Property affordability: let's keep that 2% VAT increase off the table

The controversial 2% VAT increase from 15% to 17% that got February's Budget speech postponed would have meant a nominal increase of R26,000 on a property valued at an average price of R1.3 million, according to the Seeff property Group..

Explaining this further, Renier Kriek, managing director at Sentinel Homes, said most prices in the housing market are quoted as VAT-inclusive for marketing reasons. This practice means that the sticker price of new housing would increase by 2% of the base price, which could appear inflationary. “However, the effect is not so straightforward," he said.

"Because of the high building-cost inflation over the past decades, along with the rising costs of land and low service delivery, it has become very expensive to produce new housing in South Africa.

"We currently face a housing shortage of more than 2.2 million homes, meaning that demand is relatively high compared to supply. Adding a VAT increase would only intensify this inflationary pressure on house prices,” said Kriek.

Understanding the impact

Samuel Seeff, chairman of the Seeff Property Group, said properties subject to VAT are typically those purchased from developers, such as new apartment blocks or estates.

“Assuming the price before VAT is R1.3 million, this would see an effective increase of R26,000 on the purchase price alone. Additionally, there would be VAT payable on other property transaction costs, including transfer and bond registration costs,” Seeff said.

Kriek said the effect of a VAT increase in the property sector would lead to increased house price inflation beyond what it would otherwise have been.

“In the current circumstances, we have a shortage of housing in South Africa. A VAT increase would disincentivise the delivery of new stock, leading to increased demand relative to supply and, consequently, higher housing prices overall,” he said.

Affordability challenges

The largest challenge for most homebuyers is affordability.

“If house prices increase, buyers will be forced to choose smaller or less conveniently located homes, or they may opt to rent instead. This will likely put upward pressure on rental prices as well,” Kriek warned.

He added that South Africa is facing a critical issue regarding access to land and housing. “If we cannot house the populace, we risk a decline into more populist politics and economic policy.”

Kriek said the proposed 2% VAT increase - which led to February's budget being postponed due to opposition to it - would put South African households under additional pressure.

Home loan delinquency rates have risen from 9% in the third quarter of 2021 to 12.15% in the third quarter of 2024, marking a 35% increase.

“Home loan providers are currently operating under expansionary credit policies to balance the sharp decline in the credit quality of their portfolios.

"New entrants who can prove affordability in the current market are being financed to shore up the numbers.

"However, this can only go one of two ways: either the economy improves, or a shock to the system forces home loan providers to retreat into credit conservatism, which negatively impacts the property market and the economy as a whole.”

Economic implications

The effects of economic fluctuations disproportionately affect lower-income households.

In the gap market, where housing supply is most constrained and unmet demand is highest, a VAT increase would exacerbate an already difficult situation.

“This is true for any policy that disincentivises lenders and landlords or leads to increased home price inflation,” Kriek said.

Seeff added that the VAT increase would have significantly affected property affordability, reducing disposable income available for home loan payments. “This would have had a tremendous impact on households and could potentially create compounded increases in costs,” he said.

Ncumisa Mkunqwana, CEO of Chapu Chartered Accountants, explained the government needs to increase revenue due to the budget shortfall. Through the 2% VAT increase, it had hoped to boost revenue collection by R20 billion. This increase seems off the table and the revised Budget is set to be delivered by Minister of Finance Enoch Godongwana next week.

Mkunqwana said: “As a consumption tax, VAT impacts citizens significantly. The increase would have led to a higher cost of living, as suppliers would raise the prices of goods and services to accommodate the VAT hike. That would reduce consumers' disposable income, potentially resulting in increased debt and reduced savings,” Mkunqwana explained.

Best approach

Kriek said the best approach for the economy is to keep inflation down and maintain low interest rates. “The high real cost of capital in South Africa is currently the biggest obstacle to the economic growth needed to create jobs and fuel recovery. Without significantly increased economic growth, we are at risk as a nation,” he said.

He emphasised that economic stability is vital for the local economy, including keeping taxes stable—not just VAT, but also property taxes. A VAT increase could have a knock-on effect on inflation, putting pressure on interest rates just as they have begun to decrease.

Seeff added: “The economy grew at only 0.6%, which is below expectations. It is crucial that the government keeps economic shocks, such as a 2% VAT increase, off the table.

"The economy needs to return to a growth path of around 3% urgently to address the enormous unemployment risk. Better economic growth will lead to more jobs and salary increases, enabling more people to purchase their own homes."