Fin24

Buying a house now: a good investment?

2012-07-11 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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Comments
  • ianon.ym - 2012-07-11 17:53

    Wow, that should stimulate the market.

      ian.fisher.904 - 2012-07-12 12:35

      Would you prefer it if Erwin Rode lied and said prices were undervalued?

  • ilse.dutoit.9 - 2012-07-11 20:05

    I don't know what bank you are with, but my access bond got activated with a phone call. Best bet is to get yours activated or apply for it and stash the money in there. You have a theoretical saving of 9% depending on your bond grant. Save up a while in your access bond and put a huge deposit on your second home while taking out all the money from the first one to maximize tax benefit.

  • johanvvuuren - 2012-07-12 08:28

    I don't agree with this. If you can afford additional property to rent out you practically have someone else paying off part of the bond through the rental income. Eventually after few years the monthly rental income will be more than the monthly bond payments. That makes more economical sense to me. Although house prices are fairly constant rental fees continue to increase each year as with everything else - except if the interest rate doesn't change the bond payments stay the same.

      konstabel.koekemoer - 2012-07-12 14:17

      Lots of other costs you have to consider. Increase in rates & taxes, levy increases if in a complex, increase in bond interest rates, maintenance on the property (which increases with age of the dwelling), non-payment by tenants, having no tenants for a couple of months. And it is not true that you can just increase the rent every year as tenants just move out if they can get a better deal elsewhere and often the landlords are forced to reduce the rental to get new tenants. Rental property in SA was a good investment of you bought 10 years ago because the SA housing market was where the USA market is now, rock bottom.

  • mikenortje - 2012-07-12 09:23

    Are houses really 25% over valued??? can anyone confirm this??

      napolita.kio - 2012-07-12 10:09

      How do you confirm an opinion as relates to "value"?

      appietrader - 2012-07-12 16:50

      Take in consideration the age of the dwelling and the depreciation on it. That will be part of the 25% over valuation Erwin is talking about, a must. Have rental properties and can relate to the costs and maintenance thereof.

      arno.pfohl - 2012-07-15 13:52

      reserve bank interest rates are way tooo low, in namibia a 3 bedroom townhouse goes for close to 2 million dollars or more. We are linked directly to south africa. So I would definately agree with the author. Is it just me or does everyone else also think that they could regulate the economy better?

  • JodiAllemeier - 2012-07-12 10:58

    What about locational differences and which bracket you are interested in buying in? Surely it can still be a good idea to buy in the lower-income bracket, or in areas that are still showing good growth, e.g. Woodstock in CT. Rode has ignored these differences in his response and has also ignored the additional rental income you will receive. There have also been many refutations of Rode's claim that house prices are over-valued by 25%

  • danie.jacobs.180 - 2012-07-12 14:13

    I thought per ABSA the average house is something like R860k. Take 25% off, and mr Rode reckons the average house should cost R645k. So pretty much the same as a BMW/Mercedes then. Mr Rode clearly thinks it should be like it was in 1965, when a property cost twice the man's annual salary, and when women did not work. Like they taught in the 1972 economics textbooks at varsity. How about keeping up with the times? Also, i bet using mr Rodes evaluation, I can prove that my basket of groceries at Checkers is 300% over the longterm value. Surely that will revert back to the longterm trend as well? Yes i am being sarcastic.

  • gerald.king.589 - 2012-07-12 17:00

    It's far far far too early to invest heavily in property! At 28 you can afford to and should take plenty risk. Plenty time for variance to erode itself (law of large numbers), leaving you with the wealth-building returns of risk-taking. A heavy session of actuarial mathematics will tell you the optimal % to have in risky equities at 28 is around 70%. Bond-like investments and short term trends are not most important for now but increasingly become. *Just make sure you know how to balance a portfolio against your measured risk tolerance.

      mike.immelman.7 - 2012-10-04 12:27

      I totally agree with you that it is her time to take risks. It is possible for her to buy the property with a large loan and lever her risk and returns.

  • kennyhubbard - 2012-07-12 17:54

    I believe that in todays markets where not even the like of JP Morgan can get it right, the best place you can put your money is into the roof over your head. It will always provide a defined benefit to you and it doesn't matter what the value of the property does since it is serving a specific purpose. If you get to the age of, say 50, and you have done nothing but pay off your own home, you will be streets ahead of most people. Furthermore, in terms of using you money for a deposit on a rental property.....this is a dangerous game. Investing implies that you have cash to put into an investment. Borrowing money to buy a rental property is simply speculating on margin which is dangerous. Remember, you cannot borrow money at 10% and invest it at 6% and think you are going to become rich.

  • tatsee - 2012-07-12 19:18

    There is much sense if you can locate and buy a house in a good location AND rent it out,chances are your tenant effectively will pay off your bond for you.Within a couple of years,your bond repayment will be less than your monthly rental and you slip into a profit position so if you are not really looking for capital appreciation and also looking to buff up the balance sheet,its a preety safe bet.

  • philippus.scholtz.7 - 2013-01-14 22:01

    I think the key question is whether the interest rate is to rise and to what extent. That will determine to an extent the profitability of such a buy transaction. From scholtzflip@gmail.com

  • philippus.scholtz.7 - 2013-01-14 22:13

    If the interest rate is to rise, property prices would probably come down, due to lack of demand, as a result of affordability of higher bond repayments. Thus i think one should not rush into the market right now, as the chances are good for a rise in the local interest rate later this year, due to an expected weakening in the Rand currency, as the world economy improves and foreign interest rates increases accordingly, resulting in foreign capital flowing back from RSA to overseas.

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