Property development levy to push up housing prices

Housing Minister Lindiwe Sisulu’s proposed 20% levy on new property developments, which would be used to subsidise low-cost housing, is likely to be built into developers’ costs, thereby pushing up prices of these new developments in the mid- to upper levels of the market and making consumers foot the bill for the levy in the end.

So says Barak Geffen, Executive Director of Sotheby’s International Realty South Africa, who feels a levy of this nature would not only deter property developers and other investors, but would also act as a deterrent to those wanting to buy into new developments, having in the past been attracted by the lack of transfer fees and their relative cheapness due to the economies of scale that are created compared to single residential units.

“It’s a case of what the economy lose on the swings, it will gain on the roundabouts,” states Geffen. “The levy will simply feed directly into housing price inflation, which has been slowing in the past year. It may be a good way of filling government’s low-cost housing coffers but it will make it tougher for first time homebuyers to get on to the property ladder and in so doing is likely to boost the rental market.”

Depending on the collection mechanism and timing, developers could experience serious cash flow problems if they are required to pay the levy upfront, he notes. Alternatively, property buyers will have to pony up the cash by borrowing even more via their mortgages—resulting in more interest charges.

However, this needs to be weighed up against the boost to economic growth that will occur as a result of a reduction in crime through poverty alleviation.

Sisulu has proposed that 20% of the value of a property development be spent on low-cost housing, without providing any details on the collection or enforcement mechanisms.

Western Cape Premier Ebrahim Rasool has echoed the Minister’s move, also mooting a 20% provincial development levy. He pointed out in his state of the province address that other countries like Malaysia, Ireland and even Canada had adopted similar levies, the proceeds of which were dedicated to financing low-cost housing.

However, he said it could “easily take three years” from the time the idea was first proposed until the National Treasury approved it. Several issues needed to be investigated before such a levy could be launched, particularly the extent of the impact on investment. 

Geffen added that a tension will always exist between interfering with or manipulating an economy versus letting the free market forces drive growth.  There are arguments for both sides.  However if structures like the development levy are put into practice, then efficient and effective delivery of the funds generated are what determine whether the former will result in the expected outcome.  Inefficient and ineffective use of funds limits the growth that free markets would generate.

ENDS

SOTHEBY'S INTERNATIONAL REALTY SOUTH AFRICA

For further information please contact Barak Geffen at Lew Geffen Sotheby's International Realty South Africa on 082 600 8522 or Robyn Creer at Lange on (021) 448 7407 or visit www.sothebysrealty.co.za.