South African house prices rose in only one year - 2012 - during the past six years. Now the country is back to house price falls, at least in real terms. The house price index for medium-sized houses rose 2.14% during the year to November 2013, according to ABSA, but when adjusted for inflation, medium-sized houses actually saw their prices drop by 2.99%. Contrast this with 7.96% house price rises during the same period last year.
“Expectations regarding nominal house price growth and consumer price inflation will result in relatively low real house price inflation in 2014,” says ABSA. The slowing economy, low growth in employment, real household disposable income, and tight credit due to deteriorating consumer credit-risk profiles are affecting the property market negatively, according to ABSA. Outstanding residential mortgages increased 0.7% to ZAR1.11 trillion (US$105.84 billion) in November 2013 from the previous quarter, according to the South African Reserve Bank (SARB).
During the housing boom (from 2000 to 2006), house prices rose by an average of 20% annually. Riding on the back of an empowered middle class, house price rises peaked in Oct 2004 with 35.7% annual growth (32.5% in real terms). However in Q1 2008 the boom ground to a halt, following the global financial crisis.
- In 2008, house prices fell by 0.5% (-9% in real terms)
- In 2009, house prices rose a meagre 0.3% (-5.4% in real terms)
- In 2010, house prices increased by 2.3% (-1% in real terms), encouraged by South Africa hosting the 19th FIFA World Cup
- In 2011, house prices rose by just 0.7% (-5.4% in real terms), due to lower economic growth, rising inflation, and political corruption concerns
- In 2012, the housing market bounced back with house prices rising by 9.58% (3.71% in real terms)
The South African economy expanded by 2% in 2013, after GDP growth of 2.5% in 2012, 3.5% in 2011, and 3.1% in 2010, according to the International Monetary Fund (IMF).
In November 2013:
- the average price of small homes (80-140 sq. m) was ZAR804,000 (US$76,661)
- the average price of medium-sized homes (141-220 sq. m) was ZAR1,083,000 (US$103,263)
- the average price of large homes (221-400 sq. m) was ZAR1,689,000 (US$161,044)
Interest rates are low. SARB has kept its benchmark repo rate at 5% since a surprise cut in July last year, to boost economic growth. The SABOR (South African Benchmark Overnight Rate) stood at 4.82% in December 31, 2013, slightly down from 4.89% during the same period last year.
The government is optimistic about this year, projecting that the economy will expand by 3% in 2014, based on projections released by SARB.
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 »
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.
A two-bedroom apartment in the northern suburbs of Johannesburg will cost around USD 234,000, while a three-bedroom apartment costs around USD 315,000. Renting an apartment in Johannesburg, on average, costs somewhere between USD 1,800 to USD 2,400 per month, depending on whether it has 2 or 3 bedrooms.
Renting a house in Johannesburg costs about the same as in Cape Town. In both cities, to rent a three-bedroom house costs around USD 2,900 per month.
In Cape Town the situation is completely different as regards return on investment. True, 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.
But apartments and houses in Cape Town return relatively poor rental yields, ranging from 4.08% to 6.38% for apartments, and 3.91% to 4.05% for houses. A 120 sq. m. apartment located in any of these neighborhoods will cost around USD 490,000 to buy. A bigger apartment, say of 300 sq. m., will cost nearly one and a half million US dollars.
Renting a Cape Town apartment will cost from around USD 15 to USD 19 per sq. m. per month, i.e., a 120 sq. m. apartment costs around USD 2,200 per month, and a 300 sq. m. apartment costs around USD 4,890 per month.
So the moral is simple – own a property in Johannesburg, especially an apartment - you'll earn good returns when you let it out. But if you visit Cape Town, you might consider renting rather than buying.
Capital Gains: Capital Gains Tax (CGT) (CGT) is calculated by adding 33.30% 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.
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$424,994).
Residents: Residents are taxed on their worldwide income at progressive rates, from 18% to 40%. The tax bands are adjusted annually.
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.
The current pace of growth will not be enough to reduce unemployment. In the third quarter of 2013, South Africa’s unemployment rate stood at 24.7%, or about 4.6 million unemployed people, according to Statistics SA - the third-highest jobless rate among 60 countries monitored by Bloomberg. From 2000 to 2012 average unemployment was persistently high, at 25%, according to the IMF.
To cut the high jobless rate to 14% by 2020, real GDP would need to grow an annual average of 5.4%, according to the government’s National Development Plan.
This is unlikely to happen. The South African Reserve Bank (SARB), the country’s central bank, only foresees growth of 3% in 2014.
In November 2013, the country’s overall inflation rate stood at 5.3%, according to Statistics SA. South Africa’s inflation rate was 5.6% in 2012, 5% in 2011, 4.3% in 2010 and 7.1% in 2009, according to the IMF.
With a slowing economy and high unemployment, the SARB has kept its benchmark repurchase rate at a four-decade low of 5% since a surprise cut in July 2012. The SABOR (South African Benchmark Overnight Rate) stood at 4.82% in December 31, 2013, slightly down from 4.89% during the same period last year.
The South African rand has been weakening against the US dollar, from an average exchange rate of US$1=ZAR7.5744 in March 2012, to US$1=ZAR10.3438 in December 2013.
South Africa is Africa’s biggest economy, with an estimated population of 51.7 million and a GDP per capita of US$6,847 in 2013. 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.