If you can find a home you love and can afford to buy it for cash, then maybe owning property is a good bet right now, says property economist, Erwin Rode, ceo of Rode & Associates.
If not, forget about it, he says.
Rode’s advice that property is currently not a great asset flies in the face of what some other experts say: owning a home is a good investment, even in 2022, amid rising interest rates and cash-strapped consumers. But you may have to buy and play the waiting game.
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South Africa has just come out of a ‘home-buying frenzy’, when the embattled Covid years of 2020 and 2021 saw the lowest interest rates in almost five decades and offered a window period to get on the property ladder.
This was especially true for first-time home buyers, many taking up to even 30-year bonds just to own some bricks and mortar, according to the ooba Group. For many, this was a no-brainer as it became cheaper to buy a home than to rent one.
“The COVID-19 pandemic period was positive for the local property market – triggering an acceleration in house price inflation and a rebound in activity levels,” said Rhys Dyer, CEO of ooba Group.
However, as interest rates now return to ‘normal levels’, many who bought on the edge of their affordability scale are beginning to get a gnawing feeling that perhaps they bought too quickly thinking the interest rate honeymoon period would last forever - despite continued warnings from the industry that it would not.
And even those now thinking of buying are having second thoughts before signing on the dotted line. However, experts seem to - on the whole - think buying and owning a home is still a good idea.
But not Rode.
“Homeownership has an emotional and a financial aspect to it. I will talk to the financial aspect,” said Rode in a telephone call.
“At present the housing market is in a down-swing phase and has been for the past seven years.
“This means that in practice the myth that it’s a solid investment to buy a property falls short as it is based on capital growth which is zero.
“So you will find many young people buying a house as one of the first things they do, because they believe value will keep on rising.
“This myth however is only valid if you buy a home for cash, not take out a mortgage; or when you buy during the upswing of the long property phase, like in the first decade of the 2000s.
“The problem with a mortgage at today’s interest rates is that you get negative financial gearing, which means your total return (income yield plus capital return combined) is negative. This principle also applies to owner-occupiers, not just buy-to-rent investors,” said Rode.
However, your returns will be better if you are buying in the below R700 000 segment as your income returns in the lower-priced suburbs are better, he says.
“The more expensive the home is, the less likely your rental will cover even the interest on your bond. So, in other words, the more expensive the property, the lower the income return.
“So purely from a financial point of view - over the next few years you can expect a very poor and negative return from a property with a 90% plus bond.
“In fact, your total return will be miserable,” said Rode.
He advises instead to rent and save the difference between what your rent is with what you would have paid on a bond. That way at the end you would have a nice lump sum savings, if you are disciplined enough to save.
FNB property economist John Loos believes however that the market at present - hit by high interest rates and financial pressure - could be a good one to invest in as you will have more negotiating power as sellers may be ready to accept lower offers on homes.
Samuel Seeff, chairman of the Seeff Property Group, agreed that there is now more room for buyers to negotiate more aggressively.
Loos, like regional director and CEO of Re/Max of Southern Africa, Adrian Goslett, believes renting and owning a home both have their pros and cons.
“In some instances it may still be the cheaper option to rent in the short term, given the big transfer costs involved with buying a home,” said Loos.
“Renting can also give people more certainty over home-related cash flows, because many of the surprise maintenance costs are the responsibility of the landlord.
“It also allows for greater mobility if you are uncertain about where you are going to be working or living in the not too distant future.
“Buying and selling homes frequently, with all the transaction-related costs, can lead to big losses.”
Loos, over WhatsApp, said generally speaking, in South Africa, “there is a strong desire to own one’s own home both from an investment and a lifestyle perspective, so this continues to be the dominant trend”.
Goslett, who believes buying a property will provide you with “an asset that will earn you a substantial return on investment”, added that its up to the individual to decide whether to rent or buy.
Renting, he added, offers the tenant a certain amount of flexibility. “Each individual needs to evaluate their circumstances and make the decision that meets their needs.”
Rental rates are unpredictable, however, so if you have a fixed rate on your home bond, it may be easier to predict your monthly spend.
The pool of those being able to afford to buy is however shrinking and market activity is in a downward movement. For those who can afford to, there may be some steals out there.
Waldo Marcus, head of marketing and sales at TPN Credit Bureau said the higher interest rates and a reduced ability to save could mean “some higher-income tenants decide to keep renting instead of buying their own properties”
While higher interest rates “have traditionally resulted in improved demand for rental property,” the balance in “a fragile economy is a fine line between demand shift and the ability of consumers to afford any type of formal rental accommodation”.
PayProp Rental Index recently revealed that quarterly year-on-year rental growth continues to climb in South Africa, with the average rent increasing by 2.6% in the second quarter of 2022.
PayProp’s Johette Smuts said the “continued financial demands faced by consumers as we move through 2022 could force those in the rental market to seek out cheaper accommodation options, which would prevent a complete rental market recovery”.
In this sort of market you may see muti-generational homes in which either grandparents or children move back home or all live under one roof. You may also see friends pool together to live in a commune, or even try an alternative way of living, such as staying in a caravan park.
ooba’s Dyer meanwhile suggests homeowners and home buyers need to take a long-term view to their investments.
Firstly, “existing homeowners can breathe a temporary sigh of relief as early indicators suggest GDP recovery over the third and fourth quarter of this year”, he said.
However, it comes with a warning. “While economic activity is expected to rebound as the dampening effects of the Kwazulu-Natal flooding fades, the recent bout of stage 6 load shedding – if protracted – could stifle the extent of the anticipated recovery.”
Dyer adds that on the home loan front, applicants will continue to benefit from attractive interest rate discounts – spurred on by healthy competition among the banks, longer home loan repayment periods and the more realistic pricing of homes for sale.
In terms of the impact of the interest rate hiking cycle on the property market, Seeff said we are beginning to see a two-paced market emerge. “While demand is still high on the one side, buyer hesitancy is increasing with deals taking much longer on the other side”.
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