Cash is king if you’re in the market for property

VIVIAN WARBY vivian.warby@inl.co.za

If you can afford to buy a house right now, should you? Experts weigh in on the debate

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, the

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.

South Africa has just emerged from 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 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 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,” says Rhys Dyer, the CEO of ooba Group. However, as interest rates 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 thinking of buying are having second thoughts. However, experts seem to, on the whole, think buying and owning a home remains a good idea. But not Rode. “Homeownership has an emotional and a financial aspect to it. I will talk to the financial aspect,” says Rode. “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 the 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.”

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, Rode says.

“The more expensive the home, the less likely your rental will cover the interest on your bond. In other words, the more expensive the property, the lower the income return. 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.”

Rode advises to rent and save the difference between your rent and what you would have paid on a bond. Eventually, you could have a nice lump sum savings, if you are disciplined enough to save.

FNB property economist John Loos believes, however, that the market – hit by high interest rates and financial pressure – can be good to invest in as you will have more negotiating power as sellers may be ready to accept lower offers on homes.

Samuel Seeff, the chairperson of the Seeff Property Group, agrees that there is more room for buyers to negotiate.

Loos, like the regional director and CEO of Re/Max of Southern Africa, Adrian Goslett, believes renting and owning a home have their pros and cons.

“In some instances, it may be the cheaper option to rent in the short term, given the big transfer costs involved with buying a home,” says 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 says that generally, “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”, adds that it’s up to the individual to decide whether to rent or buy.

Renting, he says, 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 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, the head of marketing and sales at TPN Credit Bureau, says 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”. ooba’s Dyer suggests homeowners and home buyers take a long-term view with regard to their investments.

First, “homeowners can breathe a temporary sigh of relief as early indicators suggest GDP recovery over the third and fourth quarter of this year”, he says. 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 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 says we are beginning to see a two-paced market emerge. “While demand is high on the one side, buyer hesitancy is increasing, with deals taking longer on the other side”.