Market in Depth

Housing market remains sluggish

Lalaine C. Delmendo | February 17, 2022

South Africa's housing market remains fragile, amidst weak economy, surging inflation, as well as rising interest rates. The price index for medium-sized apartments rose by a modest 3.4% in Q2 2022 from a year earlier, following a 4.5% increase a year ago., according to the First National Bank (FNB). However when adjusted for inflation, prices actually declined by 3.74% y-o-y in Q2.

On a quarterly basis, apartment prices rose by a meager 0.8% (and declined by 1.6% inflation-adjusted) during the latest quarter.

South Africa's housing market has been sluggish over the past several years, mainly due to high unemployment, weak household finances, and an underdeveloped mortgage market. From 2007 to 2021, house prices rose by about 69% but when adjusted for inflation, real prices actually fell 19%.

With inflation surging again, the gap between nominal and real prices has been rapidly widening recently.

Demand remains subdued, with nationwide residential market activity weakening in Q2 2022 compared to the previous quarter, amidst rising interest rates and weaker economic outlook, according to FNB's Q2 2022 Property Barometer.

“As expected, the FNB Estate Agents Survey showed signs of a softening market. Market activity weakened in 2Q22, and this is corroborated by the lengthening time properties remain on the market for sale,” said the FNB. “The survey shows souring sentiment in the KwaZulu-Natal (KZN) region, following the devastating floods. This, combined with the impact of riots in July last year, should have a lingering effect on the KZN property market.”

“Activity softened across all the price segments that we track, with the affordable market faring relatively better in 2Q22,” the FNB added.

South Africa's economy contracted by 6.4% in 2020, following minuscule growth of 0.1% in 2019. It was the steepest decline for over a century. The coronavirus outbreak has deepened the country's debt crisis, aggravated food insecurity, and weakened already fragile health systems. The economy bounced back in 2021, registering a growth of 4.9% - but still not enough to offset the huge contraction in the prior year.

Currently, the SA economy continues to suffer, with real GDP shrinking by 0.7% in Q2 2022 from the previous quarter, mainly due to the devastating floods in KwaZulu-Natal, coupled with intense power rationing, according to Stats SA. On an annual basis, the economy grew by a miniscule 0.2% in Q2 2022, a sharp slowdown from y-o-y increases of 2.7% in Q1 2022, 1.7% in Q4 2021, 2.9% in Q3 2021, and 19.1% in Q2 2021.

South Africa house prices
The International Monetary Fund (IMF) expects the SA economy to post a modest expansion of 2.3% this year.

South Africa is Africa's second biggest economy. With a population of 60.1 million and GDP per capita of US$6,950 in 2021, 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.


Analysis of South Africa Residential Property Market »

Rental Yields

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.

Read Rental Yields »

Taxes and Costs

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 40% 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 18% (40% of the maximum tax rate of 45%.)

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%.

Read Taxes and Costs »

Buying Guide

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.

Read Buying Guide »

Landlord and Tenant

Pro-landlord laws

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.

Read Landlord and Tenant »

ECONOMIC GROWTH

SA economy remains weak, inflation rising sharply

In the second quarter of 2022, the South African economy shrank by 0.7% from the previous quarter, following quarterly growth of 1.8% in Q1 2022 and 1.5% in Q4 2021, according to Stats SA. Accordingly, the devastating floods in KwaZulu-Natal, coupled with intense power rationing, contributed to the decline, adversely impacting the already weak economy that has not yet fully recovered from the Covid-19 pandemic.

On an annual basis, the economy grew by a miniscule 0.2% in Q2 2022, a sharp slowdown from y-o-y increases of 2.7% in Q1 2022, 1.7% in Q4 2021, 2.9% in Q3 2021, and 19.1% in Q2 2021.

South Africa gdp inflation
The International Monetary Fund (IMF) expects the SA economy to post a modest expansion of 2.3% this year, a slowdown from the previous year’s 4.9% growth. This is supported by Fitch Ratings, which also projects a 2.3% growth for South Africa.

“Growth is still supported by post-pandemic normalisation and high prices for South Africa’s key commodities, but these factors will fade gradually and as the international environment becomes more challenging,” said Fitch Ratings. “Electricity shortages weigh heavily on growth and this could worsen further before new supply, mostly in the form of independent power producer (IPP) projects, comes on line.”

In July 2022, the annual headline inflation jumped to 7.8%, up from the previous month’s 7.4% and the highest level in 13 years, according to figures from Stats SA, amidst a surge in fuel and commodity prices. This is now far above the central bank’s target inflation range of 3% to 6%.

South Africa’s public finances show signs of improvement. In 2021, the budget deficit fell to 5.7% of GDP, down from 10% in 2020 and 6.9% in 2019 but still higher than the annual average shortfall of 4.4% in 2012-18. The country’s public finances worsened after President Cyril Ramaphosa introduced during the onset of the Covid-19 pandemic a fiscal stimulus package worth ZAR 500 billion (US$29 billion), or a tenth of the economy - the largest ever spending plan in the country’s history.

South Africa’s debt burden was equivalent to 69.9% of GDP in 2021, slightly down from 70.7% of GDP in 2020 but still the second highest in the country’s recent history.

All the three major credit rating agencies affirmed South Africa’s sovereign credit rating but upgraded their outlook for the country:
  • In April 2022, Moody’s affirmed South Africa’s sovereign credit rating of Ba2 (equivalent to “junk status) but changed its outlook from negative to stable, amidst “improved fiscal outlook that raises the likelihood of the government's debt burden stabilising over the medium term.”
  • Then in May 2022, Standard & Poor’s also affirmed the country’s long-term sovereign rating at ‘BB-’ but revises its outlook from stable to positive.
  • In July 2022, Fitch Ratings affirmed the country’s long-term foreign currency issuer default rating at ‘BB-’ with a stable outlook.

“South Africa’s ‘BB-’ IDRs are constrained by high and rising government debt, low trend growth and high inequality that will complicate fiscal consolidation efforts,” said Fitch Ratings. “The ratings are supported by a favourable debt structure with long maturities and denominated mostly in local currency as well a credible monetary policy framework.”