The effect of a VAT increase is likely be felt across the property sector, influencing pricing, affordability and transaction costs.
However, the lower- to mid-income segments are likely to be the most affected, as higher costs put added pressure on both buyers and developers alike.
The VAT rate is set to go up by half a percentage point on May 1 and again on April 1 next year. The increases could affect confidence in the sector.
According to Landsdowne Property Group CEO Jonathan Kohler, the increase is bound to push up costs for developers, so they will probably look for ways to cut expenses or use more cost-effective construction methods to keep prices down for home buyers as much as possible.
“While a 0.5 percentage point increase may seem smaller than two percentage points it still impacts affordability, especially for lower- to mid-income buyers. However, prospective buyers should consider the full cost of owning a new development, factoring in savings from energy efficiency, renewable energy, security and amenities,” said Kohler.
He said rising living costs and affordability continued to be a concern. The gradual VAT increase, combined with a slower-than-expected interest rate cutting cycle and weak economic growth projections, created uncertainty for buyers. As a result, many may choose to rent for longer, preferring the predictable costs of a lease over the fluctuating expenses of home ownership.
“We expect activity in the middle segment of the market may be impacted, although changes in the transfer duty threshold may offset some of this impact and could lead to more activity in property transactions below R1.2m,” he said.
The VAT increase could lead to a more cautious approach from both first-time buyers and investors, with many opting for a wait-and-see stance. Investors would also need to factor the rise into their yield calculations, said Kohler.
Meanwhile Absa’s latest homeowner sentiment report for 2024 shows that first-time buyers are driving market activity, accounting for more than half of all applicants, making them a key segment in the residential sector.
Jawitz Properties CEO Herschel Jawitz told Business Day that while he did not think the VAT increase would drastically affect demand from a financial standpoint, it could shake consumer confidence. He pointed out that the residential market really hinged on two things: affordability and confidence.
“There is a deep sense of frustration among consumers about having to pay for the government’s gross inefficiency and corruption, as well as the resulting lack of economic growth — which should drive revenue collection, rather than a VAT increase,” Jawitz said.
From a developer’s perspective, Jawitz said they might look for ways to cut other development costs to offset the VAT increase.
Jawitz said the lower end of the market, particularly first-time buyers, may feel the pinch as they wait to assess the effect of the VAT increase on their cost of living and affordability. However, he did not expect it to affect the buy-to-let market. With strong rental demand in the Western Cape and residential markets offering exceptional value, the VAT increase was unlikely to have a big effect on investors.
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