VAT warning for South African homeowners

The National Treasury’s plan to implement a two-percentage-point value-added tax (VAT) hike in South Africa could result in homebuyers paying significantly more.

MyProperty Home Loans bond originator Michael-Anne Abrahams warned that potential home buyers could see significant changes in the costs associated with purchasing properties, especially new homes, if the VAT hike happens. 

South Africans are currently in limbo about what is set to happen to their tax bill this year, as the government had to postpone the tabling of the 2025 Budget.

Finance Minister Enoch Godongwana was set to table the Budget on 19 February 2025.

However, the members of the Government of National Unity could not reach a consensus on the plan, so the Budget was postponed to 12 March 2025.

The DA later revealed that it could not sign off on the Budget because it proposed raising VAT to 17%, which the party said would risk South Africa’s economic stability.

The postponed Budget has since been released, and it revealed that the National Treasury planned to hike the VAT rate by two percentage points, from 15% to 17%, to raise crucial revenue.

While the DA has said it would not support a Budget that raises taxes, the government needs more revenue, and there is still uncertainty surrounding potential tax hikes.

Abrahams warned that the postponed Budget’s proposed tax adjustment would shift the financial landscape for new constructions, existing home transactions, and accompanying services. 

This is because VAT is incorporated into the purchase price of new constructions sold by developers. She explained that with the current VAT rate of 15%, a new home priced at R1,000,000 includes R150,000 in VAT. 

If the rate climbs to 17%, the VAT will increase to R170,000, adding an additional R20,000 to the overall cost of the home.

When it comes to existing homes, this is not the case, as resales are not subject to VAT, but they are influenced by transfer duties. 

Abrahams said the VAT increase would affect all VAT-inclusive services linked to home buying, such as attorney fees, estate agent commissions, and home loan registration fees. 

“Although the direct cost of the home may not change, buyers will feel the pinch when it comes to the associated services, all of which will see a price increase due to the VAT hike,” she explained.

She added that the cumulative effect of increased costs for services can extend to the overall affordability of homeownership. 

“Prospective buyers might find their budget squeezed, forcing them to qualify for smaller home loans or adjust their home buying plans,” she said. 

“This shift could particularly impact first-time buyers, who are typically more sensitive to changes in the housing market’s entry-level pricing.”

This would spell bad news for the local property market, which has barely recovered from the double onslaught of the Covid-19 pandemic and South Africa’s high interest rates.

The Reserve Bank started cutting rates in September this year and has since implemented a cumulative 75 basis points worth of cuts.

However, the hiking cycle preceding these cuts implemented a cumulative 475 basis points worth of hikes, raising interest rates to 15-year highs.

Therefore, while interest rate cuts will provide some relief for consumers and, consequently, the local property sector, there is still a long road to recovery that would be severely hindered by a significant VAT hike

Abrahams noted that a potential rise in new home prices could push some prospective buyers towards the rental market, increasing demand for rental properties. 

“As new home prices inflate, we might see a delayed reaction in purchasing as buyers hold off, leading to a hotter rental market,” she explained. 

“This could further strain affordability for renters and escalate the overall cost of living.”