I don’t have all the figures, but from the examples given this could be a tripling of rates in some cases, taking rates from less than half percentage yield reduction to significantly more than a percentage in many cases. Given common rental yields of, say, 6% for a flat in Joburg, this could be as much as a 15% decline in net rental income.

This must translate into either:

1. a 15% reduction in house prices to provide the same net rental yield to investors;
2. a 15% increase in rentals (with a corresponding devastating impact on defaults on rentals, voids / availability of tenants, direct and wage-push impacts on CPI inflation and increased transport costs as tenants search for cheaper rental properties further away from central areas; or
3. some mixture of the two.

Who bears the burden of the increased tax?

I cannot imagine a scenario where the cost of provision of services will be higher for a rented residential property than for a owner-occupied residential property. Therefore, the increase must be designed as a way of simply increasing tax revenue and shifting the tax burden from one group to another.

Now that’s not automatically a problem – it’s the sort of decision around taxes I regularly blog about as needing to be made. The problem with this is, who is now bearing the burden of the tax increase and is it positive for our economy and public finances?

It might partly be a tax on property investors, which might be appropriate in our government’s eyes since these will be typically wealthy, high-income earners. (Although we already have capital gains tax and residential properties already don’t benefit from the significant deduction for an owner-occupied property, so one must be careful of attacking the same problem from too many different angles.)

But the tenants are also effectively going to be paying tax through higher rentals. Higher rentals will come through an increase in rentals charge to recoup some of the rate increases. Further, as rental property becomes less attractive, fewer rental properties will exist, pushing rentals up again to the point where investors receive a fair, after-tax return. We now have higher rentals and a more limited supply of property.

All of this is typical of the debt-weight loss from taxes taught in first year economics. Taxes reduce consumer and producer surpluses acting as a drain on the economy. This is before we consider second-order impacts of higher transport costs for tenants living further away – costs of transport, pollution, congestion and reduced employment.

There are a myriad other issues to consider – downwards pressure on property prices reduces transfer duties, which actually reduces revenue for the state. It is not inconceivable for National Treasury to announce an increase in transfer duties, but it would look a little silly after all the pushes to decrease transfer duties over the past few years.

A reduction in economic activity, lowered economic growth

A decline in property prices, through a wealth effect, would like lead to decreased consumption, lowering demand in the economy and adding more cyclical unemployment to our already potent cocktail of massive structural unemployment and some cyclical unemployment.

Adding pressure to our banks lending abilities

Defaults on existing loans to bank will increase, placing pressure on banks, which will likely reduce their enthusiasm for lending. Again, a reduction in economic activity as a result. Further repossessed properties (adding to all those put on the market because net rental yields are not attractive) will push property prices down further.

Will the extra revenue even be that much?

The additional revenue collected by government is likely far less than their estimates, since the natural result will be a reduction in properties purposed as rental properties.  On top of that is the additional complexity of levying rates based on use, which will probably result in additional non-compliance further decrease tax revenues and incurring costs to check for compliance.

The final result?

• Increased rents
• Decreased rental yields
• A move away from investing in property to investing in equities and offshore investments
• A hit on banks and decreased lending
• Decline in transfer duties, possibly CGT and less-than-expected increase in revenue from higher rates
• Increased transport costs and related negative impacts for employment and economic growth

So why doesn’t government focus on collecting the rates already owed to it as a starting point?

The problems became worse before they became better, but since the early 90s a large number of the principles have already been effected:

Every man and woman shall have the right to vote for and to stand as a candidate for all bodies which make laws;

All people shall be entitled to take part in the administration of the country;

The rights of the people shall be the same, regardless of race, colour or sex;

One point that decreases the current value of the Freedom Charter as a guide to out collective future is that it’s not all principles, but rather includes some practical changes:

All bodies of minority rule, advisory boards, councils and authorities shall be replaced by democratic organs of self-government .

Once we’ve done that, how useful is the statement? I would have hoped more for principles espousing the virtues of government and public organs considering all citizens of the country and being representative of the country. That would be still relevant in our imperfect current society.

Other aspects seem to have been forgotten by some political factions:

South Africa belongs to all who live in it, black and white

And some seem not be applied equally in all directions:

All national groups shall be protected by law against insults to their race and national pride;

Prisons, unfortunately, are fuller than ever and less rehabilitative than ever. At least political prisoners are no longer a feature:

Imprisonment shall be only for serious crimes against the people, and shall aim at re-education, not vengeance;

A more serious problem for me is the occasional naivete of some of the more hopefuly statements. This reflects the position in the 1950′s and how understanding on these issue has developed since then, the rise and utter failure of communism since then and arguably the complexity of understanding economics at a detailed level by broader segments of the population.

Rent and prices shall be lowered, food plentiful and no-one shall go hungry;

The mineral wealth beneath the soil, the Banks and monopoly industry shall be transferred to the ownership of the people as a whole;

All other industry and trade shall be controlled to assist the wellbeing of the people;

“Rent and prices shall be lowered” – how will that be done again? How will that be achieved without reducing incentives to produce food? Who will own these properties on which rentals are limited? Who will build additional housing without adequate return?

It’s interesting that some factions that strongly support the Freedom Charter also want lower interest rates and higher inflation.

Nationalised banks and mines and “monopoly industry” – well now you know the origins of the debate around nationalisation. I’m not going to argue in this post about the merits or not of nationalisation (there is a debate there with advantages and disadvantages), but it’s clear that the communist views of the 50s have been brought into the second decade of the new millennium mostly untouched.

The Freedom Charter was a brilliant document and still offers guidance to our country, our fellow citizens and our government today; it is not the infallible, word-of-god roadmap to Utopia that some want it to be.  We must recognise its flaws and short-comings and the idealistic, unworkable statements of hope as input into the debate on economic and developmental policy, but not as the One True Way.

It’s clear, as we already know, that South African house price increases have been dramatic. Somehow though, seeing it on a graph with a range of other countries brings it into sharper focus. Our property market has been manic.

Cash has run out. The overvalued, over-geared properties cannot support the income stream that was demanded from them.

No surprises here then.

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Their housing price index is more robust (and more independent) than those of the banks based off their own data and target markets. Rather than consider only the average price of houses sold in that particular month (which is a function of house price growth / decline but also how the type, condition, size and location of the houses sold that month differ from the prior month and year) they consider repeat sales where the same property has been bought and sold more than once.

This data is combined or “chain-linked” to provide a continuous measure of house price inflation over time.

House Price Inflation 2010 source: lightstone.co.za

The result of all of this data, best-in-class methodology and analysis? When Lightstone says “opportunities abound in local market” I actually listen. Since their business model is to sell information, I’m more likely to trust what they say.

To date, the South African economy has been relatively less affected by the global financial crisis. Unemployment in Spain is up to 18% – within spitting distance of our own extravagant unemployment rates. Several large economies have been making eyes at 10% annual declines in GDP – often used as an informal definition of a depression (compared with a recession typically defined as two consecutive quarters of decline in real GDP). Property prices have been declining between 5% and 10% (depending on who you ask) and even after allowing for our higher inflation and thus greater real decreases, we compare very favourable to the drops of 20% to 50% in some parts of some countries.

Our stock market took some very sharp dives last year, but is hovering close to 11 month highs at the moment. It seems many are pricing in a return to normal earnings in 2010. At the same time, Germany announced  yesterday a 2nd quarter increase in GDP. Is the worst behind us? Have we been very sheltered so far?

I believe we have been more delayed than sheltered. Yes, exchange controls, the NCA and more conservative lending standards protected our banks  from the direct meltdown of sub-prime mortgages. 72 banks  have failed this year in the US (69 last time I blogged just a few days ago) while none of our banks have collapsed. However, there is plenty more bad news.

Our decline in GDP started  much later than other countries. Perhaps it was this that convinced Trevor Manuel to foolishly claim we would not fall into recession. (I’m not sure which is the worse truth, Mr Manuel was sufficiently obtuse to really not believe it would happen, or it was another pre-election promise that simply was never  going to be kept.) Germany may now be exiting their recession, but this is after a year of being in recession since the start of 2008. Manufacturing output is massively down, retail sales are massively down and liquidations are still climbing.

8 weeks ago my hairdresser was happy to announce they were still busy.  4 weeks ago and again this weekend she was complaining that they were very, very quiet. Lapse experience on individual life policies continues to deteriorate, and terminations of entire provident fund schemes (as a result of business closures) is charging full steam ahead, gathering momentum rather than slowing. Restaurants have closed and not reopened. These anecdotes tell of decrease disposable income, job losses, business closures and the beginnings of economic  hardship.

So was Mr Mboweni’s decision to cut rates a populist move? Perhaps. Certainly the 7% real wage increases offered to municipal workers have no merit except popularity amongst the recipients. But I feel that our economy will go through tougher times before better, and a little more stimulus isn’t the worst idea. National, provincial and city budgets are being strained  with large expenditures (now larger with the wage increases) and  sharply reduced revenue  collections. The City of Joburg has had to negotiate a higher debt level in their bond covenant since they are at 50%, 8% above the required 42%.

Now is not the time to crack the champagne and relax – the storm is continuing and our shelter may yet prove insufficient.

photo credit: johnnyalive

I read your article on the web when i googled Rudy Visagie.
How very interesting to note all concerns people are having about “RUDCO”.
So i guess the guy is using a different company name.
I just wanted to share with you what is happening in the area in live.

There is a company by the name of Grande Properties, owned/directed by RUDY VISAGIE.  He is also offering low-cost middle class houses in Kimberley, Northern Cape. Houses range from 2-3 bedroom, fixed interest rate on 8%, 10,000k deposit for securing your plot. For a 3 bedroom you will be paying bond instalment of 2,000k fixed for 20 years at that interest rate, for a 3 bedroom at a price of 450,000k, 3,000k fixed for 20 years.

Concerns are many and most are the same as of the people in your articles, like:

1. no office setup
2. no landline
3. no working website
4. no proper indication of board of directors of this company
5. fakelike letterhead
6. approval of almost every one despite their credit status,
7. How can a property developer finance itself, and why is there no financial institution working with them
8. After depositing your 10,000k, you don’t get a document as proof rather they just put you on  a list of people getting plots then wait till they start building the house then you’ll get a contract
9. the land they apparently bought from our municipality was cheap but the agreement was that houses should be priced low for people on middle-class. Anyway they themselves bought it very cheap. The 450,000k is overpriced
10. interest rates that are fixed for 20 years

There are still many questions, some were posed but still no clear answers was provided. I think something needs to be seriously done about this guy cause if its really a scam almost 310 people by today and still increasing have paid 10,000k = 3,100,000 so far pocketed (or he disappears).

Many will be left broke than ever before.

Where this all started

As readers may recall, my interest in Rudco started from a purely financial risk perspective (most of what is on this blog). The offer he made seemed too good to be true and didn’t make financial sense. The risks were too high to him and the rewards too low – unless there was something else going on. Rudco and their low, fixed rate mortgages were shutdown in the end due to lack of regulatory approval. Several readers have described how they ended up out of pocket.

Is their financial risk here?

The pure financial risk part of this story is less clear. The lowish fixed rate mortgage sounds a little suspect, but there could be sufficient other sources of revenue and profit within the business model to make up for that. The concerns raised by the reader above relate more to the potential for budding home-owners to be overpaying for property, and by paying a deposit upfront may also end up out of pocket.

What we know

• Grande Properties has a website, presumably related to the company in question. It is still “under construction” but does include some contact details.
• The website was originally registered in 2006. The current registrant is Megaserve Technologies, which sounds like an ISP rather than the end user.
• I can’t seem to find any associated registrant with the NCR

If anyone else has any further info or details on this, please comment below or email me.

Injecting liquidity, increasing the money supply, encouraging credit extension contributed to poor allocation of economic resources, a housing market bubble and a desperate search for yield through gearing and risk-taking. Many South Africa commentators were vocal in support of this view too.

But now we have forgotten. A seasonally adjusted and annualised decline in South African GDP of 1.8% has everyone begging for an emergency cut in interest rates. Early cuts before the next scheduled MPC meeting and 200 basis point cuts are suggested and encouraged. “We must save the economy, jobs are being lost!”

Bank-affiliated economic units have been particularly loud.

Lowering interest rates would help our economy in the short term. Another credit- and consumer-fueled expansion would survive for a while. Of course, South African consumers still have a penchant for consuming imported goods, further pressuring our balance of payments and not truly adding much to the local economy. Our interest rates will have no effect on the global economy, on global demand for the resources and goods that we produce. Foreigners will not pay us any more for our goods and thus the wealth of our country and our citizens will not truly improve.

Inflation will persist, robbing all of value. Currency depreciation will reduce our wealth in international measures. And when the credit expansion does slow or reverse as eventually it must, the pain will still be waiting for us.

It is not surprising that the banks have been shouting to be heard. Bad loans, foreclosed properties and struggling earnings make for fierce motivation. Jobs and bonuses, earnings and dividends for this year and the next are more sharply in focus than the good of our fragile economy over the next ten years.

I’m surprised the estate agents haven’t put a lobbying group together yet.

Our economy already has significant fiscal stimulus through the World Cup and other, unrelated infrastructure spend. At least these developments have some potential for generating a return and future economic prosperity. It remains to be seen how many attend the World Cup and how much they spend. The budget overruns are up to 300% already and will likely climb further before they fall. Imagine what that does to the hoped for Return on Investment.

Tax receipts are already under pressure through job losses and associated declines in PAYE, reduce VAT on reduced consumption, dramatically lower earnings in many sectors especially the lucrative resources sector. Automatic counter-cyclical budget deficits are in force without drastic monetary easing.

The spike in inflation over the last year is only partly attributable to rising energy costs and international food prices.  Interest rates were kept too low for too long. Perhaps we should be looking for moderation in monetary policy and stability, rather than optimistic swings to the downside and pessimistic swings to the upsde?

Now that the pain of the coined Global Financial Crisis is felt at home, we have forgotten the dangers of excessive monetary expansion.

photo credit: TheTruthAbout…

Banks facilitated this through the creation of home equity release products or “reverse mortgages”. The bank lends money to the home-owner against the property as security. However, since the income of the “borrower” is limited, no interest payments are required. Instead, on death, the house is sold and the proceeds go first to repay the accumulated loan to the bank. The emotional trauma of having to sell one’s home is limited, no interest payments are required and the bank has another channel to route excess liquidity.

Bad selling practices and high effective interest rates gave these products a bad name. Sometimes the correct move, if difficult, is to downsize rather than rapidly erode the equity in a house. This tempered sales of the home equity release products that might otherwise have caused more headaches for banks given the current, twinned crises of credit and property.

The banks typically offered a “no negative equity” guarantee.  If the value of the house on death of the borrower was less than the outstanding loan, the bank accepted this hit to make the product more palatable to borrowers.  Careful management of loan-to-value ratios, property maintenance, borrower life expectancy, interest rates and expected growth on property is required to manage this risk.

Nowhere in these models was an allowance for property prices to plummet 12% in 2008 (in the US) and look to continue downwards.  12% is the average – positive house price growth benefits the borrower but declines put the implied put option further into the money. Thus, areas that have experienced 50% declines can severely hurt the banks with these guarantees in place.

These products has some legal difficulties in South Africa (mostly around the in duplum law that restricts the total amount owing to be not more than twice the original borrowed amount) and haven’t been as popular as many expected. Spare a thought for the banks with some of this on their balance sheets as property prices sink, loans accumulate and the far out of the money put options start to get their feet wet.