Weekend Argus (Saturday Edition)
First the buzz, then blues for the market
Additional pressures on consumers will see property negatively impacted by belt tightening
THE PROPERTY market’s confidence and optimism after the change in the country’s leadership fizzled out quickly this week when the 2018 Budget made it clear times are going to remain tough for home owners and buyers.
Although properties up to R900 000 are still exempt from transfer duties, and interest rates could drop later this year, Value Added Tax (VAT), and fuel levy increases will hit households and property prospects hard. The tax increase on estates above R30 million will hurt property investors.
“With all the money government proposes to take out of the pockets of consumers, the affordability of houses will be negatively affected,” says Erwin Rode of Rode and Associates.
The property market will be directly and indirectly impacted, particularly by:
The VAT increase from 14% to 15%.
The increase in tax on upper incomes due to fiscal creep.
The hiking of tax rates to 25% on estates above R30m.
The increase in fuel levy.
Rode says his “best estimate” is that house prices in South Africa, excluding Cape Town, will decelerate to just above 0% growth.
“The number of sales will also decelerate further, but not catastrophically. In Cape Town, the prognosis is more difficult as house prices here are still booming. One can assume buyers of houses have a time horizon of about 10 years, so it is unlikely the drought will affect buyer decisions. Nevertheless, the growth rate in Cape Town would probably normalise to about 5%.”
The VAT and income tax increases due to fiscal creep are the main factors in the Budget that FNB’s household and property sector strategist John Loos believes will affect property.
“That’s a housing market negative because it sustains the trend of households paying an increasing portion of their income to tax, thus there is less available for housing demand.”
These two factors will definitely impact consumer finances and property affordability, agrees Absa’s property economist Jacques du Toit.
Although the 1% increase in VAT – payable on the transaction of newly built homes – seems slight, Richard Gray, Harcourts Africa chief executive, says transactions like high-value commercial properties or development investments might feel the increase more than those in the middle to lower end of the market.
He says: “South Africans experiencing rising food and fuel costs and tax hikes might continue to be under financial pressure as more increases can be expected. Tax increases impact the person in the street in a direct manner, and this might have an effect on the rental market at the lower end.”
The increases can also be expected to push up construction costs, making new housing stock across the board more expensive, says Colin Anderson, a director of Rabie Property Group. VAT is charged on sales of new homes so an extra 1% will make new homes less affordable, particularly at the lower and middle ends.
Grays says: “While VAT is charged on new housing, transfer duty is charged on resales (sales of existing housing stock). There was no mention of an increase in transfer duties. If these remain unchanged this could see the differential between new and older housing stock widen, with the latter becoming more attractive to purchasers and disadvantaging developers and the construction industry.”
The tax rate increase on estates above R30m will also impact direct property investments and cause wealthy individuals, who have previously looked at personal property investment portfolios as long-term wealth storage vehicles, to consider alternatives which may be easier to liquidate and transfer to more tax efficient options, says Alexander Swart Property Group director Rowan Alexander.
The VAT increase, although marginal, will put “additional stress” on lower to middle income families already struggling to qualify for mortgage loans and make debt repayments.
“Increased financial pressure on these families may prove a risk to recent optimism surrounding property growth forecasts for 2018/19 and will cause an increase in demand for rental property.”
The rising tax burden on a shrinking base is worrying for the economy and property, but it was always going to be a tough budget, says Seeff Property Group chairman Samuel Seeff.
There was a significant fiscal budget deficit that had to be funded and, with a sluggish, albeit improving economy, this could only come from higher taxes.
“(But) by taxing the very people who are growing the economy, you make it very difficult for business owners and entrepreneurs to feel positive about investing further. Uncertainty about property ownership is also concerning.”
Seeff says the effect of weak confidence has been evident in the property market, where, since last year, there has been an accelerating decline in activity, especially at the upper end of the price scale.”
“Those who do not need to sell or buy, are preferring to hold back. This means fewer transactions and a decline in transfer duty paid to government.”
Come March 1, almost all South Africans will have less real disposable income than they do today, says Jawitz Properties chief executive Herschel Jawitz.
Although the “unpalatable” VAT increase erodes consumers’ disposable income, particularly among lower income earners, Pam Golding Properties chief executive Andrew Golding says it was anticipated, and hopes it will go a long way towards offsetting the Budget deficit.