South Africa's house price appreciation remains below inflation
Lalaine C. Delmendo | July 04, 2019
There has been little to celebrate for the South Africa's home owners for a decade. From 2008 to 2018, real house prices in South Africa -i.e., after inflation - dropped by about 4.8%.During the year to Q1 2019, while South Africa's nominal house prices rose by 3.96% according to ABSA, when adjusted for inflation house prices again declined - by 0.51%. This reflects pressure on household incomes and a depressed macroeconomic environment, according to First National Bank's analyst Siphamandla Mkhwanazi.
“We expect house prices to remain confined within the 3.5% to 4.5% range for an extended period,” said Mkhwanazi - well below the central bank's annual inflation forecast of 4.7% this year, and 5.4% in 2020.
In Q1 2019, South Africa's economy contracted by 3.2%, the biggest quarterly fall since Q1 2009, according to the Statistics South Africa. The South African Reserve Bank (SARB), the country's central bank, has slashed its 2019 growth projection to 1%, from its earlier estimate of 1.3%. In 2018, the economy grew by a minuscule 0.8%, following a 1.3% expansion in 2017.
South Africa is Africa's second biggest economy, with an estimated population of 57.7 million and an estimated GDP per capita of US$ 6,377 in 2018. It has formidable manufacturing and financial sectors. It is the world's largest exporter of gold and platinum. Tourism is also a key source of foreign exchange.
Foreigners can own immovable property in South Africa without restriction. However, all foreign funds remitted to the country must be declared and documented. The property must also be endorsed 'non-resident', as a condition for repatriation of funds.
Non-resident investors have to pay Capital Gains Tax when they later sell their properties. The purchaser of the property is required to deduct a prescribed percentage from the proceeds of the sale and remit it directly to the South African Revenue Service before paying the balance to the seller.
Analysis
of South Africa Residential Property Market »
South Africa's rental yields are good
South Africa offers good rental yields in its large cities, especially on smaller apartments.
Gross rental yields for Johannesburg apartments, i.e., the gross rental return on a property if fully rented out, are good, ranging from 6.5% to 9.3%.
Gross rental yields on apartments in Cape Town range from 5% to 8.3%.
So Johannesburg yields are higher, for the sizes that we have looked at. In previous years rental yields in Johannesburg were significantly higher. This difference is not so obvious this year.
In Cape Town is the most popular tourist destination in Africa. Its amazing beaches and weather are ideal for retirees and foreign property buyers. Atlantic Seaboard properties are among the most sought-after because of the beaches and cliffs - upscale neighbourhoods like Bakoven, Bantry Bay, Camps, Clifton, Fresnaye, Green Point and Mouille Point. Some houses nestled on cliffs have sweeping views of the Atlantic Ocean. City Bowl, which includes the central business district of Cape Town, is another upscale residential suburb. It is one of the most stable residential markets in Cape Town, because of its prime central location and vibrant cosmopolitan lifestyle.
Renting a Cape Town apartment will cost from around USD 15 to USD 17 per sq. m. per month, i.e., a 120 sq. m. apartment costs around USD 1,700 per month, and a 300 sq. m. apartment costs around USD 4,650 per month.
The most desirable neighborhoods in Johannesburg are in the north of the city, including suburbs like Dunkeld, Hyde Park, Houghton, Illovo, Inanda, Melrose, Parkhurst, Parktown, Parkview, Sandhurst, Saxonwold and Westcliff. Nelson Mandela has a house in Houghton.
Rental income tax is high
Rental Income: Annual rental income is taxed at progressive rates, from 18% to 41%.
Capital Gains: Capital Gains Tax (CGT) (CGT) is calculated by adding 40% of the capital gain to the individual’s income for that year, and taxing that income at the individual’s marginal rate of income tax.
This curious manner of calculating CGT means that the maximum tax rate applicable is approximately 18% (40% of the maximum tax rate of 45%.)
Inheritance: Estate duty on inheritance is levied at 20% of the dutiable amount of the estate. Dutiable amount is equal to the value of the estate less ZAR3,500,000 (US$250,000).
Residents: Residents are taxed on their worldwide income at progressive rates, from 18% to 41%.
Buying costs are high
Total roundtrip buying costs are between 8.9% and 27.35%, inclusive of the 7.5% estate agent’s commission (plus 14% VAT). Seven procedures are involved in registering a property transfer, completed in about 36 days.
Pro-landlord laws
Rental market laws in South Africa are pro-landlord.
Rents: The passage of the Rental Housing Act [No.50 of 1999] marked the end of rent control which had been in place since 1976. This paved the way for the entry of investors to the buy-to-let industry.
Rent Tribunal: If the tenant feels that the rent is too much, he can file a protest with the Rent Tribunal. However, only three of the nine provinces have established such tribunals, to the advantage of landlords.
Economy struggling; unemployment remains high
In Q1 2019, South Africa’s economy contracted sharply by 3.2%, the biggest quarterly fall since Q1 2009, according to the Statistics South Africa.- Manufacturing contracted by 8.8% q-o-q, driven mostly by declines in petroleum, transport and wood and paper
- Mining remains in recession, declining by 10.8% q-o-q – the biggest contraction since Q1 2016
- Trade industry was down 3.6% q-o-q, its second quarter of negative growth, mainly due to weaker wholesale, retail and motor sales
- Agriculture slumped by 13.2% q-o-q, in sharp contrast to a 7.9% growth in the previous quarter
- Construction was down 2.2%, its third consecutive quarter of decline.
“Seven of the ten industries took a knock, with manufacturing, mining and trade the biggest contributors to the fall,” said Statistics SA. “Construction, mining and trade are in recession.”
In the first quarter of 2019, nationwide unemployment was 27.6%, up from 27.1% in the previous quarter and 26.7% a year earlier, according to Statistics South Africa. Unemployment has averaged 25.2% from 2000 to 2018.
Both S&P and Fitch downgraded South Africa to non-investment grade in 2017. In March 2019, Moody’s has skipped its much-anticipated assessment of South Africa’s sovereign credit rating and moved it until November 2019, which means that the country stays at its current Baa3 rating, which is one notch above sub-investment grade. In May 2019, the ratings agency Standard & Poor’s (S&P) kept South Africa’s foreign- and local-currency credit ratings in “junk” territory.
Cyril Ramaphosa in, Jacob Zuma out.
Cyril Ramaphosa was elected president by parliament in February 2018 after his predecessor, Jacob Zuma, resigned over corruption allegations. Ramaphosa inherited an ailing economy, a divided party, and the problem of entrenched corruption.
Zuma became president of South Africa in 2009, despite corruption charges. Zuma has faced more than 700 corruption, tax-evasion, money-laundering, and fraud charges, among others. Controversy rumbles on over Zuma’s relationship with the Gupta family, funding for the construction of his home.
Cyril Ramaphosa is a trade union leader, MP, long-time ANC stalwart, and successful businessman, with a fortune of US$675 million (Forbes estimate).
Ramaphosa was Nelson Mandela’s choice for future president. His business career has not been without controversy, with several accusations of bribery and corruption against his name, but nothing on the scale of the accusations against Zuma. He was also implicated in the August 2012 Marikana massacre, when 34 striking miners were shot dead. Since 2014 he has been Deputy President under Zuma.
Ramaphosa passed his first test when the African National Congress (ANC) won the May 2019 parliamentary elections, although its 57.5% share of the vote was its lowest margin of victory since apartheid was overturned 25 years ago.
Ramaphosa currently faces an enormous task of tackling the country’s many problems – from a struggling economy which more than a quarter of the workforce is jobless to land ownership issues and entrenched crime and corruption.