Tough conditions see a slight slowing in residential property market
03 May 2016
Posted by: Author: Andrew Golding
Author: Andrew Golding (BDlive)
Despite increasingly difficult economic and social conditions, by and large the residential property market has continued to hold its own.
The first hurdle was an increase in interest rates by the Reserve Bank, which took mortgage costs up another notch. Then came the budget, which took capital gains tax up to 40% and hiked transfer duties on homes above R10m, this seen as more of a blow to the wealthy. Finally, there was another rate increase mid-March as the authorities sought to steady the rand’s slide and stave off a "junk status" threat.
But as in the past, the property market pulled itself up off the canvas, shook its head, and moved on, albeit at a slightly slower pace. Hot spots such as Cape Town’s Atlantic Seaboard have hardly blinked. Quite the contrary in fact.
On the subject of interest rates, small, irregular increases of 25 basis points tend to be easily absorbed and accepted by homeowners, present and future. Although the reality is that the present variable mortgage rate of 10.5% is up 200 points since the beginning of 2014, and 75 basis points since January, rates actually remain quite low by historical standards and neutral when compared to inflation.
To put this into perspective, the monthly repayment on a R1.5m mortgage at the January 2014 prime rate of 8.5% was R13,017. At today’s 10.5%, the monthly repayment rises to R14,976. The numbers on a R5m bond are R43,391 monthly, rising to a fraction below R50,000. The impact on bondholders’ ability to repay in the current economy, in which household disposable incomes continue to fall, is significant. Not only must homeowners find the means to pay their bonds, they also face a steadily rising cost of living, including ever-increasing property rates and utility accounts.
The transfer duty increase, which is restricted to homes valued R10m and above, could well be a shot across our bows. It looks like a wealth tax, but as one scrutinises the steady increase in residential property prices, particularly in sought-after metro centres, gated communities and other popular market segments, the increase, from 11% to 13%, will gain more significance as property continues to be sought almost as a reserve currency and prices continue their upward momentum.
The increase in capital gains tax has hidden shadows for most of us. For starters, the name is a misnomer; it’s not a separate tax at all. Capital gains tax is a component of income tax. In terms of immovable property, a person’s capital gain on selling a home — after various allowances and deductions — is known as the "inclusion rate" and is added to taxable income, depending on the type of taxpayer.
The current inclusion rate, effective from March 1 this year for individuals is 40% (increased from 33.3%), whereas companies and trusts suffer an inclusion rate of 80% (increased from 66.6%). For individuals, the effective rate of tax on a capital gain is about 16.4%, and up to 32.8% for companies and trusts.
Individuals are entitled to an annual exclusion of capital gain of R40,000 per year of assessment, which means the first R40,000 of capital gain is not taxed. This exclusion is increased to R300,000 in the year of death which, while perhaps being of interest to family members, can be of little comfort to the late lamented.
A "primary residence" — in other words your home — gets a R2m exclusion for starters, then you may deduct the mortgage bond repayment, the amount of commission paid to the estate agent who sells the property, and any improvements made to the property as allowed by the taxman. These qualifying improvements are detailed in the Eighth Schedule of the Income Tax Act.
It is critically important to keep all records of improvements as the South African Revenue Service (Sars) will not allow the inclusion if not supported by documentary evidence.
Moreover, there are a few other tripwires scattered about by the revenue collectors. For example, if you purchase a plot, develop it and subsequently sell, Sars can view this as a speculative transaction, the gain could be regarded as revenue and the entire profit subject to income tax rather than capital gains tax. There are other examples of such peril, such as the buy-to-let market.
How fair is capital gains tax? Arguments against the tax have been going on for centuries. The issue caused some chainmail rattling in mediaeval England, which at the time had two separate courts of law — the common law of the king and that of the ecclesiastical courts. Eventually the latter prevailed (from this struggle, incidentally, we eventually inherited the concept of trusts).
With the introduction of capital gains tax in October 2001, Sars argued that it leveled the playing fields between earnings and equity gains. But there are arguments against this tax flow throughout the international financial world. Many economists reason that capital gains tax impedes the flow of capital to higher-end users; what they call "the lock-in effect" and that this decreases the supply, and raises the cost, of capital for new and expanding companies, in turn leading to lower economic growth and job creation — basically putting a damper on entrepreneurship.
It’s possible that the tax is simply too rigid. The latest adjustment, for example, ignores the fact that the "primary" allowance is more or less stuck in a rut at R2m although house prices have risen steadily over the years, which has in effect widened the "pot" for inclusion.
Elderly and middle-aged parents now selling property to scale down as the nest empties, bought their houses decades past, paying a fraction of today’s value. But they didn’t speculate; they didn’t just buy a house, they bought a home. And when they did take that first faltering step into the market, nobody had even heard of a tax on capital gains.
Perhaps it’s time for SARS to take a fresh look at capital gains tax.
• Dr Golding is CEO of the Pam Golding Property Group.
This article first appeared on bdlive.co.za.