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Rent Vs Buy Debate (south Africa)

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“Better to rent than buy”

Jackie Cameron

25 January 2008

Think you should sell up? The pros and cons – two respected economists weigh in on either side of the debate.

With property prices relatively high and interest rates not showing signs of coming down any time soon, many people are wondering whether it is time to sell up and rent.

You can get more for your money, in terms of house size and location, if you are a tenant rather than an owner. And, property price growth is slowing, so your home isn’t likely to produce quick capital gains for you like it did earlier this decade.

The case for renting

Erwin Rode of Rode & Associates is a respected property economist who believes that you will make more money by becoming a tenant and using the spare cash that would have gone towards paying off your home loan for another investment.

Rode does not work for a bank so you could argue he does not have a vested interest in talking up property prices. Remember, banks make money by charging you interest on home loans. The more enthusiasm there is for property, the stronger the appetite for the mortgages that make them money.

Rode does not see residential property prices going up like they did a few years ago. In fact, he says houses are in for a period of “no growth”, though we could see prices drop for a couple of months.

Although home-owners elsewhere in the world have seen prices slump and there is concern that the US sub-prime fiasco could affect the South African property market, Rode does not see a property crash looming.

“For a crash you need the economy to collapse. There is a big difference between the financial markets and the real economy,” he points out of why South African property owners needn’t panic about stock market losses.

He says it was “high time” for a market correction, but that does not mean the real economy will crash.Economic woes in the US will have a “ripple effect on the world economy and South Africa”, but like all ripples by the time it reaches our shores it should be fairly mild. And, property markets tend to be country and market specific. Rode believes your money may be better off in a bank, like in a money market account, than in residential property for the next few years.

He is more bullish on non-residential bricks-and-mortar, which he says has not overheated.The prospects for capital growth out of residential property are “very slim”, so he wouldn’t buy now.

“As an owner-occupier it is better to rent than buy. I don’t expect property prices to grow by much,” says Rode. With the huge disparity between mortgage instalments and rentals, Rode says it is better to invest elsewhere.

The case for buying

Sizwe Nxedlana is a respected economist with Standard Bank. He agrees with Rode that now is generally not a good time to buy residential property if you are a buy-to-let investor.

This is because rentals are unlikely to cover bond repayments, which have gone up a lot in recent months, so you will be subsidising a tenant to a significant extent.

Residential prices may drop, though a crash is not likely, says Nxedlana.

Looking at median property prices (the price such that half of all houses are more expensive and half are less expensive than that price), houses are “stuck in a range” of between R550 000 and R620 000, says Nxedlana.

There is “no fresh impetus” likely to boost prices upwards for now, like a change in interest rates, but there are economic factors that support residential property at current prices.

If you are thinking of buying in order to rent, remember that now is not a good time to sell.

You could have sold for more a year ago than you could expect to sell at today. If you bought three, four or even five years ago you can expect to make a profit, but you will not be making much of a profit if you bought last year.

It is, however, a good time to buy if you want to own your own home, says Nxedlana. This is because buyers can get a good deal now, by negotiating with sellers who are finding conditions tough.

If you rent your home instead of buying it, this will benefit you in the short term. But in about 18 to 24 months time, when we see the next downward phase of interest rates, you can expect property prices to ratchet up again as more people find they can afford to buy. “If you can afford to buy now, do it,” says Nxedlana.

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“For a crash you need the economy to collapse. There is a big difference between the financial markets and the real economy,” he points out of why South African property owners needn’t panic about stock market losses.

Umm, they have no electricity as the ANC ignored the warnings to build pwer stations in 2000! The mines are closed due to lack of power, commerical farmers are feeling threatend and if the rand drops they will struggle to import seeds and fertiliser.

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