It is a line we hear time and time again, particularly from real estate professionals: buying a property is the best investment you can make.
Another famous piece of advice is that there is never a better time to take your first step onto the property ladder.
But what if you do not want to buy a home for whatever reason? What if you like the flexibility of renting?
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Or what if you think that the whole “buying a property is the best investment” thing is just a myth?
Well, if you thought this way, you would not be alone; nor would you be wrong – in theory.
In fact, Erwin Rode, managing director and chief executive of Rode & Associates – which specialises in real estate economics, property valuations, and property research, says now is not a good time to buy a home, unless you are buying it with your own capital.
Furthermore, he says the belief that property is the best investment one can make is “one of those urban legends”.
“Truth be told, it all depends.”
Echoing this, FNB property economist John Loos says that, theoretically, buying a property may not always be the best investment. Practically though, in the real world, the argument against it is “not that simple”.
“Everything depends on where in the property cycle you decide to buy. For example, if you were to have bought at the bottom of the cycle, such as in 1998, you would have definitely reaped the rewards. At other times though, buying property may not have actually delivered good returns.”
Explaining further, he says some calculations by financial experts and analysts show that, if you had rented a property instead of buying over a set number of years, and had invested what you had saved in the stock market or other such investments, you may have been better off. This is because you would not only have saved on transfer and bond registration fees, and certain maintenance costs, but possibly even paid less in rent than you would have paid for a bond overall.
Therefore, there “can be some merit to this argument”.
“However, here on planet Earth, I have yet to meet a person who has rented and has actually invested all that money that they had saved from not owning a home.”
And this is the reason why Loos says property is considered such a great investment – because you enter into a contractual obligation to pay off a bond, and when you have finished, you have an asset worth something.
“In effect, I am saying that a bonded home forces a certain financial discipline due to the serious nature of a home loan contract that needs to be settled. So even if your asset doesn’t perform as well as other asset classes over the years, that financial discipline associated with servicing debt and maintaining a home means that you ultimately have an asset worth quite a lot of money.”
The alternative to that, in the real world, is not renting and, rather, investing the savings, he says. But, normally, people rent and consume, and “that is not a good investment at all.”
“Buying a property using debt basically forces that financial investment that may not otherwise take place.”
Taking out a home loan vs buying cash
The success of a property purchase will not only depend on when in the property cycle you buy, but whether it is mortgaged, states Rode.
“When entering a period of rapid house price growth and interest rates that are low relative to consumer inflation, there are many good opportunities to be found for investors as the ratio of mortgage costs to capital return is favourable, leading to super investment performance.
“The caveat, however, is that you must buy in an era where there is rapid capital appreciation and, as a bonus, relatively low interest rates.”
An example of such a time, he says, was during the 1970s and 1980s when too-low interest rates led to high consumer inflation and rapid house-price growth.
“We had a similar situation during the first seven years of the 2000s when there was rapid house price growth on the back of the booming super commodity cycle, which favoured the South African economy.”
At the moment though, purely from a return-on-investment point of view, Rode does not believe it is a good time to invest in property if you are using the bank’s money. In fact, the prospects for significant capital appreciation are “poor” given the outlook for the economy – and this is not just relating to Eskom as South Africa has “many structural bottlenecks”.
“Currently, the interest rate is still high relative to consumer inflation. We are not in the 1970s and 1980s when the Reserve Bank wasn’t independent and did not have the guts to increase the interest rate to combat inflation.”
Asked whether one would be better off in five years’ time if one bought a property now instead of renting, Rode says the answer is ‘no’.
“If you were to buy a home today with a 90% or higher mortgage bond, the interest cost over the next five years is expected to be high relative to an expected meagre capital return on your investment.
“But, if you were to buy a middle-class house with your own cash today, you may expect a total return of about 9%. This would be great, given the poor medium-term prospects for our economy and assuming the consumer inflation rate is 5% per annum.”
So at the moment, it would, in theory, be a better strategy to rent and save − religiously every month - the difference between your rent and what a fully-geared purchase would have cost you in the form of monthly instalments.
“In five years’ time you should be better off financially. The saved amount could then be your deposit on your house.”
If you look at a long-term scenario, such as 20 years – the period it usually takes to pay off a home loan – and have bought a property cash, then you are looking at a real (after inflation) total return of 3% to 4% per annum which, again, is “great”, given the “lowish risk of housing”.
By ‘total return’ Rode means income return plus capital return.
He emphasises: “I think that if someone is investing in property today and seriously gears up, it may turn out to be a poor investment. But, at least it is a forced saving, albeit a savings plan with a mediocre return...Ultimately, every investment is about timing.”
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