A few years ago a number of skeptical experts were convinced that South Africa was experiencing a property price bubble, which was just waiting to go BOOM. Yet this doomsday prophesy never realised and today these theories are all but forgotten.
When interest rates were low and everyone was buying property with 100 plus percent mortgage bonds, and at (what then seemed) high prices, even I got a little nervous. But the real estate market held up, even when interest rates rose again.
In the past four years there has also been a number of significant legislative challenges for the real estate market, which further proved the resilience of investments in immovable property. Asset investments of another class might very well have collapsed under such legislative pressures, but property kept afloat.
For starters, the minister of finance decided that SARS should receive transfer duty even if shares in a company or close corporation, which holds real property, changes ownership. This means that SARS collects transfer duty even when the actual property ownership does not change. It's still freaky to me, but the real estate market coped just fine.
SARS would also henceforth collect double transfer duty in the case of a tripartite agreement. The tripartite agreement was a handy tool for savvy buyers who looked to structure their financial situation for maximum benefit, by signing a purchase agreement, but retaining the right to assign the transaction to another person or entity before transfer took place.
Only the final purchaser used to be liable for transfer duty, but with the changes SARS effected, the property is deemed to transfer first to the initial purchaser and then to the assignee, resulting in two transfer duty payments, unless the contract gets assigned before midnight on the initial day of signing. But real estate weathered this storm as well, and real estate investors just learned to be better prepared for the purchase.
Then came the advent of Capital Gains Tax (CGT), an unprecedented scope for taxation in South Africa. Not only would the Receiver of Revenue now collect around 8% transfer duty on immovable property at purchase time, but would also collect a portion of the profit a property owner generates at the time of selling! But property kept on rolling.
Real estate agents were next to be subjected to increased legislative requirements in the form of the Financial Intelligence Centre Act (FICA). Real estate agents are now obliged to conduct thorough financial checks on buyers and sellers of immovable property, mainly to ensure that taxpayers stay up to date if they want to buy or sell property. And real estate agents face penalties of 1 year imprisonment or R1 million fine if they don't comply with the Act.
These administrative requirements can cause considerable delays before final transfer of ownership at the Deeds Office. But real estate agents quickly adapted and found ways to speed things up - and properties still get sold regardless.
Most recently, the National Credit Act was introduced. This piece of legislation requires mortgage lenders to be even more thorough in their financial checks on home loan applicants. The lender now also has to inquire about monthly expenditure before granting a mortgage bond, in addition to the requirement that mortgagees earn 3 times their monthly mortgage repayments.
Also, the Act gives buyers the right to decline the approved mortgage within 5 days of receiving bond approval. This could leave sellers in a predicament, because the normal mortgage approval contingency clause would cause the sale to fall through without any recourse for the seller. The National Credit Act has definitely made a cash offer to purchase your property a whole lot more attractive, but property still changes hands with the help of mortgage bonds from financial institutions.
Recent Reserve Bank interest rate increases had the real estate industry worried for a while. But even the total interest rate increase of 2% does not seem to have broken real estate investment confidence and popularity.
Ongoing discussions on the need (or not) for mechanisms to restrict foreign acquisition of South African real estate, property developer levies, land restitution, land redistribution, and even the rising cost of construction, due to shortages in cement or any other reason, could not sink South African property investments.
Maybe the fact that property values have shown constant appreciation throughout South African history - far more constant than other asset classes - is what keeps investors coming back for more? I don't know. I just want some of the resilience South African real estate has shown for my own investment portfolio. Don't you?
