In a depressed market, such as the one we are currently in, many people find themselves asking whether it is more financially prudent to buy their own home or to rent one instead.
Adrian Goslett, CEO of RE/MAX of Southern Africa, sheds some light on this age old question.“While the level of South Africans who now own their property has risen dramatically over the last decade, with the ever increasing cost of living coupled with high personal debt-to-income ratios, many South Africans are purposefully selling their homes in order to downgrade their lifestyle to more affordable levels,” he says.
Goslett notes that this has resulted in the need for many people to rent instead of buying a home. Rentals are also being fuelled by the fact that house prices remain relatively high when compared to earnings, the banks’ lending criteria remains strict and deposits are still required. “All these factors combined has meant that the move towards renting gaining an ever increasing momentum,” he says.The great news for buy-to-let investors is that the ‘renting trend’ is one that is not only growing in South Africa, but also in other countries around the world. “In fact,” says Goslett, “it is expected that in the UK, the percentage of people who will be renting instead of buying their homes is expected to grow by as much as 20%, while in countries such as Germany for example, over two thirds of the population do not own their own home.”Although this rental trend may seem high, the reality is that in many cases, renting is much more affordable than buying.
Goslett explains: “Renting lowers your financial risk. In the current market, houses are difficult to sell and renting is a much less of a risky proposal should you lose your job and suddenly have the need to downgrade to a less expensive property. Renting also gives you the freedom to be able to relocate to a new city for a job, and when you compare apples with apples, you could probably afford to rent a home equal to, if not better than what you could afford to buy.
”However, he notes that the number one argument for renting lies in the fact that there are other kinds of investments that will offer a much higher return. “The theory goes like this – investing in property can be an expensive exercise when you take the costs involved in buying a property such as the transfer duty, bond registration fees and other legal fees, connection fees and moving fees. You also pay interest on a bond, and don’t forget the rates and taxes, the maintenance and insurance costs and the costs for the general upkeep of the property. “Add all these expenses together, as well as the difference between the rent you would pay versus what you would have to spend on your monthly home loan instalment, and this would leave you with a sizeable amount of money. If you are disciplined enough to save and invest this money – it is estimated that you should be able to save enough money to buy a home cash over a period of 10 or so years, use to reinvest in other avenues, or to keep it as a nest egg for retirement purposes,” says Goslett.
However, therein lies the crux of the matter – this kind of financial thesis is exclusively for the disciplined investor. “Unfortunately, most people do not have the required restraint to do this – if they have extra money, most people just end up increasing their living standards by buying more expensive cars, going on better holidays, or buying luxury goods for themselves or their home.”Goslett says that the big argument for buying a home instead of renting one is that owning your own home is in fact a kind of forced saving. “The truth is most South Africans do not save enough money for when they are older. However, being able to sell your home that you paid off over 20 years, and downsizing to a smaller dwelling will no doubt offer welcome financial relief when it is needed most. What would these people do if they had decided to rent 20 years ago?”In order to benefit from buying property, Goslett advises that consumers get into the property market as early as possible.
“The earlier you start, the better off you will be. Also, keep in mind that any 20-year bond repayment will come down dramatically in real terms as your salary increases with inflation (assuming there are no drastic changes in the interest rates). This means that even though you might have to tighten your belt to ensure you have enough money for the monthly payments when you initially start, they will become much more affordable as time goes on.”Goslett says the key to successful property investment is to pay off your bond as soon as you can, live in your home for a minimum of five years so that you can recoup some of the initial costs, and to buy only what you can afford.
But, he says, there are both pros and cons to renting a property as well as for buying one. “Everyone has different criteria and levels of affordability. Renting can allow you to suss out an area or complex to make sure you like it before you make a long term commitment, or to allow you time to save up for a deposit. On the other hand, the sooner you can start paying off your own bond; the better off you will be with an asset to your name that will certainly show good returns over the long term.”