South African property owners are navigating a challenging landscape shaped by rising rates and taxes, creating complex dynamics for investors, homeowners, and lenders alike. This is according to Paragon Finance which has revealed that flactuating market conditions, combined with strategic shifts across various sectors, make it essential for stakeholders to grasp these developments to mitigate potential losses and optimise their investments.
In Johannesburg, the situation is particularly dire. Over the past five years, property rates and taxes have surged at a pace that outstrips both property price growth and the Consumer Price Index (CPI) inflation. This has effectively increased the financial strain on residential and commercial property owners in the City of Gold. Conversely, Durban’s property rates have remained in line with inflation, offering a more stable environment for residents.
In contrast, Cape Town’s rates, which have remained minimal until now, are set to accelerate due to fixed charges being linked to property values. This discrepancy demonstrates that the municipal tax burden varies fundamentally across South Africa’s major cities, with Johannesburg property owners bearing the most significant financial pressure.
According to Statistics South Africa (Stats SA), the average annual growth rate of property rates across 39 municipalities has been 6.8% from 2009 to 2024, more than doubling over the last 15 years. In the same timeframe, inflation has only increased by an average of 5.1% per year, indicating that property owners are experiencing a real cost squeeze. Additionally, some municipalities have seen steeper property value increases, leading to heightened property rate hikes that have left many residents in precarious financial situations.
“Understanding how property rates and taxes have changed relative to South Africa’s Consumer Price Index (CPI) inflation provides key insights into the real burden on property owners in the country’s major metros,” explains Gary Palmer, Founder and CEO of Paragon Finance.
The calculation of property rates differs significantly between municipalities. Currently, Johannesburg and Durban utilise a statutory calculation called the cent-in-rand tariff. This framework determines the rate a property owner pays for each rand of their property’s worth based entirely on its market value, with no additional fixed charge. However, Cape Town has adopted a different approach, incorporating fixed charges tied to property values, meaning that property owners incur both a fixed fee and the cent-in-the-rand tariff. While this dual structure aims to enhance equity and transparency in the rates system, it has sparked controversy, particularly as it disproportionately impacts owners of higher-valued properties.
This intricate web of property rates and taxes has become a crucial aspect of the real estate landscape in South Africa, pointing to a need for policy reform to help balance the scales and protect homeowners from unprecedented financial burdens as market conditions continue to evolve.
Delving deeper into the aggregate finances of municipalities across South Africa, research from the South Africa Property Owners Association (SAPOA) shows it’s clear that property rates are fulfilling an increasingly important role in supporting municipal revenue, being used to subsidise other declining sources of income for municipalities. Some of the key drivers behind these above-inflation increases include maintaining and replacing aging infrastructure, a declining revenue base due to poor collection rates, mismanagement of municipality budgets, property valuation hikes leading to compounded increases in charges, and urban migration, adding service pressure to the region without adequate funding being made available.
For property owners, this means a growing financial burden, especially as utility costs for water and electricity also continue to rise sharply. These escalating costs can lead to affordability gaps and arrears, which in turn risk higher vacancies and tenant churn if not managed proactively.
Rising property rates and taxes can reduce the market value of properties and increase the financial burden on borrowers.
“For example, a significant increase in property tax expenses can lower a property’s net operating income (NOI), which directly diminishes its market value. This, in turn, affects the loan-to-value (LTV) ratios that lenders, like us at Paragon Finance, rely on to assess risk, potentially making existing loans riskier than initially anticipated,” explains Palmer.
Net operating income (NOI) volatility, a measure of how much the NOI of a real estate property fluctuates over time, helps Paragon Finance understand the stability and predictability of cash flows from the property, by quantifying the risk associated with the income-generating ability of the property.
