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Feeling poor? It’s not your imagination

SA’s middle class is being crushed by rising inflation and declining asset values.

How’s that retirement plan coming along?

You’re doing all the right things. You’ve bought a residential property, maybe two; you’ve got a pension fund and perhaps a retirement annuity (RA) as well and are contributing the maximum to these instruments as you’ve always been told to do.

So all should be on track; no reason to worry. As Alfred E Neuman, the face of the MAD comic books would say: “What, me worry?”

Perhaps you should start worrying, just a little, and start questioning some of the pillars of your wealth that one day hopefully, will support a ‘care-free’ retirement.

But as I’ve writtten before, there’s no such thing as a care-free retirement.

You are paying more taxes than ever before

This year Tax Freedom Day (TFD) – the day when you stopped working to pay government taxes and started working for yourself– arrived on May 25, five days later than last year and 43 days later than TFD in 1994. Over the past 22 years, the percentage of the year that you work for the government has increased by an average 1.8 days per year. The more you pay in taxes the less there is to put away for retirement.

Government revenue as a percentage of Gross Domestic Product now exceeds 30% for the first time, at 30.2%. The government salary bill, with over two million people on the payroll, now exceeds the total budget for 1994!

Residential property under pressure

In addition to a pension/provident fund, residential properties often formed a second pillar of wealth for people approaching retirement. The ‘sell the big house, move into something smaller and use the profit as a pension sweetener’ strategy worked for many years but not now. It’s the smaller properties that are in demand while the large ones are rapidly losing value in real terms.

The latest FNB House Price recorded a 7.4% year-on-year (y/y) increase for the property market as a whole – a modest 0.8% better than the CPI inflation rate of 6.6%. In real terms, when inflation is deducted from nominal prices, property prices are still 18.9% down from the peak at the end of 2007.

Survey after survey on the local residential property market – of which I find very little coverage in our media – tells the same story. The residential property market is still in the grips of a severe bear market and the outlook and prices continue to deteriorate. This applies to all provinces except the Western Cape.

It’s when you strip out the performance of Western Cape properties, constituting about 25% of the total market by value, that you see how poorly prices are actually doing in the other provinces. Average prices in this area were up 12.5% y/y to end May – almost double the inflation rate.

The trend of above-inflation increases in the province is due to the wave of semigrants from Gauteng and other provinces.

Recently a spokesperson for Lew Geffen Estates for the Dainfern area, was quoted as saying that three out of ten sales in the Dainfern area were due to families moving down to the Cape.

At our recent SA QUO VADIS? seminar at the Val de Vie estate outside Paarl, I asked the 80-odd delegates how many came from Gauteng. To my surprise more than 50% raised their hands.
So the Groot Trek down to the Western Cape is not just a dining room topic, it’s a reality, as wealthy and sometimes not so wealthy move to a province infinitely better managed than the rest of the country.

Last week I had a personal experience of just how well-managed the municipalities of the Western Cape are. Some three years ago I sold a property in the Drakenstein Municipality, which overseas the Paarl area. I actually received a phone call from someone in the finance department asking for my banking details in order to repay an amount of R2 850 (seemingly owed to me) which had been on their books for more than two years. Can you imagine that happening somewhere else?

Nominal prices in Gauteng, the largest property market by far with about 50% of market values, rose by a mere 3% – which is 3% below inflation even in nominal terms. KZN was slightly better with 5.6% growth.
The movements in property prices in the other provinces don’t really influence the national averages, due to their small sizes and low values.

FNB’s John Loos also pulls no punches. He’s not expecting any improvement soon and reckons that average prices are still way above the long-term average. So expect more of the same and even a further decline in real prices over the next couple of years.

The Pam Golding Property Group has in recent years created its own index to gauge the movement of properties bought and sold via PGP. The latest PGP index tells a startling story: property prices in the category above R2 million declined by 5.7% in the first quarter of 2016.

I waited for the general media to get wind of this alarming trend with regard to residential property prices, but in vain it seems.

A recent column of mine analysed the deteriorating conditions in the rental market, another indication that Mr and Mrs Average is under tremendous financial pressure, both as landlord and as tenant. The BankservAfrica index, that measures trends in disposable income, also clearly shows this trend. Salary increases are hovering around 7% y/y – mainly for people in government service.

Your pension fund stuck in the mud

Another thing to worry about is the sideways movement in the JSE over the past two years and even longer. Strip out the performance of Naspers, SAB Miller and BAT and most of the JSE is in a deep bear market. When measured against inflation of 6.2% y/y in the year to end May, none of the major indices, except Resources (+7.6%), beat inflation. In fact, when measured in real terms the JSE (with a return of -2.18%) is well down against inflation; the same over two years; and is barely ahead with an annualised return of 11.8% over three years.

The only inflation-beating returns you would have earned was on your investment known as multi-asset (high, medium or low equity) which has had the ability of moving 25% offshore, with great results for their investors.

Have a look at your pension/RA/provident fund statement in the months to come: don’t expect much more than 5% to 8%.Your performance has been dragged down by the local stock and bond market in bear market territory.

Investors with their money in living annuities (monies coming out of pension funds and retirement annuities) can move 100% offshore if their risk-profiles allow for it, and generally have done much better.

So here is some advice: if you are over 55 with money locked up in an RA or provident fund, consider moving the money into a living annuity to obtain 100% offshore exposure if that is what you require. Otherwise you remain hamstrung by Regulation 28, which is currently holding you back considerably.

Dodged a downgrade bullet

SA can count itself lucky that it dodged a downgrade bullet by S&P Global Ratings last week. A yellow card instead of a red one; a stay of execution. I think it was a very close call. Perhaps these ice-hearted analysts have some feelings after all. I thought our growth metrics were too poor to avoid a downgrade, but maybe finance minister Pravin Gordhan managed to convince them of his determination to get government spending under control. I found S&P’s reference to the debt obligations of our parastatals (SAA, SABS, Petrosa etc) a major warning to government.

But we have a municipal election coming up and who knows what a re-energised Jacob Zuma will do or say in the next couple of months. Prepared to be surprised.
So here we go … another six months of anguish. Or, as the late US basketball player Yogi Berra once said: Dejavu all over again.

*Magnus Heystek is investment strategist at Brenthurst Wealth Management,
He can be reached at magnus@heystek for ideas and suggestions.

COMMENTS   22

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my reply : LISTEN TO THIS MAN! he is the one adviser who has constantly recommended going off shore – which based on the depreciation of the rand has led to positive results over the past few years. interestingly enough world markets have done very little over the past 2 years in the main – see this article from uk telegraph:

http://www.telegraph.co.uk/business/2016/06/05/four-lessons-from-a-decade-of-shares-slip-sliding-away

as regards w cape property I am in 2 minds 1) there is an awful lot of “Bollywood” mansions esp in Constantia advertised each week in the weekend argus – in aus $ terms incredible value for money 2) even properties on the golden mile from bantry bay to Llandudno keep on re-appearing for sale.

even given the increase in property prices in w cape – I doubt whether over past 5 years taking into account depreciation of the rand they have done much in real terms (Sydney house prices are up 13.7% with zero inflation in aus at moment.

BTW there is nice stash in sea point over the “sale” of the old Ellerslie school property where “indigenous” people are demanding a right to this land. expect more of the same – esp in w cape – refer “reclaim the city” on facebook

If SA is going the route you all say and predict – ALL rights and values and privileges would be gone – even those who invested off shore with the knowledge of SARB who can simply get an order from No 1 to have these moneys/values repatriated and enforce it on local banks.
The only safe way to invest off shore is the illegal route – the government not knowing. But this is ILLEGAL
I don’t do illegal – I also don’t want to have a false sense of security with investments abroad controlled by SA Gov.
So, I retain and enjoy my local residential properties (not renting them out) as well as declared properties abroad – long long ago – and invest via SA Wealth managers.
Magnus’ core message is not anything new – just rehashing the same old – It is good for him to do that but I am beyond scare – I have enough to live comfortably.

I doubt that is legally correct ….. I can see how funds which utilize SARB-sanctioned derivatives to create synthetic exposure may be required to be unwound (Magnus has actually made previous reference to this) but I cant see the basis on which the government could force you to repatriate cash you have moved out and which is dispersed globally.

I do visit the Cape on business & on a few occasions, for holidays. It’s a nice place but I still feel strangely foreign there. I honestly do not ever see myself settling there. Give me the vibrancy of GP any day.

I tried to live permanently in CT overlooking Atlantic Seaboard for tw years – still have the property, but agree its not for serious professionals
Plus, the click-ish people down there are all half bankrupt but pretend not to notice and hate us from Gauteng and London.
strange fact: most CT’onians who sell their houses in CT use the proceeds to move AWAY from WCape!!

how is one half bankrupt????? capetonians aren’t clickish!!! gautengers think they’ve made it when they wear a wrist watch the size of a clock on their arms!!!!!! lol!! and the expect capetonians to make a fuss of them!!!

I agree! Cliquey of note! Been here for 4 years and you won’t make friends unless you are a hipster or a mountain biker with a fancy bike.

Gauteng has by far the friendlier population and much better jobs than CT!

agreed. CT is closet conservative too …. old white money protecting old white influence. if that’s your vibe you may as well move to Europe.

Spot on! Having (more or less) recently retired what supprised me most was how many of my fellow retirees and pre-retirees actually have no or very little clue of their finances! Oblivious of these dangers to their financial wellbeing! The arguments in the article are very relevant. One aspect missing, though, is the political aspect. It worries me the potential for our government to panic and start bringing back exchange controls in an attempt to stem the outflow of capital. The potential for a political driven exercise ala Zimbabwe.

Investing in property in WC is fine as long as there are enough people to squeeze for rentals but the salaries are bad here and don’t expect too much movement in future as most people cannot afford CT prices.

I cannot comment on the property market as I have no knowledge of that. However the comment about the number of days that you are working to pay your taxes is incorrect. Mr Heystek states that you are working from 1 Mar 2016 to 25 May 2016 to pay your taxes this year. That is 86 days or 23.6% of 365 days. This would indicate earnings of R515,000 per annum on which you would pay tax of 23.7% in the 2017 tax year. On earnings of R515,000 you would have paid 23.8% in the 2015 tax year and 24.0% in the 2016 tax year, so the statement that you are working longer each year to pay your income tax is, very simply, HOGWASH.

To Leachim2784
I suggest you Google Free Market Foundation’s calculation of Tax Freedom Day.
It’s a half serious/half tongue -in- cheek calculation that runs from 1st January to a day in the year when you approximately have paid your taxes and now get to keep what you earn for the rest of the year.
Its a concept that is applied in many countries in the world, and is most definitely not HOGWASH. If you can’t work out or realize that you are paying more taxes than ever before then I suggest you get out from under your duvet and go and talk to some real people out there. Try and tell them they are paying less in taxes……
Are you perhaps working for the ANC?

remember income tax is but one of the plethora of taxes that you/we pay…

And Magnus is only referring to the official tax rate.

If you add all the “unofficial taxes” you pay for services that you’re actually supposed to receive for your taxes , like security, private schools, medical aid etc. you’d be surprised to see how much tax you really pay.

Thank you for such an interesting and insightful article!

It gets worse. Inflation and currency devaluation are a stealth tax, pushing up SA’s effective tax rate above 80%…

I agree! Cliquey of note! Been here for 4 years and you won’t make friends unless you are a hipster or a mountain biker with a fancy bike.

Gauteng has by far the friendlier population and much better jobs than CT!

So the Rand/$ is at 14,83 this morning – How many economist and fin advisers predicted that??? All they sell is fear – Why? – Do boost their own income – @Robertinsydney – Just remember Aus killed most of the “indigenous people” – Maybe there should be more claims in Aus?? – Just returned from a 2 week holiday in a 1st world country – Living expenses are extremely high (unless you are a huge earner) – car rental companies just as scaly as here – Better roads and better law enforcement… Shocking toll system – Far worst than SA – Penalties if you pay a day late! – Middle class has been in decline in the USA for 20 years already – Reed the economist Mr Heystek – Europe starting to close their borders – Everybody wants cheap labour but the cheap labour must just not demand anything – SA hahs huge issues but so do most countries… Take some money offshore (but do it yourself) – Dont make your adviser rich – Make yourself rich

Agree with you. Just the one thing, I believe that Rand/$ is largely irrelevant when viewed in the short term, although that 14.83 is a figure we’ll certainly take for now.

A quick search for the R/$ figures:
13 Jun 2006 – today: R6.75 to 14.83 (8% per annum)
10 Jun 2011 – today: R6.77 to 14.83 (17% per annum)
8 Jun 2011 – today: R12.42 to 14.83 (19% per annum)
1 Jan 2015 – 1 Jan 2016: R11.55 to R15.56 (25%)
I won’t complain too much about any foreign investments being down 7% this week due to the currency move.

Their inflation: 0% to 2%
Our inflation: 4% to 7% (if we’re lucky).
The theoretical currency movement should not be more than 5% p.a. but unless we can find a quick solution to this zANC mess we’re in, it won’t be long before the Rand begins its downward move again.

@robertinsydney, Not everything is rosy in Oz. Glen Stevens of your Reserve Bank has continued to lower the interest rates in attempts to, as Ross Gittins puts it, “to push a piece of string “. Nothing is kick-starting spending and the RBA is terrified of deflation.

All that the low interest rates have done is chase Australian property prices sky-high. The ASX has drifted sideways for many years – I know, I have had investments in Australia for several decades and I shall not even mention the collapse of resource prices.

Financially, things are pretty tough for young Australian families (I have a son in Brisbane), BUT I have to admit, the country is reasonably well-run, has a low, and educated population and will rise again.

Entry level townhouses in secure complex….Hahahaha

Homes under R1 million in demand

While the national housing market’s upper price band above R2 million is experiencing the weakest price growth (-5.7 percent), house price inflation in the lower price band below R1 million continues to register robust house price inflation (10.1 percent). The lower price band has been the top-performing sector since mid-2015 and prices continued to accelerate during the first quarter of 2016. This pattern is evident in both the Gauteng and Western Cape housing markets. In KwaZulu-Natal (KZN), however, the top-end continues to register robust growth – averaging 9.6 percent during the first quarter.

Getting worried about 2 year returns on the JSE means you should not have money invested there in the first place… Equities is a long term game

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