Budget 2020: Stalling property market needs economic relief

The hikes started in 2015 when a new transfer duty category of 11% above R2.25m was introduced. In 2017 a further new category of 13% above R10m was added. At the same time, CGT increased in 2017 to 16.4% (from 13.65%) and again in 2018 to 18% (from 16.4%). These hikes coincided with the rise of expropriation without compensation (EWC) further compounding the pressure on the R3m-plus price categories.

Rather than contribute more in tax revenue, it has had the complete opposite effect to the extent that sales volumes at the higher price bands are just about back to the pre-2008 global financial crisis (GFC) levels.

Interest rate too high

Additionally, the current interest rate is too high. By now, we should have had at least 100bps cut which would have had a positive impact on the market and economy. More first-time buyers would have been able to get into the market while considerably more disposable income could have been freed up to spend in the economy.

Consider for example that a 1% rate cut on a 20-year mortgage bond of R900,000 bond would have saved about R580 per month and on R1.5m about R970; savings that could provide a considerable economic boost.

Although the interest rate cut in January brought some relief, it falls well short of what is needed by the economy and property market. There has been ample support for rate cuts since mid-2019 and the Reserve Bank has been overcautious at the expense of the economy.

To reignite the market and economy, we need at least two interest rate cuts from the Reserve Bank during the first half of the year. More importantly, there a strong case for the finance minister to re-evaluate and reverse the disastrous tax hikes.

Developments and upgrades

Pre-2016/17, property was one of the best performing economic sectors. As the market ticked up, there was significant growth and an influx of new developments and upgrades. Aside from the construction and real estate industry benefits and laying the foundation for further growth, the market generated significant taxes for the fiscus.

It is evident from the sales turnover figures that the price bands which have remained unaffected by the tax hikes have continued to be fairly active (i.e. to about R2.25m), although at slightly lower levels as a consequence of the economic decline.

Above that, there is a marked decline and the higher up on the price ladder you go, the more pronounced it becomes. The high-end luxury areas have really felt the decline with some R2bn lost to the market in Cape Town’s Atlantic Seaboard and City Bowl area alone including foreign buying which has more than halved.

When the market functions normally, volumes and values increased naturally through the forces of demand and supply. This was clearly evident from the 2002-2007 and 2012-2017 growth phases when the market performed well above the GDP growth rates. This, of course, meant higher tax revenues and it is unfortunate that government used that opportunity to hike taxes with, as we can now see, disastrous consequences.

The property market is well poised for growth this year despite the economic and EWC concerns, but needs an economic kickstart in the form of interest rate cuts and a reversal of the tax and CGT hikes.