Budget 2014 not property-friendly

Finance Minister Pravin Gordhan was walking an '"election tightrope" when he presented the Budget and has done well to keep his balance, says Lew Geffen, chairman of Sotheby’s International Realty in SA.

Budget did not bring any specific tax relief for home buyers or owners – either by way of a higher transfer duty threshold or by way of a tax rebate for the interest paid on home loans.

“Particularly welcome, from the macro-economic point of view, was his decision not to raise the tax rate for the country’s highest earners from 40 to the 42 percent or even 45 percent that some commentators had predicted.”

Geffen says this type of wealth tax, similar to that recently imposed in the UK and some European countries, is of course an easy answer for governments that urgently need to raise revenues to please poor voters who are clamouring for service delivery.

However, the notes the Minister has realised that it is also a trap, because it generally offers only a very short-term advantage, followed by a long and often permanent drop in revenues.

High earners are quick these days to react to any punitive tax measures by simply moving their wealth elsewhere and, and once bitten, are reluctant to move it back again, especially if, as in SA, they perceive their contributions are being wasted through widespread corruption.

As it is, he says, the 2013 Budget Review shows that while those earning more than R500 000 a year make up just 8.4 percent of SA’s 14 million registered taxpayers, they account for almost 55 percent of the tax revenue that is being collected, so government can’t really afford to alienate them.

“The renewed focus on reducing government spending and creating private sector jobs that will broaden the tax base is a much more equitable, sustainable and investor-friendly solution to the revenue problem,” he says.

These measures will also benefit real estate, says Geffen, as will any expenditure on education and small business promotion, which are the real keys to long-term growth and stability in this market.

Meanwhile, Richard Gray, Harcourts Real Estate chief executive officer says the Minister of Finance has managed to contain the expected deficit over the next year to 4 percent of GDP.

“This is a substantial decline from the 6.8 percent of GDP reached in 2010 and should reassure the ratings agencies that currently have SA “on watch” and also help to boost the foreign and local private sector investment so desperately needed for job creation.”

 Also positive, he notes is government’s renewed and apparently extended commitment to cutting expenditure and reducing wastage in the public sector.

“Apart from anything else, this is essential if government hopes to be able to deliver on its deficit containment promise, although to date there has not been much evidence of this being implemented, and it is not likely to be popular in an election year.”

Everitt points out that from a property perspective, they were concerned that the Minister was not more specific about the government’s plans to achieve economic growth – and specifically to support small business, as it is always the best creator of jobs and, ultimately, housing demand.

In this regard, he says, potential voters are also likely to appreciate the additional allocations for education, healthcare, infrastructure, grants and pensions, as well as the news that government aims to deliver more than 200 000 new social housing units this year – all of which will also be good for the real estate market in the long run.

“Everyone will welcome the Minister’s ‘present’ of R9.3billion worth of personal tax relief, but we are disappointed that there were not more specifics on what government plans do to really boost economic growth over the next few years and deliver on its massive job creation promises.”

Gray believes the Budget was somewhat long on promises and short on realities, although this was probably to be expected in an election year when no government wants to introduce major changes or rock the boat too much.

Shaun Rademeyer, chief executive officer of BetterBond has the R9.3 billion household tax relief and the measures to encourage small businesses as an indication that government recognises the sector’s ability to generate employment and assist more South Africans to rent or buy decent housing.

“We were disappointed, though, that the Budget did not bring any specific tax relief for home buyers or owners – either by way of a higher transfer duty threshold or by way of a tax rebate for the interest paid on home loans.”

Such relief, he says, would have helped to alleviate the current decline in housing affordability that is taking place as house prices and interest rates rise and salary increases fail to keep up with higher household costs.

Berry Everitt, managing director of the Chas Everitt International property group says the priorities of this year’s Budget were largely as expected in an election year, when government is obviously trying to seek favour with as many potential voters as possible.

“The focus on education, health, housing and infrastructure, grants and pensions was thus almost inevitable, and it is also no surprise that the widely rumoured tax increase for the wealthy did not materialise.”

Nevertheless, he says Gordhan did well to “more or less” balance these social demands with the need to prove to the ratings agencies like Moody’s, Fitch and Standard & Poor’s - and thus to international investors - that there is a steady hand on SA’s financial tiller and that the country is sticking to a plan to reduce its spending, grow the economy and cut its budget deficit.

“In this regard we were pleased to hear the Minister underline his commitment to cutting government spending, although we believe more attention should have been be paid to reducing the public sector wage bill – unpopular as this might be in an election year.

“Salaries and wages for public servants currently make up more than 40 percent of all government expenditure and this does not sit well with taxpayers in light of the large scale wastage and corruption that is increasingly evident in the public service.”

Everitt points out that from a property perspective, they were concerned that the Minister was not more specific about the government’s plans to achieve economic growth – and specifically to support small business, as it is always the best creator of jobs and, ultimately, housing demand.

“Having said that, the residential property market is currently flourishing, with the recent interest rate increase having caused barely a ripple, and we will be well satisfied if the 2014/15 Budget helps to create positive investor sentiment, stabilise the currency and keep the need for any further rate increases to a minimum,” he adds Property24