A VAT concession on newly-built flats and townhouses would level the playing field for young people who want to become homeowners and might also give the labour-intensive residential construction industry a boost.
This is according to Richard Gray, CEO of the Harcourts Real Estate group, who says some 40 percent of housing demand at the moment is coming from young first-time buyers who favour flats and townhouses, and that builders and developers are responding to this demand by planning and building more of these homes.
“According to StatsSA, the volume of plans passed for new flats and townhouses this year is 43.7 percent up on last year, and the construction phase of new housing has already increased by 8.6 percent, even though it is difficult at this stage of the market for developers to compete on price with pre-owned units,” he says.
According to the most recent Absa Housing Review, the current average difference in price between a newly-built home and a similar pre-owned one is still around 33 percent, and given the ongoing above inflation increases in building costs, the only way for developers to stay competitive is to make the newly-built units smaller, he says.
“In other words, young buyers of these units will be getting less for their money than they would if they bought pre-owned units, although many are content to accept this because new homes come with construction guarantees, and typically need much less maintenance in the critical first few years of homeownership and often have better security than pre-owned homes.”
However, Gray says, all buyers of new properties, including people entering the market for the first time are being penalised in terms of the relative amount of tax they have to pay for home ownership.
“Our research shows that home prices being paid by first-time buyers generally range from around R675 000 to R750 000. And the transfer duty (tax) payable on pre-owned homes in this bracket ranges from R2 250 to R4 500.
“But transfer duty is not payable on newly-built homes. Instead, VAT of 14 percent is usually included in the purchase price, which means that on a unit with a purchase price of R675 000, a whopping R83 000 is the tax component which the developer must hand over to SARS,” he says.
This hardly seems fair, says Gray, and it obviously penalises developers too, because the rate of VAT they have to charge again influences their competitiveness in the marketplace.
“For example, if a concessionary rate of VAT of say, 5 percent, was applied to first-time buyers of newly built properties, the developer could lower the price of a R675 000 unit to around R625 000 without any loss of profit. And as an added bonus, this would make it easier for potential buyers to qualify for bonds to buy their homes.”
In short, a VAT concession on new housing would boost both homeownership and entrepreneurial endeavour in the home building industry, Gray says.