, the proportion of cash property transactions compared to mortgage transactions is increasing across all the major provinces.
This is mainly as a function of declining mortgages rather than an increasing number of cash transactions, and reflects tighter domestic credit conditions.
Of the cash transactions, Gauteng accounts for 34%, and Western Cape for 31%. However, Western Cape now has more cash than mortgage transactions, with cash transactions accounting for 56% of all transactions in the province.
“The Western Cape now attracts more affluent buyers who can pay cash for property, as opposed to middle-income buyers who rely on mortgage financing,” says a Standard Bank spokesperson.
“We use data from the Deeds registry for all registered property transactions in South Africa, both cash and mortgage transactions; we then estimate the volume of property transactions in SA.
“According to our estimates, property transactions in the fourth quarter of 2016 were at a low last seen in the first quarter of 2010, and were also 48% below the peak of the first quarter of 2007. This is not surprising given high interest rates and the soft labour market. Moreover, given low consumer confidence, households have been wary of financial commitments such as buying a home.”
The data shows that the number of cash and mortgage transactions is converging amid tighter credit conditions post-GFC (Global Financial Crisis). Data suggests that the share of cash transactions increased significantly from around 20% in 2006/07 to around 40% in 2009 (post-GFC); and then slipped to around 36% by the third quarter of 2011 before rising again. By the fourth quarter of 2016, cash transactions had risen to 46% of residential property transactions, the highest since the third quarter of 2002.
The sharp increase in the share of cash purchases in 2008 and 2009 was a function of mortgage transactions declining sharply rather than the number of cash transactions increasing. Likewise, mortgage transactions have fallen faster than cash transactions, particularly between the fourth quarters of 2015 and 2016, with mortgage transactions declining by 24.5% versus a 20% decline in cash transactions in the same period.
“This reflects adverse labour market conditions and tighter credit conditions, which limit the number of people able to access mortgages, whereas fewer such constraints apply to cash buyers. This situation echoes that of the financial crisis. We do not, however, expect a similar nominal decline in home prices as was experienced during the financial crisis. But we expect that the tight lending standards currently applied by lenders will hinder robust growth in property prices.”
Data shows that the median purchase price paid by cash buyers has been lower than that of mortgaged counterparts since around the third quarter of 2002. In the first quarter of 2017, Standard Bank estimates that the median purchase price paid by cash buyers was 24% lower than that paid by mortgaged buyers. Further, cash buyers buy relatively bigger properties, at a lower median price a square metre. In the first quarter of 2017, the price a square metre differential between cash and mortgage transactions was 32%.
“Cash buyers are usually in a better bargaining position, and also, sellers may be more amenable to offering discounts to cash buyers in trying to expedite transactions. This is also more likely when a property has been on the market for a long time. Related to this, cash buyers likely have more time to look around for bargains, which may include distressed sales. All of this can lead to higher price volatility in cash transactions.
“In absolute terms, both mortgage and cash transactions are falling. We expect a meaningful recovery in household credit extension only in the first half of 2018, which should support buying activity, particularly mortgaged-backed purchases.”
A regional perspective
Gauteng had the most property transactions at 42% of all transactions in 2016, followed by the Western Cape with 25%, KZN with 11.5%, and Eastern Cape with 6%. After the surge in house prices in the Western Cape, the volume of transactions rose significantly to 25% in 2016, from 19.5% in 2008, possibly as buyers chase yields.
The rest of the provinces (Free State; Limpopo; Mpumalanga; North West; Northern Cape) in 2016 accounted for a combined 13% of all property transactions in SA and roughly 2% could not be allocated definitively.
In contrast, data from BMR shows that these provinces (Free State; Limpopo; Mpumalanga; North West; Northern Cape) accounted for about 23% of household disposable income in 2016 or close to double the share of property transactions. This implies that while people derive a decent income in these provinces, they prefer homes in urban provinces such as Gauteng and the Western Cape.