Market in Depth

South Africa's real house prices continue to fall, amidst weak economy

Lalaine C. Delmendo | May 21, 2020

There has been little to celebrate for the South Africa's homeowners for more than a decade. From 2007 to 2019, house prices rose by about 57% but when adjusted for inflation, real prices actually fell 18%.

South Africa's house prices fell 1.22% adjusted for inflation during the year to Q1 2020 (a nominal house price rise of 2.79%, according to ABSA). Quarter-on-quarter, house prices increased by a meagre 0.11% and fell by 1.45% in real terms.

Demand remains weak, reflecting the depressed macroeconomic environment, according to First National Bank's analyst SiphamandlaMkhwanazi.

“Sustainable long-term improvements in affordability (and demand) will have to be driven by income growth,” said the FNB. “Concerningly, our forecasts do not suggest a strong recovery in income growth. This threatens the sustainability of the support offered by constructive lending on the market.”

The fallout from coronavirus will make things worse. Housing demand, and consequently house prices, are expected to fall this year.

South Africa's economy fell into recession in Q4 2019, when real GDP contracted by 1.4%, following a decline of 0.8% in Q3, according to Statistics South Africa.  The economy grew by a minuscule 0.2% during 2019, its weakest performance since 2009.   The SA economy is expected to shrink by as much as 6.4% this year, mainly due to the adverse effects of the COVID-19 pandemic, according to Finance Minister Tito Mboweni.

South Africa is Africa's second biggest economy. The country has an estimated population of 58.8 million and an estimated GDP per capita of US$ 6,100 in 2019. 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.

South Africa house prices
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 »

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

COVID-19 crisis to put SA’s already struggling economy into deeper recession

South Africa’s economy is expected to shrink by as much as 6.4% this year, according to Finance Minister Tito Mboweni. The coronavirus outbreak has deepened the country’s debt crisis, aggravated food insecurity, and weakened the already fragile health systems.

During 2019, nationwide unemployment rose to a record 28.7%, up from 27.1% a year earlier, according to SARB. Unemployment averaged 25.2% from 2000 to 2018.

South Africa gdp inflation
The country’s jobless rate is projected to jump to 35.3% this year, due to the coronavirus crisis, according to the International Monetary Fund (IMF).

“Just over one-third (36%) of firms indicated that they were laying off staff in the short term as a measure to cope with the COVID-19 pandemic,” said Stats SA in its COVID-19 business impact survey.

In March 2020, annual inflation slowed to 4.1%, from 4.6% in the previous month and 4.4% a year ago, based on figures from Stats SA.

Headline inflation is expected to average 3.6% this year, before accelerating to 4.5% in 2021, according to SARB.

A fiscal stimulus package worth ZAR 500 billion (US$ 27.2 billion), or a tenth of the economy, was announced in April by President Cyril Ramaphosa - the largest ever spending plan in the country’s history.

This will weaken the country’s already strained public finances, according to Moody’s. The budget deficit is projected to surge to 13.5% of GDP this year, sharply up from 6.3% in 2019, and the biggest in South Africa’s history.

Likewise, the country’s debt burden is expected to rise sharply by 15 percentage points, to 84% of GDP in 2020, according to Moody’s.

South Africa exhange rate
“The package is key to helping the country’s weakest households and enterprises to weather a period of lower revenue inflows amid the domestic lockdown in global trade,” Moody’s said. “However, the support measures are unlikely to prevent a sharp economic contraction this year.”

In March 2020, Moody’s downgraded South Africa’s sovereign credit rating to “junk” status, moving the grade down from Baa3 to Ba1 and maintaining a negative outlook. Both S&P and Fitch followed suit in April, sending the country’s credit rating further into non-investment grade territory.
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