by Magnus Heystek of Brenthurst Wealth
How’s that retirement plan coming along?
You’re doing all the right things. You’ve bought a residential property, maybe two; you’ve got a pension fund and perhaps a retirement annuity (RA) as well and are contributing the maximum to these instruments as you’ve always been told to do.
So all should be on track; no reason to worry. As Alfred E Neuman, the face of the MAD comic books would say: “What, me worry?”
Perhaps you should start worrying, just a little, and start questioning some of the pillars of your wealth that one day hopefully, will support a ‘care-free’ retirement.
But as I’ve written before, there’s no such thing as a care-free retirement.
You are paying more taxes than ever before
This year Tax Freedom Day (TFD) – the day when you stopped working to pay government taxes and started working for yourself – arrived on May 25, five days later than last year and 43 days later than TFD in 1994. Over the past 22 years, the percentage of the year that you work for the government has increased by an average 1.8 days per year. The more you pay in taxes the less there is to put away for retirement.
Government revenue as a percentage of Gross Domestic Product now exceeds 30% for the first time, at 30.2%. The government salary bill, with over two million people on the payroll, now exceeds the total budget for 1994!
Residential property under pressure
In addition to a pension/provident fund, residential properties often formed a second pillar of wealth for people approaching retirement. The ‘sell the big house, move into something smaller and use the profit as a pension sweetener’ strategy worked for many years but not now. It’s the smaller properties that are in demand while the large ones are rapidly losing value in real terms.
The latest FNB House Price recorded a 7.4% year-on-year (y/y) increase for the property market as a whole – a modest 0.8% better than the CPI inflation rate of 6.6%. In real terms, when inflation is deducted from nominal prices, property prices are still 18.9% down from the peak at the end of 2007.
Survey after survey on the local residential property market – of which I find very little coverage in our media – tells the same story. The residential property market is still in the grips of a severe bear market and the outlook and prices continue to deteriorate. This applies to all provinces except the Western Cape.
It’s when you strip out the performance of Western Cape properties, constituting about 25% of the total market by value, that you see how poorly prices are actually doing in the other provinces. Average prices in this area were up 12.5% y/y to end May – almost double the inflation rate.
The trend of above-inflation increases in the province is due to the wave of semigrants from Gauteng and other provinces.
Recently a spokesperson for Lew Geffen Estates for the Dainfern area, was quoted as saying that three out of ten sales in the Dainfern area were due to families moving down to the Cape.
At our recent SA QUO VADIS? seminar at the Val de Vie estate outside Paarl, I asked the 80-odd delegates how many came from Gauteng. To my surprise more than 50% raised their hands.
So the Groot Trek down to the Western Cape is not just a dining room topic, it’s a reality, as wealthy and sometimes not so wealthy move to a province infinitely better managed than the rest of the country.
Last week I had a personal experience of just how well-managed the municipalities of the Western Cape are. Some three years ago I sold a property in the Drakenstein Municipality, which overseas the Paarl area. I actually received a phone call from someone in the finance department asking for my banking details in order to repay an amount of R2 850 (seemingly owed to me) which had been on their books for more than two years. Can you imagine that happening somewhere else?
Nominal prices in Gauteng, the largest property market by far with about 50% of market values, rose by a mere 3% – which is 3% below inflation even in nominal terms. KZN was slightly better with 5.6% growth.
The movements in property prices in the other provinces don’t really influence the national averages, due to their small sizes and low values.
FNB’s John Loos also pulls no punches. He’s not expecting any improvement soon and reckons that average prices are still way above the long-term average. So expect more of the same and even a further decline in real prices over the next couple of years.
The Pam Golding Property Group has in recent years created its own index to gauge the movement of properties bought and sold via PGP. The latest PGP index tells a startling story: property prices in the category above R2 million declined by 5.7% in the first quarter of 2016.
I waited for the general media to get wind of this alarming trend with regard to residential property prices, but in vain it seems.
A recent column of mine analysed the deteriorating conditions in the rental market, another indication that Mr and Mrs Average is under tremendous financial pressure, both as landlord and as tenant. The BankservAfrica index, that measures trends in disposable income, also clearly shows this trend. Salary increases are hovering around 7% y/y – mainly for people in government service.
Your pension fund stuck in the mud
Another thing to worry about is the sideways movement in the JSE over the past two years and even longer. Strip out the performance of Naspers, SAB Miller and BAT and most of the JSE is in a deep bear market. When measured against inflation of 6.2% y/y in the year to end May, none of the major indices, except Resources (+7.6%), beat inflation. In fact, when measured in real terms the JSE (with a return of -2.18%) is well down against inflation; the same over two years; and is barely ahead with an annualised return of 11.8% over three years.
The only inflation-beating returns you would have earned was on your investment known as multi-asset (high, medium or low equity) which has had the ability of moving 25% offshore, with great results for their investors.
Have a look at your pension/RA/provident fund statement in the months to come: don’t expect much more than 5% to 8%.Your performance has been dragged down by the local stock and bond market in bear market territory.
Investors with their money in living annuities (monies coming out of pension funds and retirement annuities) can move 100% offshore if their risk-profiles allow for it, and generally have done much better.
So here is some advice: if you are over 55 with money locked up in an RA or provident fund, consider moving the money into a living annuity to obtain 100% offshore exposure if that is what you require. Otherwise you remain hamstrung by Regulation 28, which is currently holding you back considerably.
Dodged a downgrade bullet
SA can count itself lucky that it dodged a downgrade bullet by S&P Global Ratings last week. A yellow card instead of a red one; a stay of execution. I think it was a very close call. Perhaps these ice-hearted analysts have some feelings after all. I thought our growth metrics were too poor to avoid a downgrade, but maybe finance minister Pravin Gordhan managed to convince them of his determination to get government spending under control. I found S&P’s reference to the debt obligations of our parastatals (SAA, SABS, Petrosa etc) a major warning to government.
But we have a municipal election coming up and who knows what a re-energised Jacob Zuma will do or say in the next couple of months. Prepared to be surprised.
So here we go … another six months of anguish. Or, as the late US basketball player Yogi Berra once said: Dejavu all over again.