Tuesday 29 July 2014

Property prices are too high in Namibia

This column first appeared in the Namibian newspaper on 29 November 2012

The inability of people to purchase a first time home is a common complaint heard everywhere in the country.
In this column I would like to look at problems created by property speculators and what can be done to assist in getting a bigger portion of our citizens to become homeowners.

One of the ways that speculators make money can be illustrated through the townhouse developments that have been springing up all over the country.  When the developer starts a project, most of the selling is done to a network of friends, family and other speculators who already own a property and gave the relationship with a bank to get the required financing fairly quickly and easily. Thus, sometime even before the first earth is turned, most of the houses in the development have already been sold. These purchasers however do not need to pay for the property until the actual development is completed. This means that they have only signed their name on the deed of sale and there is no need for any money at this point.

The property development can take a period of 18 to 24 months and as the developer reaches completion of the property, the speculators start advertising the property for sale. Most new homeowners are eager to purchase as they see the development is almost complete and wish to be the owner of a 'brand new' house. But there is a catch!

Prices go up all the time. Because the demand for houses is so high, the price of the property will be higher at the end of the construction, that is, 18 months after the start of the development.
So, if the speculator bought the house at a price for N$ 400 000 in January 2011, the property will have increased in value with as much as N$ 150 000 by November this year. So the new homeowner will now be buying the property from the speculator for the price of N$ 550 000. What makes it worse is that sometimes the dates of the transfer of property from the developer to the speculator, and the speculator to the new homeowner, are the same.

In other words, the speculator 'bought' the property by signing their name on the deed of sale and has not paid a single cent during this period on the property, but is still able to sell the property at a huge profit.

Taxing multiple home owners

We should put higher taxes on people who own more than one house in Namibia. By forcing property owners who hold land on speculation to sell or rent out for what they can get, a tax on land values tends to increase the competition between owners, and will lead to the reduction of the price of land.

One way of doing this is to introduce a Capital Gains Tax, in other words a tax when you make a profit on the sale of a property or other asset. This is done in many countries all over the world and after introduction has seen house prices decrease by as much as 30 percent as demand by property speculators drops.
This tax will not affect your primary residence provided that your property is smaller than a pre-determined size (for example two hectares) and the profit you make is less than a certain amount (for example N$ 500 000). If you are a homeowner having a second property or a holiday home, you will taxed on the profit you make when selling the other property. In addition, the government should make capital gains tax applicable on all properties registered in the name of close corporations, trusts and companies.

As long as Namibians lack ownership of property they will have very little (or no) interest in their community. Home ownership has a positive impact on families, communities and Namibia's economy as private ownership of property is fundamental to both our freedom and our prosperity in the future.