The house price index for medium-sized houses rose by 4.38% y-o-y during the year to end-Q3 2016, according to ABSA. However when adjusted for inflation, the average house price actually fell by 1.95%.
Large-sized houses rose (least in nominal terms), but their prices were up by only 2.7% (-3.5% inflation-adjusted) y-o-y to Q3 2016. Small-sized houses, on the other hand, rose by 5.2% (-1.2% inflation-adjusted).
House price rises are expected to continue slowing during the remainder of 2016, amidst falling foreign investor confidence and uncertain economic conditions. Likewise, residential construction activity is also expected to remain subdued and may deteriorate further in the coming months.
“Nominal house price growth is forecast to remain in a narrow range of between 4% and 4.5% in 2016 and 2017, with real price deflation of around 1.5% to 2% expected over this period, taking into account the outlook for headline consumer price inflation,” said ABSA in its October report.
Why foreign buyers aren’t taking advantage of the rand’s decline
Property in South Africa is now dramatically less expensive for foreign buyers than four years ago. The rand has fallen from US$ 1 = ZAR 6.76 in July 2011 then, to US$ 1 = ZAR 13.85 inOctober 2016 - though the rand has recovered a little since January.
Yet there's been no big increase in home-buying by foreigners, according to FNB’s Q4 2015 Estate Agent Survey. Foreign buying is in fact “off its “highs” reached around 2014”. FNB attributed this to:
- Declining investor sentiment towards South Africa, also reflected in the weaker rand;
- Weaker performance of residential property globally, influencing its popularity as an asset class.
Foreigners own around 3% of all South African properties, a proportion which is still growing, according to Tyson Properties’ Sharon Cockerell Brown. Most foreign owners are based in Europe, mostly in the United Kingdom, as well as Germany, Italy, Holland, and France. There are also buyers from African countries such as Mozambique, Zimbabwe, Angola, Cameroon, and Nigeria. An increasing number of buyers from China and Dubai are also eyeing properties in the KwaZulu-Natal and the Durban area, according to Craig Hutchison, chief executive of Engel &Völkers Southern Africa.
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.
After reaching an all-time low of ZAR 16.36 = US$ 1 in January 2016, which was 29.3% down on a year earlier, the rand has partially reversed its losses in recent months. It has gained around 16.5% against the US dollar, reaching an average exchange rate in September 2016of ZAR14.03 = USD 1.
Analysis of South Africa Residential Property Market »
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.
Capital Gains: Capital Gains Tax (CGT) (CGT) is calculated by adding 33.3% 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 13.653% (33.3% of the maximum tax rate of 41%.
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$250,000).
Residents: Residents are taxed on their worldwide income at progressive rates, from 18% to 41%.
Rents: The passage of the Rental Housing Act [No.50 of 1999] marked the end of rent control which had been in place since 1976. This paved the way for the entry of investors to the buy-to-let industry.
Rent Tribunal: If the tenant feels that the rent is too much, he can file a protest with the Rent Tribunal. However, only three of the nine provinces have established such tribunals, to the advantage of landlords.
The current pace of growth will not be enough to reduce unemployment. The country’s unemployment rate was an amazing 26.6% in the second quarter of 2016, according to Statistics South Africa. From 2000 to 2014 average unemployment was persistently high, at an average of 24.8%.
To cut the high jobless rate to 14% by 2020, real GDP would need to grow an annual average of 5.4%, according to the government’s National Development Plan. However, this is unlikely to happen. The economy is expected to grow by just 0.4% this year, amidst severe drought, rising inflation, and declining exports, according to the South African Reserve Bank (SARB).
In December 2015, Fitch Ratings downgraded South Africa’s credit rating to BBB-, just above junk status. Fitch also changed their outlook from stable to negative due to lower than expected economic growth. Standard and Poor’s (S&P) also lowered South Africa’s outlook from stable to negative. Recently, Moody’s also maintained a negative outlook for South Africa and warned of a credit rating downgrade if economic growth falls below its projected growth of 0.2% this year.
Yet South Africa has strengths. It is Africa’s biggest economy, affording its population of almost 55 million a GDP per capita of US$ 5,727 (2015). 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.A pity, then, that its political elite serves it so poorly.
President Zuma’s dwindling popularity
ANC leader Jacob Zuma became president of South Africa in 2009, despite corruption charges. Zuma is an economic leftist who supports wealth redistribution, a polygamist who has married 6 times and is reported to have 20 children, including one "love-child".He has pledged to create 5 million jobs by 2020, but that target is obviously unrealistic.
Critics claim that President Zuma is indecisive, appeases factions within the party, while safeguarding his own position. Zumahas faced more than 700 corruption, tax-evasion, money-laundering, and fraud charges (which were eventually dropped), among others. Controversy rumbles on over Zuma's relationship with the Gupta family, funding for the construction of his home.
In December 2015 he fired the well-respected Finance Minister Nhlanhla Nene, replacing him with an unknown backbencher, David van Rooyen. The reasons were obvious: Nene had opposed extravagant state spending, including on state-owned South African Airways (whose chairwoman DuduMyeni is Zuma’s close friend). Nene had also barred an acquisition of a new presidential jet, and advised that South Africa could not afford a trillion-rand Russian nuclear deal.
Zuma revised his decision a few days later, appointing Gavin Gordhan as finance minister. Investors calmed after Gordhan’s appointment, since he had already served in the same position from 2009 to 2014.
However in recent months, a turf war between Zuma and Gordhan has developed over government spending, corruption, and the direction of the ANC.
In the August municipal elections, the African National Congress (ANC) had its worst-ever election result, its share of the national vote falling to 53.9%, and losing control of three cities - The City of Johannesburg, Nelson Mandela Bay, and City of Tshwane.
The political infighting is currently undermining investment and sabotaging economic recovery. In fact, ratings agencies have warned that if the political conflict continues, South Africa’s credit ratings could be downgraded to junk status.