Cape Town’s virtuous circle

I remember when Clifton, on Cape Town’s Atlantic coast, was home to a very different residential community. Among their number were artists, writers and poets. Accompanying them were a few remittance men (foreigners able to draw on financial support from their families back home) with a well-developed game of beach bats (best played on a summer evening). They lived modestly on land leased cheaply from the municipality, upon which comfortable wooden bungalows, as we called them, were perched on the steep inclines. Life indeed was a beach for those who had, somewhat mysteriously, acquired valuable residential rights and easy access to brilliant sunsets.

And then the City of Cape Town did something sensible. It offered the established residents the opportunity to convert their land leases into freehold at an attractive rate. Rents and the value of renovated homes then began an upward spiral that continues to this day. The original locals mostly sold up and cashed in their windfalls to be replaced by the rich and (perhaps) famous.

The originals chose to move on to other, less valuable locations and lower rentals. They traded off consuming less expensive accommodation for more of the other necessities of life. The renovators, demolishers and builders moved in to satisfy those who could afford more valuable homes on Clifton beach – homes that have proved to be good investments to offset higher rentals and higher real estate taxes levied on their market value. These homes have provided a growing flow of revenue from rates levied by the city.

A Clifton-type story is now unfolding in other parts of Cape Town and its environs, where rents and property values have been rising and are expected to continue to increase. High-rise real estate developments are underway to meet the demand for space, providing jobs and income way up the supply chain, including the supply of labour. The average price of a home in Cape Town and the Western Cape has increased by 60% since 2020. In Durban or Johannesburg, house prices have increased by only 12% on average since 2020.

Average house prices in Cape Town, the Western Cape, Johannesburg and Durban (monthly data, 2020 = 100)

Source: Stats SA, Investec Wealth & Investment International, 19/08/2026

There are, however, downsides to a successful city. These include traffic congestion for established residents and visitors, and increased strain on the delivery of water and electricity, refuse collection, and road maintenance and management. The other downside for those who do not own (and hence have not realised significant increases in their wealth) is more expensive accommodation. You can rent at much lower rates per square metre in Johannesburg and Durban.

The answer to the growing scarcity of any good or service, including accommodation, is to increase supply (“build baby, build”). All who travel to inner Cape Town from the North or the South will notice that undeveloped land is abundant near the city centre. Turning that low- or zero-yield land into homes is surely possible. The city, by adding, at its own expense, the infrastructure to connect vacant land to essential services, would help deliver more housing. This should translate into lower home prices, given competition. The additional income collected each year from rates charged on the additional housing stock would help recover the city’s costs. Investing in infrastructure can provide good long-term returns, both in kind and in cash, for a growing city.

Property developments can be made more viable when higher permitted bulk is exchanged for additional so-called social housing, as appears to be underway in Cape Town. Accommodation would be supplied at a subsidised rental for those fortunate enough. Many questions need to be answered about social housing, however. People with low incomes will not be able to afford even heavily subsidised rentals in high-rise buildings that have to be maintained. The essentially middle-income, or soon to become middle income, cohort of teachers, health workers and administrators could qualify. But how will they be selected? And will they be permitted to do another Clifton? They could rent out or sell up because it makes sense for them to spend less on what is becoming expensive accommodation and more on other essentials.

A successful city, with a growing stock of taxable real estate, can make choices that reinforce the potential to raise incomes, with a budget that provides for improved amenities that, in turn, add to property values. The tax revenue helps maintain the municipal capital stock and fund additional capacity to meet growing demand, thereby supporting and reinforcing property values, which in turn further improve revenue flows. This would be a virtuous circle made possible in Cape Town, avoiding being captured by its own officials, a fate suffered by other municipalities.

The value of taxed real estate in Cape Town has been rising by about 7% a year over the past 10 years, from about R1 trillion in 2016 to nearly R2.2 trillion in 2025. The average rate of the wealth tax on this property has been a consistent 0.07% per month. Taxes collected on property have been rising at about the same rate, from R6.5 billion in 2015-2016 to R13.92 billion in 2025-2026. The city expects R15.8 billion of income from rates in the 2026-2027 fiscal year, an annual increase of 13.7%.

Cape Town property values (left scale) and income from rates (right scale), Rbn

Source: City of Cape Town Financial Statements and Investec Wealth & Investment International, 19/08/2026

A charge that can perhaps be levelled at Cape Town is that it spends and funds too conservatively. It should be encouraged to do more with its strong balance sheet (minimal debt) and rising cash revenue streams. It could raise debt to expand its infrastructure in ways that would reinforce property values and revenues. More boldness is called for.