How tax on foreigners can help the CPT housing crisis

I don’t generally favour intervention in a market. Despite a liberal arts brainwashing (tertiary) education, I’m a firm believer in the free market. Except, when a market isn’t functioning as it should, regulation ought to be considered. The Cape Town property market is in crisis, fuelled by foreign buying, ‘semigration’, an Airbnb-induced boom and a simple shortage of land because of topography. Average prices of properties in some areas have more than doubled in the last five years (read: Here’s how Cape Town property prices have exploded). When upper middle class families – ‘wealthy’, by any measure – can’t afford to buy, there’s clearly a problem.

A tax on foreign residential property buyers is not a novel idea. The most recent and high-profile of these, in Vancouver, Canada, has helped cool demand and drive down prices. From August last year, a 15% tax on foreign property investment was imposed. Prices are down 18.9% between January 2016 and January 2017. Now, the situation in Vancouver was abnormal with 13% of property transfers involving foreigners.

In Cape Town that number, according to some estimates, is around 8%. Not quite Vancouver-bubble territory, but not far off other regions like Sydney, Australia at 10% (New South Wales opted to introduce a 4% stamp duty surcharge and 0.75% land tax increase in the state’s mid-2016 budget).

Floating the idea of a property tax for Cape Town is not new (Judd Lasarow argued for it in a Huffington Post blog post in March), but it is surely long-overdue. (Why the ANC hasn’t yet stumbled upon this policy idea given the contentious land issue is a mystery.) Given the topographical challenges present in Cape Town, I’d argue for the introduction of a 20% tax on foreign purchases. Implementation would be tricky as transfer duties fall into the national fiscus and are collected by Sars, but there are surely creative ways of solving this on a provincial or local government level.

This would help moderate demand and – crucially – raise additional revenue. The City of Cape Town should go one step further and levy a rates surcharge on properties that are vacant (you could use all sorts of thresholds on services consumption to identify these). Again, this is not a unique idea. But, be aggressive in implementation (100% or 200% of base rates) and make the threshold 11 months of the year.

Now, it is not these taxes themselves that are useful, rather what is actually done with the additional funding. All additional revenue raised through these avenues (and related ones like potentially taxing Airbnb rentals) needs to be ring-fenced into a special purpose vehicle owned by the city with only one mandate: developing and delivering affordable housing for residents.

With annual property transactions at (or over) R20 billion in the Cape metro, a 20% on foreign purchases would raise an additional R300 million to R400 million a year (depending on the portion of foreign purchases). Naysayers may argue that foreign buying will drop, and in the short term they most likely will. But, with a steadily weakening currency over time, the long-term trend is not going to change materially.

Beyond the amount raised from taxes on sales, levying surcharges on unoccupied properties will raise additional revenue and likely provide some intervention in the city’s rental market. The city forecasts income of R7.577 billion from rates in 2016/17. It is not a stretch to imagine that an extra R200 million a year could easily be raised by a surcharge on vacant residential properties.

That’s at least half a billion a year in direct city funding to address an acute affordable housing backlog. Public-private partnerships, like the 22 hectare Conradie site near Pinelands being developed by the province, city and private sector, would surely be the best approach. Adding provincial (human settlements subsidies) as well private sector money, means that R500 million a year could be closer to R2 billion, and will have an outsized impact on the problem. Development finance could increase the pool even further.

Mandating private sector residential developers to build a certain percentage of units of affordable housing in designated areas in return for zoning rights of those fancy towers being built all over the City Bowl would be a fourth option still (a topic for another time).

But the need to ring-fence this revenue cannot be overstated. It’s far too simple for funds like this to be absorbed into all manner of “urgent” priorities elsewhere in a city’s budget. The thing with a measure like this is that for every day it remains unimplemented, the city is simply forgoing desperately needed funding to solve its second-biggest crisis (after water, of course)…

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