Property Sector looks to Budget 2016 for relief on Transfer Duty
When Finance Minister Pravin Gordhan delivers the 2016 budget speech this week, It is unlikely that national treasury will change the transfer duty on property but estate agents are wary.
This is because the government is trying to generate more revenue given the strain on the fiscus.
Although SA is trying to avoid a sovereign downgrade, Wednesday's national budget is the most important from both economic and political perspectives since the country’s transition to democracy.
“With local and international attention focused on the speech, from a property market perspective it is hoped that the imperative to increase overall revenue collection will not result in a further increase in transfer duties on property transactions, says Dr Andrew Golding, CE of the Pam Golding Property group.
“While last year’s increase in the threshold for transfer duty to R750 000 and below, versus the previous R600 000 threshold, was positive, as was the decrease in transfer duty on transactions between R750 000 and R2.25m, a move to increase transfer duty would serve to dampen a property market already beset by rising municipal rates and other costs inherent in owning a property, as well as the rising trend in both interest rates and inflation as well as the overall impact of a sluggish economy,” he says.
“The fact is, a large portion of sales in the property market are transacted in the price band up to around R3m, so it stands to reason that raising transfer duties would not only serve to dilute sales but ultimately also revenue collection,” says Golding.
Many potential buyers of houses valued around R3m and up could be turned off of doing so because of any increase in the transfer duty.
Chairman Samuel Seeff agrees.
“We are on record to the effect that last year’s hike has done little to generate additional income for the state coffers, but has in all likelihood made top end buyers above the R2.25M mark think twice,” he says.
“There is clear evidence that luxury buyers in top end areas such as Cape Town’s Atlantic Seaboard and City Bowl as just one example, are staying put, opting to rather extend and renovate rather than sell and they just do not see the incentive in moving," he says.
"The legislated transaction costs are just too high. When you factor in the aspects that make up the costs of transacting such as transfer costs, transfer duty and capital gains tax, sellers are in some instances having to fork out the equivalent of up to 20% of the value of the purchase price just in costs,” says Seeff.
CEO of Jawitz Properties, Herschel Jawitz, says entry level buyers need support.
“The other option would be for the threshold below which transfer duty is not payable to be increased in line with property price growth in 2015 which would mean an increase in the threshold from R750 000 to R800 000, this threshold was increased by 25% from R600 000 to R750 000 last year, before transfer duty is payable. Given that we are in a rising interest rate cycle, this would give meaningful support to first time buyers at the affordable and lower end of the market,” he says.
Dr Golding says South Africans across the country need to be encouraged to buy housing but need incentives to do so.
“This is at a time when an injection of improved economic sentiment would be welcome in order to boost market confidence and drive activity in the property market, and which is seen against the backdrop of gradually increasing interest rates. Equally important is a focus on creating an investor-friendly environment and achieving sustainable economic growth,” says Dr Golding.
“By the same token it is imperative that those in the lower income groups remain encouraged to invest in ownership of their own homes, thereby fostering a culture of saving,” he says.
“Encouraging, however, has been the recent engagements between government and business leaders to discuss strategies to stimulate growth and revive investor confidence to help avert a possible rating downgrade to junk status,” Doctor Golding says.
Gordhan's comeback
The second coming of Pravin Gordhan is expected to shake South Africa’s economy out of a near-terminal state of marasmus and, hopefully, convince investors and rating agencies that government is serious about addressing economic, financial and political challenges that beset the country. While he does that, someone has to watch Gordhan’s back, so to speak.
Gordhan has first-hand experience of how harshly financial markets will punish any suggestion of political machinations holding sway over economic common sense.
Gordhan will almost certainly announce belt-tightening measures at home, including an increase in taxation on high-earners, while trying to convince ratings agencies and foreign investors of government’s seriousness about the country’s woes.
The rand plunged nearly 10% in December after Zuma suddenly fired former finance minister Nhlanhla Nene, briefly replacing him with a backbench member of parliament with no record of national fiscal management.
With the currency in free fall, Zuma backtracked rapidly, making Gordhan South Africa’s third finance minister in five days. The return of a man who earned respect at home and abroad during his first term from 2009 to 2014 helped to soothe investors at a difficult time for emerging markets.
Still, Gordhan has little room for manoeuvre as the budget and current account deficits are persistently running close to 50% of GDP while the economy has struggled to grow since a recession during the global crisis of 2008-09.
President Jacob Zuma’s annual state of the nation address last week drew a cool reception, after he acknowledged that domestic structural shortcomings were partly to blame for the economic stagnation, but largely blamed a global downturn.