The 2021 Budget and real estate
MAIN IMAGE: Samuel Seeff, chairman Seeff Property Group; Esther Ochse, head of FNB money management; Herschel Jawitz, CEO Jawitz Property Group; Shaun Rademeyer, CEO MultiNet Home Loans.
- No tax hikes to pay for government’s Covid-19 vaccination drive
- Adjustment in tax brackets for personal income tax offer some relief to low to middle income earners specifically
- Promise to cut public sector wage bill by R265bn over next three years
What is important for the real estate sector about the 2021 Budget is whether the government will make the tough decisions required to slash national expenditure and debt, stimulate critically needed economic growth and restore investor confidence.
Thankfully, Finance Minister Tito Mboweni surprised us this week with a ‘more positive’ budget without the tax increases he had predicted in his mid-term budget might have to be implemented. The minister had an exceptionally challenging task before him with this year’s budget. The country is facing a host of challenges which has been exacerbated by the lockdown measures to curb the Covid-19 pandemic –soaring unemployment levels (32.5% in Q4 2020), crippling national debt, financial strain of failing SOE’s and a listless economy to name but a few. Earlier this week Tony Clarke, managing director of the Rawson Property Group said the 2021 Budget will be a make-or-break budget for the residential property sector with reference to the critical importance of job creation to rebuild the economy and restore investor confidence.
Yesterday’s 2021 Budget Speech had some positive surprises such as the absence of personal tax hikes and adjustments on the personal income tax brackets but Mboweni also made it clear that government is in dire straits to address the national debt and a long uncertain road lies ahead towards restoring economic growth.
Covid-19 vaccination drive
A month earlier Treasury had indicated that an increase in personal taxes was considered to pay for the national Covid-19 vaccination drive this year. Instead, Mboweni yesterday said government will foot the R19.3bn bill to acquire and roll out the national vaccination campaign. This is welcome news not only to the overburdened consumers but also to the property sector. Berry Everitt, CEO of the Chas Everitt International property group, says is it the single most important item in the Budget as “we all know the Covid-19 vaccines need to be administered as fast and efficiently as possible if SA is to achieve any real measure of economic recovery in the next 12 months”.
Relief for taxpayers
More good news for taxpayers, especially people in the lower- and middle-income groups, was the adjustments announced on the personal income tax brackets. FNB’s head of money management, Esther Ochse, says the 5% adjustments will ultimately mean that the consumer will have more money at the end of the month in their pocket.
Given that most of last year’s property sales were in the lower to middle price range below R3 million, this is encouraging news for continued sales especially as the current low interest rate is expected to remain so for a while. Samuel Seeff, chairman of the Seeff Property Group, says given that January’s inflation rate of 3.2% is still well within the Reserve Bank’s target range, the outlook for the interest rate remains positive and property buyers can still take advantage of the five-decade low borrowing costs.
“It remains one of the best times ever to buy property and Seeff expects the market outlook to remain positive based on current conditions. As we have seen over the last year, the bulk of the activity will be below R1,5 million and up to R3 million in the high end areas,” says Seeff.
The bank lending climate also remains favourable for qualifying homebuyers. This coupled with the low interest rate has encouraged especially first-time buyers to enter the property market resulting in outstanding sales performance in 2020 during the pandemic. According to Shaun Rademeyer, CEO of Multinet Home Loans, for the first time in several years the average property value submissions to the banks have exceeded the double-digit growth percentage during the last 5 months. Since July 2020 the average percentage in submitted property values has exceeded 12% in comparison to the same period in 2019. “The main reasons for the growth,” Rademeyer says, “is attributed to the decline in the interest rate, which has captured the attention of first-time home buyers as well as previous homeowners re-entering the housing market.”
Most important from a property perspective is what the Budget will do to address obstacles to economic growth and to boost business and consumer confidence notes Dr Andrew Golding, chief executive of the Pam Golding Property group. The tax relief for both individuals and businesses will provide a boost to confidence levels – particularly as possibly significant tax increases were predicted as possible, by some commentators,” he says.
The income tax rate is lowered with from 28 to 27% for businesses with years of assessment from 1 April 2022. Clarke says although he is happy that substantial tax hikes have been avoided for middle to lower income brackets, the 1% Corporate Tax relief falls short of hitting its objective to help companies, entrepreneurs and the economy. “Tito Mboweni has a very tough budget to balance especially since we are recovering from years of corruption and overspending from the government as well as a bloated public sector, but the 1% in corporate tax relief falls far too short,” he says.
Furthermore, the relief consumers receive on personal taxes will unfortunately be offset by the costs they will have to absorb following the 15.63% electricity price hike from the 1st of April along with a 26c per litre increase in the fuel levy.
Cut government expenditure!
The biggest obstacle to economic growth is government expenditure. According to Biznews South Africa’s public sector wage bill as a percentage of GDP now match the Nordic nations (Denmark, Iceland and Norway) and is double that of Ireland, Korea, Switzerland and Germany. Mboweni’s announcement that the wage sector bill will be cut by R265bn over the next three years is therefore greatly welcomed although it remains to be seen whether government will be able see this through given the past resistance to expenditure cuts by the sector’s powerful trade unions.
Golding says government’s ongoing commitment to fiscal consolidation should be well received by the ratings agencies and investors. Bruce Swain, CEO Leapfrog Property Group, says the plan to cut the public sector wage bill is particularly welcome, as it has been recognised to be one of the most effective ways to reduce a country’s debt burden.
Status quo on transfer duty-free threshold
Although somewhat expected, it is disappointing that government decided to keep the transfer duty exemption threshold unchanged on R1 million. Clarke says it is a pity especially for the higher brackets where transfer duty was increased about three years ago. “I would have liked to have seen some change there, where transfer duty thresholds were increased across the board from the lower to higher markets in order to boost more positivity for the property market,” he says. Income from property taxes was expected to be flat from last year, but is expected to grow by R1,4 billion to R16,8 billion in the 2021/22 year.
Uncertain road ahead
Last year the country’s economy contracted by 7.2%, making SA one of the hardest hit economies in the world according to Biznews. Mboweni optimistically predicts a positive 3.3% growth rate for 2021 but there is scepticism whether this is achievable.
Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa says in the recent past there have been similar growth rate promises that didn’t materialise. “There is much ground to make up for the lack of growth over the previous years and based on the lack of available revenue to invest, it seems unlikely that we will see that growth rate happening in the year ahead,” he suggests.
Herschel Jawitz, CEO of Jawitz Properties, says that the numbers around economic growth are concerning and questions whether the budget will do enough to drive the economy to levels that create sustainable jobs, raise income levels and uplift the country as a whole. “Predicted GDP growth of 2,2% in 2022 and 1,6% in 2023 are simply not going to do the job. For property prices to grow in real terms, demand will have to exceed supply on a consistent basis. This will only be reflected when more people earn more money and that’s about economic growth,” concludes Jawitz.
The overall budget stimulates the economy which will in turn have a positive effect on the property industry, but more could have been done to stimulate the property industry says Clarke. According to Golding the tax relief and fiscal consolidation should go some way towards boosting economic growth but adds that much of the progress in stabilising debt depends on upwardly revised growth forecasts materialising. “As the Treasury itself notes ‘the outlook remains highly uncertain and the economic effect of the pandemic is far-reaching’,” he ends.