Much has been said about younger buyers getting caught in the "rent trap," but what exactly does this mean and why should one aim to avoid it?
The rent trap describes a situation where people get stuck in a position where they are continuously renting property, instead of buying their own. The reason why this is particularly relevant for millennial and Gen Z tenants is that this rent trap gets harder and harder to break out of as you get older.
Those who are moving into their first home will face the decision to rent or purchase their first property. The option to purchase will only be available if money has been saved up for a deposit.
“In the scenario where money for a deposit isn't saved, you will have to rent for a period. Avoid spending all of the budget available to you on rent alone,” advises Just Property CEO, Paul Stevens. “This is the first step in avoiding the rent trap: make the choice to rent a property in a lower price bracket and save up towards a deposit on a property. This can be done in as little as two years.
It’s also important, says Stevens, to purchase your own property as early in life as you can: Lightstone’s Residential Property Indices (published Sep 2018) show that national house price inflation is currently 3.8%. Weak performance in the property market has been a reality across much of South Africa for the past 10 years and in the short-term the outlook is equally bleak. However, this trend may change if South Africa’s political and economic environments improve. For South Africans who do not have means or mindset to leave the country, now is a good time to buy property here.
Stevens advises that those entering the property market to “start young, start small, and build up. Take a long-term view. For example, buy the bachelor flat you can afford now. Live in it while you save hard for a deposit on your next home. You can then sell or rent out the bachelor flat and buy a 1-bedroom flat or cottage. Live in the 1-bedroom and repeat the process: sell and move to a 2-bedroom etc. It’s not easy but success in life takes hard work and discipline. The long-term rewards, the prospect of creating wealth for generations to come, is a phenomenal prospect.”
Stevens says it’s easy to fall into the rent trap by assuming that your income will increase as you get older and that you'll always be able to maintain your current standard of living, even increase it. “But that is not necessarily what the future holds in store. Responsibilities increase, as does rent and already we are seeing data the is showing long-standing tenants battling to keep up with escalations. If you're already renting the most expensive property you can afford, it is quite possible that you will never own your own property and you are maybe placing yourself at risk.”
“Owning a home is not like owning a vehicle. The minute you drive your dream-on-wheels off a dealership’s floor it depreciates in value and will continue to do so over time. Property (in most cases) works in reverse. Over time, it increases in market value and when you decide to cash-in one day, you will experience the joys of capital growth; something your future-self will thank you for!” Stevens concludes. “This is what the parent of Gen Z should be telling their kids.”