The Return of the Buy-to-let Residential Investor has arrived

If you’ve been sitting on the fence about buying a house and doubting whether real estate is the great investment it used to be, now is the time to take a leap! Although several property economists in South Africa have recently been saying that renting a home is preferable to buying, don’t let this overly negative press necessarily deter you from one of life’s greatest joys.

Auction Alliance’s forth quarter analysis of housing market conditions in the country’s three largest metropolitan areas found that home values declined in all markets, whilst residential rentals had risen across the country

In most of the major metropolitan areas, house prices and interest rates have fallen so far recently that the monthly cost of owning a home is now more affordable than at any point in the past 15 years, and in fact is less expensive than renting in many South African suburbs.

In the East Rand of Johannesburg, which had the most favourable values for owning versus renting, the monthly payment on the average home was R1800 assuming a 20% down payment during the third quarter. By contrast, the average asking rent stood at R2, 000, according to Auction Alliance. Other suburbs where owning is now cheaper than renting include Kraaifontein, Kempton Park, Vereeniging, as well as the Johannesburg and Pretoria CBDs.

Even in cities where it is still cheaper to rent than to own have seen big boosts in affordability. In Cape Town, the monthly cost of owning a home has averaged around 83% more than renting over the past two decades, however, during the third quarter of 2011, owning was only 22% more expensive than renting.

Interest rates, which are hovering at around 9%, are at their lowest levels in three decades. As a result, monthly bond payments on median priced homes are becoming lower than the average rent levels in many middle income areas. It does remain less expensive to rent than to buy in the most popular South African suburbs but, we are reaching the stage that if a buyer has a 10% deposit, it is cheaper to buy than to rent on properties under R750, 000.

For many years, South African house prices had grown so sharply that investors, who bought properties to rent them out, shied away from the residential market in favour of commercial property. This has now changed and we are seeing a growing industry of residential investors who realise that, in a low interest rate environment, they can get above average returns on buy-to-let residential properties. These investors are naturally turning to auctions as their preferred method of transaction as they bulk up their inventory while the market is still bearish.

However, even in these suburbs where the monthly carrying costs on a bond are lower than average rents, potential owners must be aware that home ownership carries other increasing maintenance costs and higher exposure to risk.

If you’ve been sitting on the fence about buying a house, now is the time to take a leap! Several property economists in South Africa have recently been saying that renting a home is preferable to buying, but don’t let this negative press deter you from one of life’s greatest joys without doing your own research.

Take a look at five reasons why I believe owning your own home makes sense in this market.

1. Equity

When you pay rent, you never see that money again. Yes, buying a home may come with some hefty initial costs (deposits, transfer costs, legal fees), but you will make that money back over time in equity built in the home. Historically, homes appreciate by about 4 to 6 percent a year. Some areas are still experiencing normal appreciation rates, and for the areas that have seen harder times since the recession, the housing market will recover at some point. Home ownership is about building long-term wealth. A home bought for R25, 000 in 1981 is most likely worth 20 times that in today’s market.

2. Relationships

Tenants tend to see their neighbours come and go quickly. Some people sign year leases while others are in an area for much shorter periods. Apartment blocks also tend to have less common shared space for people to meet, greet, and socialise. Home owners, however can get to know each other. Neighbours that own their homes stay put much longer (at least three to five years if they hope to recoup their purchase costs). This means more time to develop relationships. Research has shown that people with healthy relationships and stable home environments have more happiness and less stress.

3. Predictability

Well, as long as you have a fixed-rate term on your mortgage bond it’s predictable. Most people buying homes today know that a fixed-rate is the way to go. This means your payment amount is fixed. If your monthly mortgage payment is R5, 000 today, then it will still be R5, 000 a month in 2 years. This allows for people to budget and make solid financial plans. Home ownership, though, generally comes with a predictable table of expenditures. Even the big purchases are predictable. You know most roofs last for about 15 years, and you know that each year you’ll need to pay for the gutters to be cleaned, and so on.

4. Ownership

Okay, this is a given. Home ownership means you “own” your home. However, owning your home comes with some incredible perks! You can renovate, update, paint, and decorate to your heart’s desire. You can plant trees, install a pool, expand the room, or do holiday decorating. The bottom line is this is your home and you can personalise it to your taste. Most tenants are stuck with the same beige walls and beige carpet that have been chosen by the landlord.

5. Great Deals

It’s a great time to buy. Interest rates are at historic lows, and this means big savings for today’s buyers. Home prices have also taken a dip since the recession, which means homes are more affordable than ever. Right now, it’s cheaper to buy and cheaper to borrow. If you have steady income and cash for a deposit, then be sure to start looking for a home to buy while property prices are subdued.

Home ownership can be a real joy. Now is the time to get off the fence and into a home that is right for you!