The residential property market has not beaten inflation in 11 years. Magnus Heystek, founder and chairman of boutique wealth management company, explains the reasons for this and offers valuable advice.
If you don’t fully grasp the impact of inflation on home loan rates offered by banks, you need only look at a council bill. Notice how the rates, refuse and water/lights costs have increased but the value of the property hasn’t comparatively advanced?
This shift emerged 11 years ago, and has seriously tested homeowners ability to realise the value of their property investment. Magnus Heystek, founder and chairman of Brenthurst, voted best boutique asset management company in the country, says there is a direct correlation between inflation and the prime overdraft rate offered by banks, the difference between the two usually around three to four percent.
But when inflation rises, as it has done systematically over the past decade, the impact on homeowners is an increase in their bond repayment, and sometimes this can be significantly higher. This makes homeownership fairly difficult in this economic climate, and is seriously impacting on the wealth of homeowners in particular.
There are a number of compounding negative factors influencing the market, and thus inflation, not least of which is the current global economic climate, which is depressed, and even more depressing in terms of outlook. The International Monetary Fund (IMF) has recently downgraded to 3.3% its January predication of a 3.5% global economic growth rate. The World Bank has also cut its 2019 forecast for sub-Saharan Africa from 3.3% to 2.8%.
Predications such as these are rarely exaggerated, which throws a curve-ball into the peculiarities of the South African scenario, which as Heystek points out, is plagued by a culture of poor savings: ‘And when it comes to long-term investment plans, individuals tend to react emotionally when markets go up and down. The end result is that many don’t have savings other than the value contained in their personal property.
“This was somewhat manageable for many years up to 2008, where the trend of investing savings into property and on retirement selling the asset to live off the cash acquired, was profitable.”
One of the major reasons that property owners are no longer able to invest their savings into their bond, or increase the value of their home with improvements, is because they quite simply don’t have savings. Anything extra is being gobbled up by the administrative costs of property ownership. “With an increase in rates and taxes over the past decade rising at 11-12%, homeowners are spending more of their household budget maintaining their bond repayment, which I remind you increases with inflation.”
There’s no point in ‘fixing’ the bond either, says Heystek. “When banks do fix the bond, it’s at a high rate, which translates into the homeowner paying more because interest rates fluctuate. Banks are smarter than us, so they will always ‘fix’ at a level where they benefit. It’s far better to let your bond float and from time to time realise the benefit of some spare cash.”
See more: Don't use your home loan like an ATM
For those that do have spare cash, the fact that they are banking it rather than putting it into their property asset says volumes about the lack of confidence in the country. “People are concerned about land expropriation, land claims and the invasion of property, the latter sometimes escalating into violence,” says Heystek. “Add to this the uncertainty of the political climate with the forthcoming election and Eskom not being able to supply power, let alone at an affordable rate. It’s become a wait-and-see game, the outcome dependent on government and its policies to see if things can be turned around.
Particular areas primed for investing in property include: “Western Cape, Umhlanga, Ballito, Somerset West, the Cape Town Waterfront and parts of Johannesburg on average offer good property investments but again, costs are still soaring and sellers are finding it can take up to six months to secure a sale, sometimes at between 10-15% below asking price. After the elections, I believe there might be more confidence.”
There is one aspect however that is a game-changer: “Attitude towards the purchase of property,” says Heystek. “By that I mean that despite people knowing that a property purchase is a long-term commitment, they approach it on a short-term basis. Buying to sell within five to seven years means you’ll lose out given the costs of conveyancing, bond registration, transfer and estate agent fees.
“In South Africa there is a prevailing automatic instinct to buy property, particularly applicable to young investors but this is, in my experience, often a reckless decision. The younger you are the more likely it is that you will experience a number of changes in lifestyle; job and career advancement, move homes, relocation to different cities, and marriage. Unless you can guarantee a seven-year commitment to a property purchase, you are far better off renting right now; it’s simpler, cheaper, and puts more money in your pocket.”