Not a no-brainer: Purchasing
‘South African friends: Rent property or buy, and why?” I typed on Facebook last week. It seemed an innocent question. I was not prepared for the onslaught that followed.
Many spurned the traditional viewpoint that you should rent only if you can’t afford to buy. Some of the experts agree.
“The short answer is buying incurs a lot more costs than people factor into the equation,” said Simon Brown, personal finance commentator and founder of JustOneLap.com. “For example, they see a house go from R1-million to R1.5-million and think it a great return. But over what period? And at what cost? Both buying and selling incur significant costs. Upkeep on the house incurs further heavy costs over the period of ownership. Bonds are also very expensive in terms of fees and ownership.”
When you take all the costs into account, buying a property — even when you can afford to — is not actually the no-brainer that many believe it to be. “If one were to rent and save the difference into a simple exchange-traded-fund investment the numbers come out as doing better renting and investing [than buying property],” said Brown.
If you’re willing to stay in one home for decades, analysts say there’s an inflection point when buying eventually becomes cheaper than the costs incurred by rental. But most people move sooner than that, pointed out Warren Ingram, personal finance adviser at Galileo Capital.
“Most of us start working and are told by our parents and friends to buy a small home rather than pay off the landlord’s bond,” said Ingram. “Conventional wisdom says that we should then sell our starter home when we get married and buy a larger home more suitable for raising children. Once we get older, we then sell the large family home and downscale to a more manageable property.
“This might seem like a sensible strategy until you take into account the buying, holding and selling costs of your home. It is worth remembering that you pay a significant amount of money in agents’ fees, legal fees and potentially transfer duties. In addition, you need to cover the costs of property maintenance and rates or levies.”
There’s also capital gains tax. Most people won’t be liable for this when selling their primary residence. But if your capital gain exceeds R2-million and if you’re selling an additional dwelling, you’re liable to pay.
But if you plan to live in your home for eight years or more, these costs become more affordable. “For someone who rents a property over a long timeframe, the increasing rental costs will eventually exceed the costs mentioned above by such a large margin that it makes sense to buy.”
But, said Ingram, “most people tend to rotate properties much more quickly than every eight years. For them, it makes sense to rent and save the difference between their rental cost and the cost of paying a mortgage, maintenance and rates.”
Like any investment, there are certain risks inherent in buying a home.
“Owning a property has location risks. We’re only going to likely own one and the area may be an issue,” said Brown. “But truthfully, how skilled are we as non-experts at picking the right area?”
Often, owning a home is about more than just the return on investment. People say it gives them a sense of security.
Muriel Mushariwa, originally from Zimbabwe and now a South African citizen and home owner, said: “The economic crisis in Zimbabwe led to my family members losing their pensions and investments overnight. Unless they had offshore investments, they lost everything.
“Immovable property became an important source of income. People could rent it out and have some money to survive or just have a roof over their heads. It’s hard to imagine, but think about the salary in your bank account being worthless. Immovable property becomes the better investment.”
For many, property ownership is an important indicator of upward mobility and an asset that can be passed down to children. A person retrenched from a large company used every last cent of his pay-out to buy a small home on the outskirts of Johannesburg’s East Rand. He said his decision had earned him the respect of his in-laws. They were willing to support him financially in his four years of unemployment. He sometimes did not have enough money for food, but he would sooner survive by accepting handouts rather than sell his home.
For others, it offers freedom of lifestyle. “We buy because we loathe answering to a body corp or owner,” said Tara Steyn, a home owner in Randburg. “We can paint our house pink if we like. We make improvements to our house, not as an ‘investment’, but to make it a space that works for us. At the end of the day, if we don’t get a return, it is fine with us. We feel we are getting the joy and use out of the property.”
The case for buying to let
Market commentator Francois Janse van Rensburg points out that banks won’t lend consumers money to invest in stocks, but they will lend you money to buy property.
The bank’s risk is fairly low: the loan is secured by the property itself, and the bank can sell it if you don’t pay. He makes this point in his book Making Money Through Buy-to-let in South Africa.
The likes of Janse van Rensburg say that, when buying property for investment purposes, “work on the basis of never using your own money to buy an investment property; ie, always try to use the bank’s money instead.” So, when deciding between investing in property or equity, do the maths.
But when deciding between investing in property or nothing at all, the argument for property is still a strong one.
Slowdown in economic growth and the Reserve Bank’s interest rate hiking cycle of last year exerted downward pressure on South Africa’s house price growth. It is expected to average about 3% in 2017, down from 5% in 2016, according to FNB.
But slower house price inflation that underperforms rental inflation helps to lift rental yields, said John Loos, FNB’s household and property sector strategist. The national average gross residential yield hit 9.06% in the third quarter of 2016. “Our average house price-average rent ratio index … [has] begun to show a decline in this ratio. This implies rental inflation outpacing weak house price inflation.”
For this reason, “buy-to-let investors are among the only residential sector investors expected to yield better than inflation income this year,” reported hometimes.co.za.