The proposed 2% VAT increase, which would have raised the rate from 15% to 17%, caused the postponement of February’s Budget speech.
This increase could have added R26,000 to the price of a property valued at R1.3 million, as per Seeff Property Group.
Renier Kriek, managing director at Sentinel Homes, explained that most housing prices are quoted with VAT included for marketing purposes. As a result, the 2% increase would raise the price of new homes by 2% of the base price, potentially giving the impression of inflationary pressure.
However, Kriek noted that the situation is more complex.
Due to high building costs, rising land prices, and inadequate service delivery, constructing new housing in South Africa has become increasingly expensive.
With a housing shortage of more than 2.2 million homes, demand exceeds supply. A VAT hike would only further exacerbate the inflationary pressures on home prices, Kriek warned.
Samuel Seeff, chairman of Seeff Property Group, pointed out that properties subject to VAT are typically newly developed homes, such as apartment blocks or estates.
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For a property priced at R1.3 million before VAT, the increase would add R26,000 to the overall cost, with VAT also applicable to transaction costs like transfer and bond registration fees.
Kriek emphasized that a VAT rise in the property sector would lead to greater house price inflation, worsening the current housing shortage. The increase would discourage the development of new homes, raising demand relative to supply, and consequently pushing prices higher.
The main challenge for homebuyers is affordability. Rising house prices would force many buyers to consider smaller or less conveniently located properties, or to rent instead, which would likely drive up rental prices as well. Kriek also highlighted the critical issue of access to land and housing, warning that failure to address this could lead to more populist politics and economic instability.
Kriek noted that the proposed VAT increase would add pressure to already struggling South African households. Home loan delinquency rates have surged from 9% in the third quarter of 2021 to 12.15% in the third quarter of 2024, a 35% rise. As a result, home loan providers are adopting more lenient credit policies, but this approach is unsustainable and could lead to a contraction in credit availability if the economy faces a shock.
Economic volatility disproportionately impacts lower-income households, especially in the gap market, where demand for housing is high and supply is limited. Kriek argued that any policy that discourages lenders and landlords or causes house price inflation would make matters worse.
Seeff added that the VAT increase would have reduced property affordability, decreasing disposable income available for home loan payments, which could create a compounded cost increase.
Ncumisa Mkunqwana, CEO of Chapu Chartered Accountants, explained that the government needed to raise revenue due to a budget shortfall. The 2% VAT hike was expected to generate an additional R20 billion, but this measure now seems unlikely. The revised Budget, to be presented by Finance Minister Enoch Godongwana, will likely exclude this increase.
Mkunqwana pointed out that as a consumption tax, VAT impacts citizens directly. The increase would have resulted in higher living costs, as suppliers raised prices to absorb the VAT increase. This would reduce disposable income, potentially leading to more debt and lower savings.
Kriek emphasized that the key to economic recovery is controlling inflation and maintaining low interest rates. The high real cost of capital is currently one of South Africa’s biggest barriers to economic growth and job creation. Without substantial growth, the country risks further instability.
Both Kriek and Seeff stressed the importance of economic stability, including maintaining stable taxes like VAT and property taxes. A VAT increase could negatively affect inflation, raising pressure on interest rates just as they have started to decline. Seeff also noted that with the economy growing at only 0.6%, keeping such economic shocks off the table is essential for achieving sustainable growth and reducing unemployment.
