Minister Pravin Gordhan had a difficult budget speech to deliver on 22 February as the economy struggles through its largest under performance since the 2009 recession, with the added challenge of a R30.4 billion tax shortfall.
The economic growth forecast remains unchanged at 1.3% for 2017, 2% for 2018 and 2.2% for 2019.
Bruce Swain, MD of Leapfrog Property Group, who discusses how this will affect the South African property market:
A quick overview of tax increases
As part of a R28 billion package of tax hikes, South Africans earning taxable income above of R1.5 million per year will now pay 45% personal income tax. The top previous bracket was 41% at R701 301. On the other end of the income spectrum there is limited bracket creep relief with the increase of the tax free threshold from R75 000 to R75 750.
While VAT remains unchanged, there will be increases in the general fuel levy (of 30c/litre) and 9c/litre in the road accident fund levy. Excise duties for alcohol and tobacco will increase between 6% and 10%.
“It’s time to look at different ways to live. Most of us tend to wait until a crisis like a drought or power cuts to start a vegetable garden, consider solar electricity or using public transport (where possible) to save on petrol costs,” says Swain.
“I think we could all benefit from being more pro-active – Minister Gordhan has indicated that there will be a further R15 billion increase in taxes next year, and who knows what economic and or natural challenges our economy could face? It’s now more imperative than ever to decrease the household debt-to-income ratios so that homeowners are better prepared for these increases and any unexpected economic setbacks.”
Good news for buyers
In a move that will save buyers a significant amount, the threshold for the payment of transfer duty on house purchases has been increased from R750 000 to R900 000.
The residential property market has been struggling, barring a few exceptions like the Western Cape’s Atlantic Seaboard with the latest FNB Mortgage Barometer indicating that the number of residential transactions fell by 4.8% year-on-year in the 12 months to the end of October 2016.
“Buyers were given some relief in 2015 when the threshold was raised to R750 000 (up from R600 000 in 2014). This further increase to R900 000 will do much to alleviate the pressure on buyers, which will in turn boost the property market,” says Swain.
Retain your investment for longer
Swain says he applauds both Minister Gordhan and Minister Sisulu for appealing to homeowners, especially in the lower end of the property market, to hold on to their homes for longer.
“A house is an asset that can be used to generate real wealth – not just by eventually selling it for a good price, but to by using it as collateral to fund a child’s education, for example. This is responsible advice that ought to be applied by all South African homeowners,” he says.
Gerhard Kotzé, MD of the RealNet estate agency group, says the Budget is extremely positive and encouraging for the real estate industry, apart from the hefty increases in the fuel and road accident fund levies, which will increase household transport costs.
“From our point of view, there will be an immediate benefit from the increase in the transfer duty threshold to R900 000. This will be a huge relief not only to first-time buyers, but also for many existing owners who are downscaling now from large homes to smaller ones in order to reduce their expenditure on maintenance, rates and utilities such as water and electricity,” says Kotzé.
“The new threshold will enable many of these buyers to use all the equity built up in their existing homes as a deposit on their new home instead of having to divert some of it to transfer duty.”
He says this, in turn, will mean that they are able to reduce their monthly bond instalments and use the difference to pay off debt or save more.
“Meanwhile, the change will lower the amount of cash that first-time buyers need to cover a deposit plus transaction costs, and that will definitely make it easier for them to acquire their own homes sooner rather than later,” says Kotzé.
“On a home priced at R900 000, the cash amount required for transaction costs will now decrease from almost R40 000 to approximately R25 000 – and being able to put the difference towards the deposit will definitely bring forward the purchase date.”
Kotzé says other positive aspects of the Budget for real estate include the fact that there was neither a VAT increase nor an across-the-board increase in personal taxes, and that there was no increase in the Capital Gains Tax rate which would have acted as a deterrent to property investors.
“We also appreciate the renewed focus on the redevelopment and improvement of urban infrastructures, including roads, water reticulation networks and public transport. If these plans can be implemented as envisaged, it will raise living standards in our cities and towns and have major spinoffs, not only in terms of property demand, but in terms of tourism, enterprise development and job creation,” says Kotzé.
“And finally, we applaud the fact that the Minister was able in these difficult times to find an additional R600 million for the social housing authority to provide affordable rental housing for poor people close to employment opportunities in the inner cities.”
Berry Everitt, CEO of the Chas Everitt International property, group says Minister Gordhan has made a brave – and somewhat unexpected – move in deciding to focus this year’s Budget on economic growth rather than “play it safe” with a contractionary plan to cut expenditure and reduce the country’s deficit at all costs.
“He has clearly taken the view that the only way for the country to move forward is to ‘spend on the right things’ – that is, on doing what it takes boosting consumer confidence, attracting investment, facilitating enterprise and fostering job creation. And we are delighted because these factors are also the keys to a healthy and growing real estate market,” says Everitt.
“Nevertheless, most households will remain under pressure this year due to the higher cost of living and higher debt levels, and we don’t expect an immediate spike in home purchasing. As Minister Gordhan noted, it is going to take time for consumers to regain their trust and confidence in the economy and to feel the benefits of the policies laid out in today’s Budget.”
“They are also likely to adopt something of a ‘wait-and-see’ attitude towards the Minister’s promises that wasteful public sector expenditure really is being cut and that procurement and other corruption really will be tackled at all levels.”
“Despite the constrained economic outlook and the message by the Minister of fiscal prudence, the South African property market outlook for 2017 is cautiously optimistic, with steady or stable house price growth, relatively low interest rates, favourable inflation outlook, and careful confidence by lenders,” says Harry Nicolaides, Century 21 CEO.
“The relaxation in the transfer duty rates will therefore act as further stimulus for the property market.”