On 22 February this year, during his Budget 2017 speech, (former) Minister of Finance, Mr Pravin Gordhan, announced that the threshold for the payment of transfer duty on residential properties would be increased from R750 000 to R900 000. In other words, the purchase of residential properties that are valued at R900000 or less will no longer attract any transfer duty. Prior to the Minister’s announcement, a transfer duty of 3% was payable on property valued between R750 000 and R900000 – which according to the amendments now applies to property valued between R900 000 and R1 250 000. The full set of changes are reflected in Table 1 below.
Table 1: Comparison of 2016/2017 and 2017/2018 transfer duty thresholds
As a result of these changes, estate agents estimate that the cash required for transaction costs for homes valued at R900 000[1], will decrease by approximately R15 000 (from R40 000 to R25 000)[2], a difference that can have a material impact on affordability for many first-time and middle-income home buyers. Whilst from a fiscal policy viewpoint, these changes will impact on the country’s coffers (through the reduction in transfer duty revenue), there is a broader social objective to encouraging home ownership. Within the currently constrained economic environment, ownership of a home can be used as security/collateral for other important household purchases, for example, financing education,[3] or simply to build up equity. As shown in the table below, the structure of the tax change is such that it should impact more on lower value houses, and thus offer more savings to lower income individuals – in taxation terms, therefore, the incidence of the change is progressive in effect.
Table 2: Tax incidence by property value
Against this backdrop, this blog seeks to (i) unpack the changes to the transfer duty table and its implications, and (ii) assess whether these proposed changes have in fact incentivised home ownership. Whilst the actual saving to the new home owner will vary depending on property value, in general reduced transfer costs should broaden the purchasing options available to first time and middle-income buyers. The inference here is that these savings will be used to reduce overall debt obligations (increasing the value of the deposit).
Table 3: 2016/2017 Comparison of Indicators
The change was implemented during Q1 2017, so we therefore have only one data point (Q2 2017) during which it has had full effect. Table 3 above compares Q2 2017 with both the same quarter the year before, and Q1 2017[8] . Compared to a year ago buyers, on average, are purchasing more expensive homes (3.6% increase in average purchase price), and relatedly increasing the deposit paid (up by 4.1% of the value of the purchase price). When compared with Q1 2017 we observe a similar increase, where the average price of homes purchased increased by 2.8% and the deposits (as % of the purchase price) increased by 4.7%. However, when considered from the view of first time buyers (FTB), from Q2 2016 to Q2 2017 average purchase price has increased by only 2.9%, whilst the average deposit declined by 8.1%. Similarly, for FTBs a Q1 /Q2 (2017) comparison reveals that the average price of homes purchased declined by 0.9%, and the deposit paid declined by 2.9% of the purchase price.
Typically, first time buyers are individuals whom are much more constrained financially and tend to purchase homes below the R 1 000 000 mark. They should thus be most affected by the transfer duty change. However, in practice the higher cost of living over the last six months (i.e., increasing food, electricity, fuel prices), and political uncertainty, may have had a greater effect on this segment of buyers. This accordingly to ooba can be captured by the decline in FTB volumes of new applications which declined by 5% (52% to 47%) from Q2 (2016) to Q2(2017).
So why is this so?
As already mentioned, consumers have been subjected to a number of financial stressors over the last six months, some of which (food, fuel and electricity inflation, for example), we have already highlighted. In attempting to understand the pressures faced by those on the lower end of the middle-income bracket and below, we have taken a further look at the changes to the income tax rates as well as CPI from March 2016 to June 2017. During this period, top marginal tax rates have increased from 41% in 2016/2017 to 45% in 2017/2018 (due to the inclusion of a new top income bracket), while adjustments have been made for bracket creep due to inflation.
However, various stakeholders have indicated that the latest adjustment to the income tax rates do not fully account for inflation, with the result that the effective tax rate on various income bands has increased. Specifically, at income levels of R250 000, R500 000 and R 1 000 000 respectively, the effective tax rate has increased by 0.2% (R250 000), 0.7% (R500 000) and 0.7% (R 1 000 000), which suggests that real income has declined, albeit marginally.[9][10]
Counterbalancing these pressures, headline inflation has been declining steadily. While it averaged approximately 7% over the March 2016 to June 2017 period, by June 2017, it had reached 4.6%. Lower inflation will tend to improve purchasing power. However, changes to the 2017 CPI basket reflect the greater financial pressures on households, including the following weight adjustments; food and non-alcoholic beverages 17.2%( from 16.4%), household and utilities 24.62% (from 24.52%) and transport 15.4% (from 14.3%). Households spend (on average) the bulk of their income on housing and utilities -32.55%, transport -16.29% and, food and non- alcoholic beverages -12.9%. Collectively these items comprise of approximately 60% of household expenditure.
Drawing on the above, our view is that these changes have left consumers, and particularly middle to lower income individuals, slightly worse off. Increased financial pressures reduces the ability to finance a home. Simply put, middle to lower income households will prioritise items such as food and transport, even if those costs then prevent them from affording a home. The change in the transfer duty thresholds has thus probably only partially mitigated against the pressures on first time and middle-income buyers, rather than stimulated growth in this market.
[1] The focus in on the R900 000 point as this is where the changes start applying. It is acknowledged that as one moves down the scale the savings on transaction costs will vary.
[2] Property24 accessed on 4 August 2017. This amount includes both the R4500 decrease in transfer duties and other associated changes.
[3] Finance 24 accessed on 11 August 2017
[4] Calculation as follows; at property value of R 1 250 000, the saving is equal to 30% (R4500/R15 000). Similarly, for subsequent property values, i.e. at R 1 750 000 the saving is equal to 10% (R4500/R45000) and so forth.
[5] Ooba is a home finance provider whom has been tracking the market trends for almost a decade, and conducts business with all major banking institutions.
[6] See Moneyweb accessed on 15 August 2017
[7]This captures the within year change
[8] Moneyweb accessed on 15 August 2017
[9] These figures were quoted in 2014/2015 Rands