The buying versus renting debate has been highlighted several times over the past three years amidst continued subdued average house price and value growth. Most property economists are of the view that it is better to rent and wait for the market to turn before buying again. Seeff chairman, Samuel Seeff, however, says that while this has merit for investment buyers, buying is almost always better than renting for ordinary buyers that constitute about 90% of the buying population.
While it may be marginally cheaper to rent right now, these economic models assume that renters could invest their savings elsewhere. This is unlikely given that, according to the National Treasury, South Africa’s national net household savings rate has declined from around 6,6% in the 1970s to negative levels since the early 2000s. Clearly, there is a need to improve household financial security and home ownership plays a key role in this, he says.
Within the South African context, it makes far more sense to buy than rent. It takes incredible discipline to save and in any event, considering the high national average household debt ratio (around 76% according to FNB), it is unlikely that households have much left to save after paying rent, he adds. Renting also quite easily becomes habitual; the longer you rent, the longer you have to continue renting. Property is not getting cheaper, quite the contrary. While average house price growth since 2007/8 has been in the single digits, it is still growing. Rentals are also continuing to climb, albeit off the pre 2007/8 levels.
Fundamentally, you cannot look at home ownership purely from an investment viewpoint, although history shows that South African property remains a sound investment vehicle. There is a strong psychological element. Owning the roof over your head provides long-term stability; a foundation upon which to build a life and raise a family. Home ownership is the cornerstone of a healthy society and a better standard of living. Conversely, renters often have to move around, each time incurring additional costs. It is disruptive, unsettling and does not create a stable environment for children who often have to move to a new school.
The upside of the downmarket conditions is that we are in the best buyers’ market in over three decades with a mortgage rate that is the lowest in more than 40 years. Should a rate hike come into effect towards the end of the year as predicted by economists, it is still likely to be gradual and the rate would still be below what it was pre 2007/8. Such an increase would in any event also be offset by salary increases come year-end, he adds. While a rate hike may make bonds marginally more expensive, rents too would go up, he adds.
While renting would result in a lower net spend over a 10 to 15 year period, you will have nothing to show for it at the end of the period. If however, you invest in property now, you will have made significant inroads into reducing the capital amount borrowed in 10 to 15 years’ time. Paying off a mortgage is a forced saving and, provided you buy smart, you could end up with an asset worth twice as much as you paid for it after a 15 to 20 year period, he adds.
Right now, buyers have the potential to buy incredibly smart and those who are able to do so, should take advantage of the prevailing conditions. While the outlook for capital growth in the short term remains subdued, investing in property does not only bring about short term benefits, says Seeff. Precisely because the market is not delivering big capital growth yields right now, makes it the right time to get into the market. Buyers still waiting for a better time to buy may well end up looking back with regret.
First time home ownership especially needs to be encouraged and, government should look at incentives beyond the ‘gap-subsidy’, says Seeff. A longer repayment term of up to 30-years could make a real difference in the lower to mid-section of the market. A tax incentive that allows home owners to offset a portion of their monthly bond repayment could be a further boost, he adds. Encouraging greater buying would have a multiplier effect on employment and economic growth. A significant value chain can be created, from boosting construction and property related services to growth in tax income for state coffers, concludes Seeff.