How will the drought impact property prices?

With level 4 water restrictions set to be implemented in Cape Town, Justmoney asks whether or not this will impact property prices in the area.

Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, notes that lecturer of Environmental and Geographical Sciences at the University of Cape Town, Kevin Winter, recently highlighted that since 1995 Cape Town’s population has grown 55% from about 2.4 million to an expected 4.3 million by next year.

“Over the same period, dam storage has increased by only 15%. Do the sums – even with sufficient rainfall we clearly need to increase our water storage infrastructure or review our bulk fresh water processing methods to keep pace with the growing population. We have a massive ocean out there and desalination research, which has made massive leaps in recent years, coupled with reductions in the cost of the technology make it one option that should be seriously examined by provincial authorities.

“That said, even though there will be a scarcity of water in the Western Cape for at least a year, I do not see this having any impact whatsoever on the value of property,” says Geffen.

John Loos, household and property sector strategist at First National Bank (FNB), agrees that the water restrictions will not have a major “direct” impact on property values. “I say this because I think most people work on the assumption that a drought will end at some point and water supply will normalise. There may be a small group who would go for smaller no frills properties which use water efficiently, but I don’t think a lot will merely because of the “temporary” drought.”

Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, says that he does not see water restrictions having a negative impact on property prices in the near future. “I do think borehole or other more ‘green’ installations will add value to a property but that’s a general comment that’s not related purely to water restrictions.”

The water restrictions and property

Geffen notes that as we experienced with Eskom’s rolling blackouts and the subsequent effect on the overall economy, it’s only if there is no infrastructure development plan in place long term that water will become a meaningful deciding factor in the purchasing of homes. This is not just an issue in the Western Cape, but globally.

“In South Africa, major repairs need to be undertaken to existing structural networks if GreenCape’s market intelligence report earlier this year is accurate that nearly 40% of potable water is being lost through leaks in aging infrastructure. Preventing that loss is almost half the job done,” says Geffen.

He adds: “In property terms the national flood of semigration to the Western Cape continues unabated despite the ongoing drought and still shows no sign of slowing. While the market has flattened significantly across the rest of the country many people seem to be cashing in every last cent of their savings in order to afford the relocation south-west, where in Cape Town in particular, you’re generally paying twice as much as you would for an equivalent home elsewhere in the country. Drought or no drought, the perception remains that the lifestyle offering in the Western Cape is the best in the country, as is the service delivery.”

Houses with swimming pools

The new water restrictions prohibit the use of municipal water (potable water) for external use, such as water gardens or filling pools. However, Goslett notes that a pool is a luxury item, as such people who purchase a property with a pool can probably afford the maintenance.

According to Geffen, low pool levels aren’t a factor at all in Cape Town. He reveals that homes with pools that do show a drop in water level that are currently on the market, are more favourably perceived by buyers than those with full pools, because unless you have a borehole on your property as a Cape Town resident, a topped up pool means you don’t care about the water crisis, therefore you don’t care about your city, your environment or your community. Cape Town tends to pride itself on its environmental awareness, so things like that don’t go down well.

However, there is also a trend towards more compact living. This includes smaller gardens that are more manageable. Despite this, Geffen notes that in a hot country like South Africa, there will always be a demand for swimming pools. “Many have reduced in size over the years from being able to accommodate the entire neighbourhood’s children to the more modern plunge or lap pools, but they remain high on the list.”

Factors that may impact the property sector

According to Loos, a greater concern would be if water tariffs were to ‘beat general inflation’ over the coming years to become a lot more expensive, as has happened with electricity. He explains that his would have a noticeable impact on the size and water efficiency of homes in demand over this period. “The move towards smaller homes has already been going on for a few decades, earlier due to mounting urban land scarcity and more recently I believe die to multi-year municipal rates and tariff hikes.”

However, despite Loos believing that property prices would not be drastically impacted by the drought, he notes that if the drought is not alleviated in the Western Cape any time soon, it is conceivable that it would start to impact heavily on the economy and job creation in the region, and that potential economic impact (depending on how much worse it gets), can significantly dampen property demand. “This is what I call the indirect impact on property.”

Geffen adds: “Unless properties have boreholes for irrigation, it is just a fact of life that gardens in Cape Town are going to be dry and sun-baked at the moment and buyers understand that. If shrubs have completely died, when the winter rains start it’d be a good time for home owners to consider replacing them with more hardy indigenous plants that will better withstand the Western Cape’s climate, and perhaps reduce the size of large lawns that require frequent watering by creating feature extensions of paved or decked outdoor entertainment areas. This will in turn increase the resale value of the house.”

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