The Ripple Effect

The Ripple Effect

08-06-2005

Like a stone thrown into a pond, prosperity ripples out spatially from the areas where the strongest economic growth is happening. As is the case with a stone, the size of the economy at the particular growth point also determines how notable the ripples will be and how far they would move out from the centre before dissipating.

Rode’s Report editor-in-chief Erwin Rode says that while it is useful to know that the ripple effect will inevitably take place around every significant growth point in an economy, it is not as easy to see or as immediate as the effect of a stone thrown into a still pond.

Socialists deny that there is such a ripple effect, and are proponents of forcing economic growth where it is needed. According to Rode, when spatial trends are analysed, however, one can clearly see that the economy starts growing in the urban epicentres, and then moves outwards to secondary cities, and from there to towns.

The ripple effect can be picked up most clearly in the residential market. The ripple effect can move very slowly, as the house price boom has demonstrated. House prices started increasing in the metropolitan areas in 1999 and only reached some towns in SA about two years ago, if at all. The ripple effect can also only continue as long as there is continued economic activity and job growth at the centre.

This natural rippling out of economic activity from the big urban economies - based on the vibrancy of growth at a particular time in a particular place - is one of the reasons why a variation in economic growth rates is experienced in different metropolitan areas.

Rode’s analysis of historic flat rentals* revealed that fifteen years ago the levels of flat rentals in all the major national metros were roughly similar, for instance. Since 1995, Port Elizabeth’s rental growth, and to a much lesser extent, that of Pretoria, started lagging behind the rest. Durban was not left unscathed either, and in the late 1990s its rental growth also started to lag behind that of Johannesburg and Cape Town.

In the last two years, however, the Rode team has seen rentals in Durban and Port Elizabeth grow at a double-digit rate. Currently a standard-quality 1-bedroom flat in Durban, Cape Town and Johannesburg costs, on average, R2000/month, while in Pretoria the same flat is somewhat less at R1600 per month, whereas in Port Elizabeth it is even lower at R1500/month.

* Rode's Time Series database dating back more than two decades, serves as a handy instrument to gauge such spatial trends.