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
