Western Cape, South Africa’s second largest housing market in the country, continues to have the lowest price inflation in the country, according to Lightstone January Indices released today. This is despite being the second largest housing market.

Western Cape’s inflation dropped to 10,1% in September, which Lightstone says, is a considerable drop from a year before when its inflation was at 14,5 However, KZN has shown a much steeper drop off from 19,6% in September 2006, to 12,5% in September 2007.

Of the four major provinces, Gauteng still appears to be showing the slowest pace of decline in house price inflation, and from 15,8% in September 2006, its rate had only declined to 12,5% a year later.

This relative stability in Gauteng, Lightstone notes, should be expected. “The province’s housing affordability never deteriorated as badly as the other major ones over the boom years, and its market is driven overwhelmingly by primary residential demand. In addition, it has a well-diversified services-driven economy, which makes it probably the most stable in terms of economic growth.”

Eastern Cape continues to outperform other major provinces at 15,7%, a slight recovery to its performance in January when inflation was 16,1%.

With the higher proportion of investment and holiday property demand in the coastal regions, Lightstone expects these areas should be more cyclical than Gauteng, given the less essential nature such buying. “Given rising interest rates, it is believed that many potential inland buyers of coastal property have been holding off for a while, exerting greater pressure on coastal markets than the primary residence-dominated Gauteng.”

“In addition, the heavy dependence of KZN on manufacturing and international trade may make it more exposed to the global economic slowdown currently in force.” Hence, Lightstone expects that the coastal provinces will bottom out in the cycle at significantly lower price inflation rates than will Gauteng.