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South Africa's housing market accelerates
However, things are looking up. The house price trend for the last few months of 2017 suggests that prices are recovering. The house price index rose by 5.47% during the year to November 2017, according to the FNB. When adjusted for inflation, the average house price rose by 1%, the second consecutive month of y-o-y real house price growth, following 0.24% growth in September. Prior to that, South African house prices had declined y-o-y in real terms for 16 consecutive months.
The previous weak performance of the housing market was mainly attributable to the country's weak economy. The central bank also tightened the mortgage market by raising the repurchase rate by about 200 basis points, from 5% in early 2014 to 7% in 2016.
The newly positive outlook for the housing market was reflected in ABSA's Homeowner Sentiment Index (HSI) for Q3 2017 with an overall score of 81%, up from 74% in the previous quarter. While country credit rating downgrades negatively affected property market sentiment for the first two quarters of 2017, improving macro conditions positively affected property market sentiment for Q3.
"After 3 years of slowing annual average house price growth, we believe that 2018 could see a slightly stronger growth rate, but would caution against expecting too much. From an average house price growth rate of 3.7% last year, we project the 2018 average to shift a little higher to nearer to 5%," according to FNB's Property Economist John Loos. However, Loos pointed out some risks that might affect the price growth such as the political uncertainty leading to the 2019 general elections, as well as credit rating downgrades.
Falling trend of foreign homebuyers
Property in South Africa is now dramatically less expensive for foreign buyers than six years ago. The rand has fallen from US$ 1 = ZAR 6.76 in July 2011, to US$ 1 = ZAR 13.12 in December 2017.
Despite that, home-buying by foreigners has recently declined, according to the First National Bank (FNB). From a peak level in Q4 2014, FNB's Foreign Home Buying Confidence Index ―an index reflecting the level of foreign buying on a scale of +2 (a lot more foreign buying) to -2 (a lot less), has gone down since 2015 and was in negative territory in four out of the last six quarters. As of Q3 2017, the index was at a slightly negative level (-0.01), indicating less foreign buying from a year ago. FNB attributed this to:
- Weaker investor sentiment towards South Africa, due to the country's stagnation
- Uncertainty about the country's future economic policy
- Negative news, such as credit rating downgrades
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.
The rand has partially reversed its losses in recent months. After reaching an all-time low of ZAR 16.36 = US$ 1 in January 2016, 29.3% down on a year earlier, it has gained around 24% against the US dollar, reaching an average exchange rate in December 2017 of ZAR13.12 = USD 1.
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 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%.
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.
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.
Credit rating downgrades in 2017, a moderate growth outlook in 2018On an annual basis, South Africa's economy grew at only 0.8% during the year to Q3 2017, following stronger y-o-y expansions of 1.3% and 1% in Q2 and Q1 2017, respectively.
In 2016, South Africa had its slowest expansion for seven years with only 0.3% growth. The economy remained subdued in 2017, and is projected to have grown by 0.7%, mainly due to low business and consumer confidence. The economy is expected to have moderate growth of around 1.2% in 2018 and 1.5% in 2019, according to the South African Reserve Bank (SARB).
Before the slowdown in 2016, the economy expanded by 1.3% in 2015, 1.7% in 2014, 2.3% in 2013, 2.2% in 2012, 3.3% in 2011, and 3% in 2010, according to the IMF.
The current pace of growth will not be enough to reduce unemployment. In the third quarter of 2017, South Africa's unemployment was at 27.7% to about 6.2 million, according to Statistics South Africa. Unemployment in the country is persistently high, averaging at around 24.9% from 2000 to 2016.
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.
In November 2017, the ratings agency Standard & Poor's (S&P) downgraded South Africa's credit rating for the second time in 2017 from 'BB+' to 'BB', citing the country's weak economic growth and deteriorating public finances. S&P made its first rate cut in April 2017, lowering the rating to 'junk' status, after former finance minister Pravin Gordhan was dismissed following a cabinet reshuffle. The other two ratings agencies, Fitch and Moody's, also downgraded South Africa's credit ratings earlier in 2017.
"We expect that offsetting fiscal measures will be proposed in the forthcoming 2018 budget in February next year, but these may be insufficient to stabilize public finances in the near term, contrary to our previous expectations," according to S&P.
South Africa is Africa’s biggest economy, with an estimated population of 56.5 million and an estimated GDP per capita of US$ 6,089 in 2017. 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.
Cyril Ramaphosa in, Jacob Zuma out.
At time of writing - February 2018 - the African National Congress's (ANC) top executive was on the verge of a meeting that seemed certain to lead to ANC leader Jacob Zuma's departure - an event long-awaited by all informed opinion in South Africa.
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.
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.
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 Dudu Myeni 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 Pravin Gordhan as finance minister. Investors calmed after Gordhan’s appointment, since he had already served in the same position from 2009 to 2014.
In the August 2016 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.
A cabinet reshuffle was announced by Zuma in March 2017 led to the dismissal of Gordhan as finance minister along with his deputy Mcebisi Jonas. Malusi Gigaba took over as the new finance minister. This move was highly criticized by Deputy President Cyril Ramaphosa, and other leaders of ANC and the South African Communist Party (SACP), intensifying the call for a motion of no confidence and impeachment. On April 3, 2017, a few days after Gordhan's dismissal, the ratings agency Standard & Poor's downgraded South Africa's credit rating from BBB- to BB+. Fitch Ratings followed suit, cutting the country's credit rating from BBB- to BB+, on April 7, 2017.
In August 2017, Zuma was able to survive his eighth motion of no-confidence, which was defeated by 198 votes to 177, with 25 abstentions. But in December Zuma's ex-wife Nkosazana Dlamini-Zuma lost the ANC leadership to Ramaphosa, in an election held during the ANC National Conference.
Cyril Ramaphosa is a trade union leader, MP, long-time ANC stalwart, and successful businessman, with a fortune of $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.