The South African housing market is now gaining momentum
March 15, 2013
After a lackluster performance in the past four years, the South African housing market is now gaining momentum.
During 2012, the house price index for medium-sized houses rose by 9.53% (3.57% in real terms), the highest year-on-year increase since February 2008, based on figures released by ABSA. House prices increased by 2.93% (1.63% in real terms) during the latest quarter.In January 2013:
- the average price of small homes (80-140 sq. m) was ZAR789,400 (US$89,301)
- the average price of medium-sized homes (141-220 sq. m) was ZAR1,077,700 (US$121,915)
- the average price of large homes (221-400 sq. m) was ZAR1,592,800 (US$180,185).
“Low interest rates will continue to support the property market and the affordability of mortgage finance,” said ABSA. But ABSA predicts that though nominal house prices will rise in 2013, these rises will remain in single digits in view of slowing economy, and real house price growth will remain under pressure, given continuing increases in inflation.
Residential building plans approved dropped by 5.8% to 49,775 units in 2012. On the other hand, residential buildings completed rose 6.2% to 43,031 units. Total outstanding residential mortgage balances increased by 3% to ZAR790.9 billion (US$89.5 billion) in 2012, 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, the property market remained depressed, with house prices rising by a meagre 0.3% (-5.4% in real terms)
- In 2010, house prices increased by 2.3% (-1.1% in real terms), encouraged by South Africa hosting the 19th FIFA World Cup
- In 2011, house prices rose by just 1% (-5% in real terms), due to lower economic growth, rising inflation, and political corruption concerns
Foreigners can own immovable property in South Africa without restriction. However, all foreign funds remitted to the country must be declared and documented to ensure repatriation. The property must also be endorsed ‘non-resident’, as a condition for repatriation.
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.
Looking back at the glory days
During the glory period from 2000 to 2006, South Africa’s housing market boomed, driven by 4 main factors:
- The emergence of a financially stable black middle class had a tremendous impact on housing demand, encouraged by tax reliefs for individuals, in the context of a growing economy.
- South Africans who had parked money offshore during the Apartheid era were allowed (and required) to bring it back by September 2004. Much of this money went into property.
- Better stability and security helped. During Apartheid and its sequel, property prices badly lagged the economy, as the security situation went from bad to worse.
- Lastly, the Financial Sector Charter in 2003 boosted mortgage loan growth. Financial institutions committed to provide ZAR 42 billion (US$5.45 million) of housing finance to the low income market. Then in 2006, the CGT exemption on primary residences was raised from ZAR1 million (US$127,129) to ZAR1.5 million (US$190,694). Transfer duties on properties were lowered too. For example, no transfer duty is payable on properties valued at ZAR500, 000 (US$63,565) or less.
The subsequent slowdown of house prices in 2008 can be attributed to the full implementation of the National Credit Act in mid-2007, interest rate hikes, and to the global financial crisis.
The National Credit Act aimed to protect borrowers from over-indebtedness, by limiting the amount of funds that can be borrowed, and requiring every lender to assess borrowers’ credit-worthiness. It requires lenders to disclose every term in the contract and gives the borrowers the right to request their credit report, and to challenge the report if there are inaccuracies.
The act has tended to reduce the supply of mortgage loans.
Mortgage market shrinking
The value of new mortgage loans granted by banks on residential property fell 34% y-o-y to the second quarter of 2011, so that during the first three quarters of 2011, total outstanding residential mortgages rose only marginally, with a y-o-y increase of only 2%.
Modest growth, high unemployment
South Africa experienced unprecedented growth before the global economic crisis of 2008. Then in late 2008 the slowdown plunged it into recession.
In the last quarter of 2012, the South African economy recorded a higher-than-expected real GDP growth (annualized) of 2.1%, up from just 1.2% the previous quarter, according to Statistics SA. Despite this, overall growth was lower in 2012 at 2.5%, down from 3.5% in 2011.
The current pace of growth is not enough to reduce unemployment. In the fourth quarter of 2012, South Africa’s unemployment rate was 24.9%, according to Statistics SA. From 2000 to 2011 average unemployment was persistently high, at 25.7%, according to the IMF.
To cut the high jobless rate in the country to about 14% by 2020, real GDP needs to grow an annual average of 7%, according to the government.
This is unlikely to happen. In January 2013, the South African Reserve Bank (SARB), the country’s central bank, cut its projected real GDP growth in 2013 to 2.6%, from an initial forecast of 2.9%, due to falling demand from European countries.
With a weaker rand and high unemployment, the SARB has kept its benchmark repurchase rate at 5% since a surprise cut in July last year. In January 2013, South Africa’s inflation rate was 5.4%. Inflation is expected to be 6% by end-2013.
"Producers and exporters face another difficult year,” the SARB said. “The recession in the eurozone is forecast to continue, and local operating conditions are expected to remain challenging given high electricity costs, strained labour relations, fading productivity and inadequate economic infrastructure. These constraints are generally expected to offset most of the benefits of a weaker rand.”
The South African rand has weakened over the US dollar recently, from an average exchange rate of US$1=ZAR7.6461 in February 2012 to about US$1=ZAR8.8744 in February 2013.
Jacob Zuma – a worrying figure
ANC leader Jacob Zuma became president of South Africa in 2009, despite corruption charges. Zuma is an economic leftist who supports wealth redistribution, but has assured foreign investors that their interests will be protected.
He has pledged to create 5 million jobs by 2020, but that target looks increasingly unrealistic.
Economic challenges seem to be becoming secondary to the growing political uncertainties. Zuma’s position is under pressure and the African National Congress is losing support. Critics claim that Zuma is being indecisive, appeasing factions within the party, while safeguarding his own position.
Populist measures are not out of the question. Zuma told a ruling-party rally in the northern town of Polokwane in January that foreigners might face restrictions on buying landed property, and be limited to leasing land. Foreigners can now own immovable property without restriction.
Land redistribution is an ongoing issue. Farmland is still mostly white-owned. Officials have signalled that large-scale expropriation is on the cards, with the government aiming to transfer 30% of farmland to black South Africans by 2014.
With the opposition Democratic Alliance gaining significant strength, the National Assembly has approved an information bill to “safeguard national security”. The law is said by critics to pose a threat to freedom of speech.
- Unceasing gloom in South Africa hits housing market - December 01, 2016
- Dramatic fall in rand fails to attract more foreign buyers to South Africa - February 11, 2016