News & Advice Money

Definition: SAVING – income not spent, deferred consumption, expenditure reduction. Every economy measures its health on the balance between income and expenditure. While consumption creates jobs, pays salaries and grows industry, consumption when not funded by income, requires credit. Most people cannot afford to purchase a home without credit, without a mortgage loan. So the ongoing weakness in the property market has led some prospective home owners to question whether renting for the next few years may be a better option. Traditional wisdom may state that ownership is better. But modernity dictates that the traditional be interrogated, that accepted norms be probed.

 

The NUMBERS:

CPI inflation has averaged 5, 97% for the past 12 years. Although average property prices have escalated and provided nominal growth of around 13% over the same period, real growth is halved once inflation is stripped out. Knowledge Factory’s property data indicates that for properties between R300, 000 and R5, 000, 000 the compound annual growth rate based on median prices for the past 4 years has just managed to crawl above the zero mark to 0,06%. FNB’s research, based on a different set of variables, puts real house price growth over the same period deep into negative territory at -12, 6%. To be fair, however, property is a medium to long-term investment. That’s where the picture changes since the real growth rate (with inflation stripped out) over the past 12 years has been a healthy 70, 3%.

An EXAMPLE:

You rented a home for the past 12 years and invested the “savings”- the difference between a mortgage bond payment and rental payment – each month at an inflation beating 8% annual interest rate. You began by investing R500/month back in 2000 and increased this by 10% annually. In 2012 you would have R194, 000 – an annualised growth rate of 34% – just enough to pay a deposit on an average 3 bedroomed house in South Africa.

Alternative EXAMPLE:

Had you invested the same amount on the JSE each month, the return on investment would have been greatly influenced by your share portfolio and is impossible to forecast accurately. Your returns may have been exceptionally good or an abysmal loss.

The HUMAN ELEMENT:

Both examples mentioned above, however, exclude a vital element-the human element. South Africans are notoriously poor savers-the SARB puts household savings rate at just 1.6% of income. Put more plainly, for every R10, 000 earned just R160 is saved! Even then, stokvels or savings accounts notwithstanding, how the saved funds are spent reveal much about the purchaser’s psyche. Consumer spending is often greed, rather than need-driven. Desire trumps necessity. This is not unique. As in other emerging markets, socio-political variables are tied to historically poor financial management. Cultural and social values create aspirational buyers with a skewed perception of spending which affects the consumption of goods. The 4 primary goods categories are non-durable (e.g food), semi-durable (e.g. clothing), durable (e.g. vehicles) and super-durable (e.g. property). The Old Mutual Savings and Investment Monitor from end 2011, offers insightful findings. It confirms that the recession-or slower than expected post-recession economic activity-is weighing heavily on the minds of consumers. In total 88% of survey respondents admitted they were financially affected by the recession.

FORCED SAVING:

Purchasing a home rather than renting may therefore be viewed as a forced saving tool. If nothing else, even with expected poor short-term returns, the purchase of a super-durable good paves the way for stable wealth creation. Comparisons between where you decided to invest with where you could have (or should have) invested is ill-advised and likely will leave you feeling invidious. The future is now. There is no economic reason to prevaricate. If you need to buy, then buy. If you need to sell, then sell.

DECISION TIME:

When making a decision of this magnitude, homework is necessary and the basic principles of real estate and financial management apply.

1) Location, location, location- means purchasing the “worst” home in the best area you can afford. This will prevent you from overcapitalizing when you start adding-on or renovating. In addition, foresight may prevent you from incurring relocation costs while navigating life-cycle changes.

2) Ensure you can afford the current interest rate PLUS an additional 2%. You will be bitterly disappointed when, due to inadequate planning, you are coerced to liquidate your investment before you have made a healthy return.

3) Manage potential risks/benefits. Consider how crime may affect property values such as its proximity to informal settlements or taxi ranks. Conversely, having your home next to a Gautrain station or new Mall may increase its value, but consider the increased traffic or noise factors.

4) Insist on your on current property data from a verifiable source such as Knowledge Factory’s SA Property Transfer Guide.

Dieter Deppisch

Property Sector Analyst

Shares 0

Leave a Reply

Future of property in sectional title sector
Unpacking new property legislation
South Africa’s Natural Attractions are Popularising Eco-Estates
Lightstone predicts a buyer’s market for 2017
Don’t Wait For “The One” Before You Buy a Home
Don’t Let Criminals Take The Pleasure Out Of Your Leisure
Comments: Budget on Economic Growth
Should You Ever Buy or Sell Property To a Friend or Relative?
New Generation Digs Now On The Rise
Western Cape House Prices Remain Steady
Investment hot spots – Waterfront and Clifton apartment prices hit historic highs despite economic lows
Sectional Title Scheme: NEW LEVY STRUCTURE Required!
South African Holiday Towns Now Underperforming Metros
Stronger Rand Makes South African Property Expensive For Foreign Buyers
Know The Risks Before Building Airbnb Castles In The Sky
Future of property in sectional title sector
St Francis Bay’s housing market attracting top dollar
Lightstone predicts a buyer’s market for 2017
Factors that determine property value
Pros and Cons of Buying Property Through a Trust
Don’t Wait For “The One” Before You Buy a Home
Purchasing Property And Compliance Certificates: Great Expectations?
Investment hot spots – Waterfront and Clifton apartment prices hit historic highs despite economic lows
First-Time Home Buyer Should Act Sooner Rather Than Later
Buyers in Cape Winelands Predominantly Gauteng Semigrants, Increasingly Europeans
South African Holiday Towns Now Underperforming Metros
Time To Make The Right Choice For Retirement Living
5 Ways To Maximise Your Credit Rating
Budget Tips For A Smooth Switch From Renting To Owning
Buy First And Cut Your Stress Level
Lightstone predicts a buyer’s market for 2017
House Won’t Sell? Here’s What You’re Doing Wrong!
Factors that determine property value
Create Home Buyer Appeal Through Home Staging
Is There A Difference Between Offers?
How To Decide When To Sell
Does My Agent Care About Me Or Just The Commission?
3 Questions To Ask Before Listing Your Home
I Just Bought A Home – Now I’m Unexpectedly Being Transferred
What Is The Difference Between Value And Marketability?
Time To Stage Your Home When Selling
Get Higher Offers On Your Empty Home
When Is The Best Time To Sell A Property?
How Important Is Financial Fitness For Home Sellers?
Real Estate’s Dirty Little Secret And Why It’s Costing You Money!
Average residential rental values on the increase
Is It Possible To Terminate A Lease Agreement Without Recourse?
New Generation Digs Now On The Rise
When Is Your Rent Due?
Gauteng Property Rental Market Forecasts Growth
Keeping Track of Parking On Common Property
How And When To Legally Evict Tenants
The Rental Housing Amendment Act: Waiting For Light In The Dark?
Tenants: Be Aware Of Ongoing Credit Checks
How To Rent With Pets
Is My Landlord Liable To Provide Security?
Why Are Property Inspections So Important?
Rental Property: To Furnish Or Not To Furnish?
Why Prevention Is Better Than Cure: Eviction Procedures For Landlords
Important Insurance Issues For Landlords
5 Mistakes To Avoid When Relocating
7 Tips For Packing And Moving Quickly
Moving? Things To Think About!
Maximising Small Spaces
7 Tips To Help Your Children To Adapt To The Move
What To Do With Your Home When You Have To Relocate
Moving With Pets Can Be Tricky
Estate Agent Moving Tips
Telltale Signs You Need A New Home
Seven Signs You Need A New Nest
Über Wealthy On The Increase And On The Move
St Francis Bay’s housing market attracting top dollar
Factors that determine property value
Average residential rental values on the increase
4 Things Homeowners Waste Money On 
Pros and Cons of Buying Property Through a Trust
Comments: Budget on Economic Growth
Investment hot spots – Waterfront and Clifton apartment prices hit historic highs despite economic lows
First-Time Home Buyer Should Act Sooner Rather Than Later
Sectional Title Scheme: NEW LEVY STRUCTURE Required!
Buyers in Cape Winelands Predominantly Gauteng Semigrants, Increasingly Europeans
Dangers of Debt Consolidation Without A Plan
5 Biggest Downsides of Paying Off Your Bond
Push Into South African Real Estate Not Slowing Down
Problems Repaying Your Bond? Get The Banks In Your Corner!
How To Kill The Interest On Your Bond
Commercial property still important asset class for private buyers
Know The Risks Before Building Airbnb Castles In The Sky
Green Buildings Catching On In South Africa
Digital Disruption And The South African Commercial Real Estate Market
Can You Run A Business From A Sectional Title Home?
What’s Driving Change In The Commercial Property Sector?
5 Ways Commercial Property Space Planning Can Save You Money
Investing In Commercial Property an Attractive Option
3 Obvious Signs That It’s Time For Office Relocation
3 Things You Need To Know Before Buying Vacant Land
Price Correction In Commercial Property Market
South Africa: Evolution of Industrial Properties
The Commercial Times Are Changing
Healthy, Sustained Demand For Commercial Property
Incoming Inspections Are Vital For Rental Property