Value of home ownership

11 Mar 2011

Those first time home buyers entering the property market in SA find that one of their major challenges is to overcome the “mental block” caused by short-term thinking, says Michael Bauer, GM of IHFM the property management company and managing director of IHPC, the exclusive estate agents at Bardale Village.

“Time and again,” says Bauer, “we come across the attitude, “Why should I buy when I can rent at a monthly payment that can be a much as 30% below the monthly bond payment – and which leaves me free of repair and maintenance costs and able to move on as and when I feel like it?”

This mindset, says Bauer, takes no account of the obvious fact that, whereas rentals will rise by 8 to 10% (or more) each year, bond payments on average remain the same – so that by the time the property owner is in his second decade of payments (even if he has moved on to a bigger home) it is quite likely that his monthly payments will no longer be a major burden and will be less than 15% of his gross income.

“By contrast,” says Bauer, “the couple paying rents will find that by the time the property owner has paid off his 20 year bond (and is debt free), they are paying 10 times more than they did 20 years ago – and what is worse, they will have to go on paying rent until their last day”

Quoting a specific example, Bauer said that on a R400 000 bond issued at a hypothetical interest rate of 11%, the property owner would pay altogether R990 000 in capital and interest over 20 years, but would own a asset worth R1,06 million (assuming an annual capital appreciation of only 5% compounded on the R400,000 property).

The tenant in the same category of home, starting with a rent of R2 500 per month (subject to annual increases), would at the end of 20 years find that his total payments have been in the region of R1,7 million in rent. He would have no asset to show for his outlay and will still have to continue paying rent.

“Experience has shown that capital growth and rental escalations are far above the annual adjustments to income, so it will become less and less affordable to rent in future if you continue living in an area of your choice. You will be forced to move to areas which you can afford on your retirement income (which is usually 60 to 75% of your final salary).

“The government, which is repeatedly urging South Africans to become homeowners, needs to propagandise this fact,” said Bauer. “I am sure that they do not need reminding that home ownership is the chief foundation stone of a stable society. The message should be clear – home ownership should be a first priority for South African families.”