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Buying a house now: a good investment?

Jul 11 2012 12:54
WITH houses staying on the market for longer and 87% of properties being sold at less than asking price, investors are increasingly weighing their investment options.

A Fin24 reader asks:

I'm a single 28-year-old female who has owned a property for the past two-and-a-half-years. At the moment I'm in a financial position to consider buying another property and renting out the first one.

I have money saved up in an account that only gives me 5% interest, but I could use it towards a deposit for a new home. My current bond is not an access bond, so if I put funds into it I will not be able to take them out if I need to in case of emergency.

Is it wise to buy property at my age in the current economic situation, or are there better options for my money to grow?

Erwin Rode, property economist and registered professional valuer, answers:

If you were to invest in a residential property now (assuming you buy at market value), your expected net income yield in a good location would be in the vicinity of what you can get in the money market (say about 5%). This assumes no gearing (no mortgage bond).

By leveraging your purchase, you will probably end up in a situation where you will have to pay in every month to service your mortgage (assuming an interest rate of, say, 10%). Thus, from a short-term cash flow point of view, buying a residential property now is a bad idea.

But what about capital appreciation, you might ask.

Forecasts by Rode & Associates show it would be prudent not to expect much capital appreciation from residential property over the next five years or so. In fact, these calculations show that houses are presently overvalued by about 25%.

What all this amounts to is that I do not consider buying a house now as a good investment.

 - Fin24

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property market  |  property  |  investing  |  house prices


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