Market in Depth

Signs of improvement after 5 year depression

Lalaine C. Delmendo | July 29, 2021

South Africa's housing market is showing signs of improvement, after being depressed for the past five years. The price index for medium-sized apartments rose by 4.61% in April 2021 from a year earlier, an improvement from the previous year's 1.2% rise, according to the First National Bank (FNB). In fact, it was the biggest y-o-y growth in four years.

Yet when adjusted for inflation, prices increased by a minuscule 0.1% y-o-y in April.

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 2020, house prices rose by about 62% but when adjusted for inflation, real prices actually fell 18%.

But with inflation moderating, the gap between nominal and real prices has noticeably narrowed in the past three years.

Demand continues to rise this year, albeit at a more modest pace following a strong surge in the second half of last year, according to FNB's June 2021 report.

“Our proprietary market strength indicators show that demand is now moderating, following a strong rebound in 2H20 and into 2021. However, these remain above pre-pandemic levels, in part reflecting the positive effect of lower interest rates on market activity,” said the FNB.

“Liquidity remains intact: mortgage extension continues to grow at a faster pace, and loan-to-price (LTP) ratios remain high. Our investigations show that much of this credit is funding purchases in the middle- to upper-priced segments,” the FNB added.

South Africa's economy contracted by 7% in 2020, following minuscule growth of 0.2% 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 is projected to expand by a modest 3.1% this year, according to IMF estimates - still not enough to offset the huge contraction last year.

South Africa is Africa's second biggest economy. With a population of 59.6 million and US$ 5,067 GDP per capita in 2020, 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 »


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

The coronavirus outbreak has deepened the country’s debt crisis, aggravated food insecurity, and weakened the already fragile health systems. The economy is projected to expand by a modest 3.1% this year, according to IMF estimates, but still not enough to offset the 7% contraction last year.

In Q1 2021, the nationwide unemployment rate rose to 32.6% - the highest jobless rate since data began in 2008. Unemployment averaged 25.5% from 2000 to 2020.

In April 2021, annual headline inflation jumped to 4.4%, the highest level since before the pandemic, mainly driven by rising transport and food prices, according to Stats SA.

South Africa gdp inflation
A fiscal stimulus package worth ZAR 500 billion (US$ 36.4 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.

As a result, this has aggravated the country’s already strained public finances. The budget deficit soared to about 12.3% of GDP in 2020, sharply up from 6.7% in 2019, and the biggest in South Africa’s history.

Likewise, the country’s debt burden increased sharply t0 83% of GDP last year, from 62.2% in 2019 and 56.7% in 2018, according to SARB.

In November 2020, Moody’s downgraded South Africa’s sovereign credit rating further to “junk” status, moving the grade down to Ba2, from Ba1 in March 2020 and Baa3 in November 2019. Then in May 2021, credit rating agencies S&P and Fitch Ratings affirmed the country sovereign rating at BB-, or three notches below investment grade, but Fitch maintained its negative outlook.

South Africa exhange rate
“The ‘BB-‘ rating is constrained by high and rising government debt, low trend growth and exceptionally high inequality that will complicate consolidation efforts,” said Fitch Ratings.

“We assume that the economic fall-out of any new waves will be more limited than last year, as policy-makers have containment measures will be more targeted and the economy has adapted, but it could still weigh on public finances,” noted Fitch Ratings.

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