How to make Cape Town more affordable

Build, baby, build

It’s expensive to rent an apartment in Cape Town. And it’s becoming more so.

In 2018, the PayProp Rental Index revealed that the Western Cape was already South Africa’s most expensive province for tenants, with average monthly rents reaching R8,795. Fast forward six years to 2024, and this figure had surged by 24%, climbing to R10,875 per month. This increase far outpaced the rental growth in the country’s two other major economic hubs, Gauteng and KwaZulu-Natal, where average rents rose by a more modest 15% over the same period. The Western Cape’s rental market, therefore, not only remained the priciest but also saw a significant acceleration in rental inflation relative to its peers.

We have no definitive evidence of why rental prices are going up, though I can think of many potential reasons. Cape Town is wealthier than the rest of South Africa; its GDP per capita is R151,284 compared to the R112,563 for the average South African. It’s also growing faster, though, as I’ve written before, the statistics on this are rather dubious. What is clear is that Cape Town is attracting migrants across South Africa. As other metros buckle under the weight of, shall we say, revolutionary wear and tear, Cape Town’s world-class infrastructure – and water – becomes an attractive proposition.

Investors are responding to the positive economic climate, too. In late 2023, Amazon moved into its new Africa headquarters in Observatory. Several new hotels – here, here and here – have recently opened or are currently under construction, and this year, the Waterfront will begin its most ambitious project yet: a twenty-year R20 billion development plan to reclaim land from the sea and build residential apartments, retail spaces, hotels and cultural facilities.

All of these are good reasons to expect rents to rise faster than other parts of South Africa.

But a new scapegoat has recently emerged to take the heat for rising rents: digital nomads. On News24, Unesco youth ambassador Tara Roos suggests they should pack up and leave, accusing them – without evidence – of stealing apartments, jobs, and even our culture. As she puts it: ‘To us, Cape Town in December is not just a place; it’s a feeling. A feeling that for these digital nomads is fleeting. They do not understand our culture.’

Tara’s solution to save our rent, jobs and culture? ‘The City of Cape Town should consider implementing rent control measures to cap rent increases in popular neighbourhoods’.

Rent control is a policy in which governments set limits on how much landlords can increase rents, typically to keep housing affordable during times of rising demand. While it may offer short-term relief for tenants, rent control often discourages new housing development and reduces the incentive for landlords to maintain properties. The result? Fewer available rentals, lower housing quality, and, ironically, rising prices in the uncontrolled market as supply tightens further.

Or, as John Cochrane put it best, ‘rent control is always popular – the best way known to ruin a city short of bombing.’

I’ll give Tara the benefit of the doubt. Idealism often burns brightest when you’re young, propelled by the hope of creating a better world. But I have less sympathy for Ndifuna Ukwazi Law Centre’s Jonty Cogger, who thinks rent control is the answer because, bizarrely, apartheid-era suburbs like Thornton had rent control for white tenants. Or Howard Law professor Ziyad Motala, who argues on News24 that Cape Town needs ‘strict regulation of short-term rentals’ to avoid ‘exploitation’. Funny how lawyers always think the law can outmuscle supply and demand. Hammer, meet nail.

What is needed isn’t a hammer, but a chainsaw. When Argentinian president Javier Milei scrapped rent controls in late 2023 as part of his sweeping deregulatory reforms, the results were swift and dramatic. Rental supply increased by over 170%, and average rent prices dropped by 40%. Milei’s reforms allowed landlords and tenants to negotiate freely again, letting the market mechanism do what it does best: balancing supply and demand without the distortions of heavy-handed regulation.

Or consider this evidence from a new paper by Andreas Mense in the Journal of Political Economy Macroeconomics. Using data from Germany, Mense examines how increases in new housing supply affect rent levels across the market. His research, which cleverly exploits rainfall delays during construction as a natural experiment, finds that even small increases in market-rate housing supply can reduce rents across the entire distribution. Specifically, adding one new unit of housing for every 100 rental units offered on the market reduces rents by 0.4% to 0.7%.

Mense finds that this impact is not limited to luxury housing – rents decline across the market, including lower-cost units. He attributes this effect to the ‘filtering’ process, where newly available high-end units free up older, more affordable homes as wealthier renters move into new buildings. These results directly challenge the idea that only subsidised housing can ease affordability pressures, showing how increasing supply – even without direct subsidies – can have broad benefits.

So, what should Cape Town do to combat rising rents? The title of a new graphic novel by economist Bryan Caplan offers a bold answer: Build, Baby, Build. His argument? Soaring housing prices are largely the result of excessive regulation that restricts construction, artificially limiting supply and pushing up costs. Zoning laws, height restrictions and lengthy permitting processes have made building new housing so difficult that demand has outpaced availability, especially in desirable areas.

Caplan argues that radical deregulation – allowing property owners to build taller, denser and more freely – would not just lower housing costs but could reduce inequality, improve economic mobility and even curb homelessness by expanding affordable housing options. He calls it a ‘panacea policy’, making the case that fewer barriers to development would benefit nearly everyone: from middle-class families priced out of central locations to young professionals struggling to find rentals. His message is clear: more housing, not more rules, is the way out of the crisis.

In South Africa, the so-called ‘construction mafia’ adds to the regulatory hurdles. These criminal groups extort developers for a share of projects, creating new layers of risk, delay, and cost. Their actions, combined with existing regulatory hurdles, inflate building costs and deter investment, making housing even more unaffordable.

If the goal is to make housing more affordable, the focus should be on reducing red tape, not adding rent control. As Nick Hedley succinctly summarised in his column on the topic last year, the only two sustainable ways to tackle rising rents are densification and an expanded public transport network. Both, however, depend on clearing the regulatory bottlenecks that make building taller and building smarter more difficult than necessary.

The evidence is clear: cutting rents starts with cutting red tape.

An edited version of this article was published on News24. Lisa Martin provided helpful research assistance. Support more such writing by signing up for a paid subscription. The images were created with Midjourney v6.