Real Estate, you have 3 choices.
Well, four actually. In fact, five would probably be more accurate. In the property market you can either Buy, Sell, Buy-to-Let, Rent or Stay where you are.
While these options have always been available, new research by insight analysts, Knowledge Factory, indicates that one’s choice needs more discernment now than ever before.
Traditional thinking such as “Buy-a-house-and-be-set-for-life” or “Buy-two-properties-and-live-off-the-rental” now needs extensive qualification to still hold true. Even seasoned investors have been left burdened by staggering increases in municipal rates, home maintenance and insurance costs compounded by poor performing rental yields in some price brackets.
Buying when interest rates are at historical lows can catch home owners unawares when the inevitable – a rate hike – appears. Emotive buying can disguise the reality of ownership costs. When realisation dawns they may have no alternative other than to sell and could be hit with the double whammy of poor capital growth. Some are left in the unenviable position of having to sell below their initial purchase price. Particularly affected are those trying to sell unimproved or vacant land. The happy flip side, however, is that when the purchase is done with forethought along with a sufficient financial buffer, qualified buyers can benefit from a surfeit of desperate sellers.
Selling in the current real-estate cycle is not to be taken lightly. Clearly defined reasons are needed. Buyers are spoilt for choice and will use the leverage of a buyers’ market. Some estate agents may offer a high “market value” to win the mandate but nothing changes the true value – what a willing buyer will pay. The reality is that over 84% of sellers are forced to discount their asking price. The average discount is 10% and that blow has to be absorbed after waiting, on average, for 15.6 weeks to close the sale.
Property investment is chosen for purely speculative growth, long-term income generation or a combination of the two. In either case, pricing is vital. Speculating on short-term capital growth is unrealistic in the present economic climate unless the distressed property market presents a bargain. In addition, capital gains tax (CGT) can cap returns on medium-to-long term speculation.
If long-term letting as an income generator is chosen, then a reality check is in order. Growth in the >R15, 000/month band is deep in negative territory (-8.5%) whereas the lower bands (< R5000 / month) are offering marginally positive yields. Using the national average rental of R5, 180/month, the gross annual return on a mid-priced house (R970 000), is a modest 6.4%.
After municipal rates and other unavoidable ownership costs are stripped out, the example above underperforms even conservative investment models such as retail savings bonds (capital growth excluded).
Due to high deposit requirements for mortgages, wise first-timers are choosing to rent before dipping their toes into the property market. The key is to save the difference between the monthly rental and the bond repayment on the equivalent house.
Using the example above and paying R5, 180/month in rent, the prospective homeowner would need to save an additional R3, 400/month to get used to the cost of bond repayments. To secure a reasonable 12% homeloan deposit would take three years of disciplined saving. An intelligent choice!
To stay is a conscious choice. It is not a cop-out nor is it about “making do”. In fact it may be indicative of prudent financial planning. With debt-to-income ratios above 76% very few households in South Africa can absorb the high cost of moving to a new home, let alone make necessary modifications. To stay is a decision to forgo transfer costs, attorney fees and bond registration costs. Unless circumstances dictate otherwise, to stay where you are in a home you can afford while reducing your debt burden may be the wisest choice of all. Whatever your choice, proceed with caution as the realities of our strained economic cycles are played out both domestically and in the international arena.