Your Home & The 2012 Budget

Homeowners, bank officials, estate agents, valuers and investors listened attentively to Finance Minister, Pravin Gordhan’s budget speech.  The aim of South Africa’s economy and every other developing economy is to create jobs, reduce poverty, expand infrastructure, create housing for gap markets and keep homeowners in their homes. Will the new budget achieve that? Time will tell. But here are a few salient points: 

Addressing housing gaps: The housing demand by prospective homeowners who earn too much to qualify for RDP houses but earn too little to qualify for a regular mortgage bond is growing.  Budget 2012 proposes a tax carrot for developers/employers who provide housing below R300, 000 a unit.  A new housing-subsidy (up to R85,000) for those earning R3,500-R15,000/month will give this sector a welcome stimulus. Although this proposal still needs work – public consultation and a review of existing incentives – it is a step in the right direction. 

Big Footprint = Pay more:  Following public consultation, government revised its concept for a carbon emissions tax. Although a draft policy paper will be published in 2012, implementation will be phased in slowly over the next 13 years. Tax relief will reward efforts at carbon footprint reduction, irrespective of whether you are building an individual house or developing a large housing estate. In addition, homeowners will be encouraged to adopt energy-efficiency technologies. This will have multiple benefits for companies manufacturing clean-energy products, for the environment and naturally reduce the weighty burden on Eskom’s shoulders. 

Speaking of ESKOM: The electricity levy generated from non-renewable sources increases by 250% to 3.5c/kWh for the new tax year. The extra funds will support initiatives such as ESKOM’s solar geyser program and replace the current funding structure. Fortunately, for homeowners, this increase is not expected to have an impact on electricity tariffs.  

Capital Gains Tax (CGT): The CGT inclusion rate for individuals and special trusts moves from 25% to 33.3% while companies are harder hit and move from 50% to 66.6%. To mitigate the impact on middle-income earners, various exclusion thresholds will be increased. Here are some of the most important changes: Annual exclusion: R30,000 (was R20,000), exclusion amount on death: R300,000 (was R200,000 and primary residence: R2 million (was R1,5million)  

Will Share-Blocks go the way of the Dodo? Converting a share block into sectional title schemes has the potential to create tax complications. It involves a “liquidation” of the company to effect the change from a company-centric to a property-centric structure. It is proposed that these changes receive a tax-free rollover.  

Should I buy or should I sell? Mr Gordhan was candid regarding South Africa’s pedestrian growth prospects. He acknowledged the weakness in the residential property market while the commercial sector battles high vacancy rates. What this means for the broader property sector is a longer period of consolidation. Well-known risks stay put. CPI inflation, currently breaching the upper limit of the target band, will be watched carefully as world events in the Eurozone and oil prices remain unsettled. For property owners,  municipal rates/taxes and electricity price increases translate into higher operating costs.  

There are some positives, however. Government aims to extend its infrastructural expenditure substantially over the next 4 years. This will trickle through the economy to create development and investment opportunities. The building industry in particular will benefit. Improved roads, rail and port facilities and the extra jobs created could well mean a further increase in the number of first-time homeowners.  

Summary: Dieter Deppisch, Knowledge Factory’s property-guru, summarises: “The cyclical nature of the property market elicits a gamut of emotions. When it’s a sellers’ market the buyers complain while the current buyers’ market has sellers grumbling. There is an upside. Each cycle is necessary to balance an otherwise fragile economy. Real-estate is an essential component of wealth building in South Africa but it goes further than that. Irrespective of market cycle, getting families into their own homes crafts a stable variable. A stability that will later reflect on their credit rating, work opportunities and create a constant where their children can be raised. Homes in the R300,000-R600,000 band continue to sell even in a buyers’ market. They are the ideal entry level for first-timers and a backbone of buy-to-let investors. We expect further consolidation over the next 36 months as weaknesses in the broader economy are addressed. For qualified buyers however, there has never been a better time to buy!”

 Knowledge Factory

24 Feb 2012