In his 2006 budget, finance minister Trevor Manuel raised the transfer duties threshold - pushing the sum on which 5% duty is payable from R190 000 to R500 000 and the sum on which 8% duty is payable from R330 000 to R1m.
Why now, and what does it mean to you as a property investor? Until a decade ago, residential property was a local affair, with local laws and - more pertinently - local bank lending that was carefully regulated in most countries.
Globalisation in the 1990s brought increasing cross-border financial activity and technology that made communication between lenders and borrowers easier.
As a result, there was a rush to lend to homeowners. At the same time, inflation fell and stayed down.
Low interest rates and the low cost of home loans, aggressive bank lending with innovative products and growing wealth triggered a worldwide home-buying spree. Prices around the world rose well above their historic trend against incomes. Debt rocketed.
Private bank clients throughout the world have trillions in loan capital secured by residential property.
They have used this to buy more, and gone beyond their homes as investments. Buy-to-let has been the investment of choice since the 1990s. Special tax breaks in some countries, such as Australia, pushed borrowing for buy-to-let to 40% of all bank lending.
Rapidly rising prices made getting rich out of property seem certain and easy.
"It was like getting money for nothing," says leading UK economist Roger Bootle. And that's what people got used to through the 1990s and into the 2000s.
Central banks usually push interest rates up after several years of rapid price rises to knock the boom on its head before it starts firing up inflation.
Over-borrowed owners are forced to sell their homes, prices fall and the market corrects to grow another day.
But something else happened. Rising house prices created an ever-widening gulf between property values and mortgage debt.
Homeowners started feeling wealthier - this is called "the wealth effect" - and started increasing their home loans to spend on a better life. This is called equity withdrawal. Far from raising interest rates, central banks, notably the US Federal Reserve, kept interest rates low to keep homeowners borrowing and spending as business growth faltered after 2001.
It worked. The economies kept on growing, and inflation stayed subdued.
Has Manuel woken up to the power of residential property to help SA reach 6%/year growth? Manuel says he wants "to contribute to promoting home ownership and encourage the secondary market" - the resale of homes is worth about R120bn/year at the moment.
By slashing residential property transaction costs, he is not only helping first-time home-buyers and the emerging market; he is making it easier to invest in residential property.
For better or worse, SA has joined people around the world in using residential property to create sustainable income and wealth. But now it is more important than ever to understand the rules of residential property wealth.
- Rule number one: chase income. An income-producing investment is better quality and often lower risk than one that relies entirely on growth in value. A coastal stand may grow faster in value than an urban townhouse. But you will have to sell the stand, usually paying normal tax of up to 40% of the profit, because you will not be able to persuade the taxman that you were investing, not dealing. Returns today on flats and townhouses are rarely above 5%. Even in the high-risk inner city, flatlands returns are falling to below 10%. You can get a similar yield from listed property.
A first-time investor can borrow up to 108% of the purchase price of a flat against 50% for listed shares or a coastal stand. And his interest rate would be anything up to 2,2% below prime. So despite the risk of a high loan to value of the property and the low initial returns, residential property is where a first-time investor takes his first step in building wealth.
Capital growth will slow down over the next five to seven years in SA as it joins the world in low inflation and low interest rates. Bootle points out that the high inflation era of the last century was unusual. Inflation averaged about zero in Britain during the 19th century. He believes we are moving into another period of low or zero inflation, even deflation, when prices generally fall. Mass urban migration, globalisation and technology are the cause of this.
So what can South Africans expect?
RETURN TO NORMALITY
Economic growth and a return to normality have been driving SA house prices towards convergence with other countries. Added pressure on prices comes from the emerging black middle class moving into the better suburbs. But like the rest of the developing world, SA also has been experiencing migration of millions of people from the country to the cities.
You can see this from research by Standard Bank earlier this year showing that South Africans are migrating from country districts to cities - and up the economic ladder.
Clear evidence of this comes from the number of South Africans owning traditional huts declining dramatically from 19% of home occupants in 2000 to 12% in 2005.
The number of people occupying squatter shacks has grown by 613 000 to 6% of the population since 2000.
What's even better news is that the data gives impetus to housing minister Lindiwe Sisulu's bid to eliminate informal housing within a decade. This despite the enormous task of providing housing for about 3m people.
The Standard Bank data also shows that while 6% of householders occupy squatter huts, 7% of house owners own such huts.
The percentage of owners in houses has grown from 71% to 74%. The percentage of those occupying houses as tenants is up from 64% to 68% - an extra 2m people. The same proportion of the population as live in squatter huts - 6% - now also live in flats.
House prices in the traditional suburbs started growing in value from 1999 in response to falling interest rates, rising confidence and emerging black middle class buyers. Now affordability is tempering the annual price rises in excess of 30% annually to the mid teens.
But urban migration is pushing the prices of township and inner-city properties into rises of over 20%. This is the main area of opportunity for investors over the next few years.
But beware. The secondary market and the relationship between landlords and tenants is very different from those you as an investor will find in the traditional suburbs. You need specialised knowledge and contacts to secure your investment. Once you have found that specialised knowledge, you will find returns far in excess of what you get in the suburbs. Initial rental yields - the net annual rental divided by the purchase price - in 2006 were still well above 10%/year.
But then price rises will become more shallow and rental yields will fall over the next few years converging with those of the traditional investment areas in SA - and more developed countries.
"Despite tremendous growth over the next decade, low inflation and low interest rates make a very reasonable scenario for SA," says leading property commentator Erwin Rode.
"Looking at residential investment yields in the UK, Australia and New Zealand, and allowing for an African risk, I think investors will have to be happy with residential rental returns of about 6,5% in SA."
SA will eventually join the rest of the world in low, single-digit house price growth.
A two-bedroom flat earning a net income of R60 000/year will cost about R920 000. If mortgage interest rates are 8%, the investor will have to put down a 20% deposit to get a positive cash flow.
No more money for nothing.
But Johannesburg agency boss Darryl Meyers, a former banker, believes SA property prices will grow faster than the international average for a few years to come. "I think we can look for outperformance in residential property at least to the 2010 soccer World Cup.
Eventually, dinner-party gossip about how somebody turned a R500 000 house into a R2m home will dry up. Borrowing to the hilt in the expectation that you can sell for much more than you owe in a year or two will cease. Residential property investment will return to its traditional, boring role of slowly building a passive income over years, even decades.
SA investors will also find revenue services clamping down more vigorously on property speculation dressed up as investment.
One of the oldest property lessons will have to be relearnt by millions: the income you get and its compounding growth are the most important elements in property investment.
This is the way real wealth has been built in the past.
ACCUMULATE OVER DECADES
- Rule number two: accumulate, don't rush. Invest over decades, not years. If you're below 50, you have a few decades in which to accumulate a reasonable portfolio at low risk. You will end up with a substantial contribution to a very decent living. That surely is what investment is for.
- Rule number three: specialise. There are about 12m residential units in SA compared with 430 companies on the JSE. See chapter 3 (page 20) about becoming a property investor.
- Rule number four: your own home is not an investment, but a pivot for investment.
If you sell it to buy a similar home, you will have nothing over from the sale of the first house.
There are ways to realise your wealth from your home: you can move into a cheaper property, which is rare. Even older "empty-nesters" who downsize usually buy a smaller house costing the same as their older, bigger house. You can increase your bond, withdraw equity and use the cash to start a business, improve your education and earning power or invest in a buy-to-rent property.
The improved income that results can then be used to reduce your home loan as quickly as possible. It's important because your home loan interest payments are not tax-deductible - another reason it's a poor investment.
Homeowners, at about 85% of the house market, are far more important than buy-to-let investors. And they are displaying increasing knowledge of the investment value of their homes as prices rise and their equity - the difference between the value of the property and its mortgage debt - grows. They are increasingly becoming asset managers, capable of using the home as a pivot around which they can distribute consumption (through equity withdrawal) and savings (by building up equity) through their lifetimes. They may even be ahead of the banks, who lend them money, and the advisers, who find it difficult to make a living out of residential property beyond mortgage bonds.
But homeowners' investment behaviour relies on the highly liquid residential markets, liberalised financial environments with flexible mortgages and low transaction costs that are found in Australia, the US, the UK, Ireland and the Netherlands.
In Europe, where bank lending remains regulated and house turnover low, homeowners do not use their homes as wealth-creating vehicles. Transaction costs - legal fees, transfer duty and estate agent commissions - are high; 9% in Italy, 11% in Germany and 18% in Belgium.
SA's property market shares some of Europe's ills. Its banks are deregulated and the mortgage market flexible. But the arrival of aggressive British banks such as Barclays and Standard Chartered will speed up that process. The biggest remaining problem has been that transaction costs are high. That is changing too. Increasing competition has squeezed estate agents' commissions down to about 5% from as high as 7%. Legal and bond costs are about 2%. With transfer fees as high as 10%, the average transaction cost was up to 19%. After Manuel's dramatic cut in transfer duty, the maximum now drops to 17% but the average individual transaction cost is probably below 10% today.
More importantly, liquidity is limited to a small portion of the market. Only about 1,4m of SA's 8m homeowners are in the established house market. The remaining 6,4m have had little or no equity growth because they lack secondary markets and banks consider them too risky to give them large loans.
But Manuel's low duties will help trigger a secondary market in these areas.
The imbalance has an upside. It offers opportunities for investors with an appetite for risk to buy low-cost properties at high yields in the inner cities and former townships. Homes can still be bought for less than R100 000, giving a last chance for double-digit initial yields, strong rental demand and enormous capital growth once markets normalise.
Yields are already falling fast as investors seek refuge from the less than 5% yields they can get in prime suburbs to areas with limited secondary markets close by. These include suburbs such as Bulwer and Albert Park in Durban; Yeoville and Sophiatown in Johannesburg and Rugby and Retreat in Cape Town. Early inner-city investors achieved yields of more than 30%.
BECOME AN INVESTOR
- Rule number five: become an expert. The residential property market has no central source of information and as with other property markets, it is impossible for the average person to know what is happening in a particular place. More than any other property subclass, residential property markets are local and prices can be more affected by the micro-environment than offices, factories or shops.
So, unlike investing in unit trusts or insurance policies, seriously investing in residential property means becoming an expert of sorts. The high transaction cost of property - the sales commission, transfer duty and legal costs - and the big difference between capital gains tax (a maximum of 10%) and income tax (40%) combined with the need for some degree of expertise, means that long-term investors usually get better returns on residential than speculators.
Look for sources of learning and understanding. The banks competing for the R500bn mortgage market have serious research available on their websites. Dedicated websites offer access to information on prices and other market data. www.property24.co.za is probably the most comprehensive. Subscription site www.saptg.co.za gives price and ownership data.
Most South Africans have not experienced a property boom before and soaring prices could encourage many to believe that "this time it's different" and the present upswing will not be followed by a downturn. If enough people believe this, it will make a bubble and the ensuing crash inevitable.
Given the history of SA property and the present rebalancing of the economy, there is little doubt that prices will overshoot and speculation will eventually drive them beyond all fundamentals in most areas. As surely as night follows day a crash will come - one day.
The experts will survive.
