As an investor coming in at the tail-end of a multi-decade boom in residential property, I have never really bought the idea that “your home is an asset.” While I believe there is money to be made for savvy investors – and that is probably not the majority of residential property buyers – two articles over the weekend affirmed for me that this is potentially a risky asset class.
The first was a interview with Public Service and Administration Minister Lindiwe Sisulu who said that a proposal had been put forward for the government to be the backer of 1.3 million individual mortgages for government employees (Read the full article on iOL here).
“We [government] are the collateral,” said Sisulu in her interview with the Cape Argus.
Don’t get me wrong. I am a huge believer in the transformative power of low-income housing to move people into the middle-class. This should be an imperative for South Africa and is part of the reason I’ve been investing in the likes of RBA Holdings as a long-term punt.
My concern is more that the middle-to-upper income earners are likely to abuse the system because, much like ministers and their fancy cars, if government is guaranteed to pick up the tab then why worry what risk you take?
You need just a 1% default rate of those 1.3 million government employees owning a very average house in Randburg, Soweto or Roodepoort to create a R1 billion hole in the system
The fact that government is already bloated and overpaying for skills is an aside but it is basically taking a relatively solid piece of legislation in the National Credit Act (NCA) and finding a way to circumvent it for populist gain. Not smart.
The second article I read over the weekend was a new position paper prepared by David Lipton of the International Monetary Fund (IMF) entitled: “Fiscal Policy and Income Inequality” (read the full report here).
Page 40 of the report kicks off with:
“Some taxes levied on wealth, especially on immovable property, are also an option for economies seeking more progressive taxation. Wealth taxes, of various kinds, target the same underlying base as capital income taxes, namely assets. They could thus be considered as a potential source of progressive taxation, especially where taxes on capital incomes (including on real estate) are low or largely evaded. There are different types of wealth taxes, such as recurrent taxes on property or net wealth, transaction taxes, and inheritance and gift taxes. Over the past decades, revenue from these taxes has not kept up with the surge in wealth as a share of GDP and, as a result, the effective tax rate has dropped from an average of around 0.9% in 1970 to approximately 0.5% today.”
The government playbook seems to be to use its balance sheet to get people into the tax network and then clobber them with “progressive” taxation systems which include property taxes. After all if you can inflate the value of the underlying properties by offering guarantees, then you can boost your tax base artificially.
The problem with this play is that while the government trumpets R9 billion in “tax relief” at the National Budget, they are stealthily finding innovative new ways to nail you and keep you trapped in the middle-income cycle with a declining net personal wealth.
Think carefully before you buy your next property on credit. You are probably buying an asset which has been inflated by loose monetary policy at the bottom of an interest rate cycle and government is already coming up with ways to tax you for holding that asset.