Should newlyweds buy or rent?
A Fin24 reader writes:
I am getting married in December 2011 and need to look for a place to live.
All the reports of interest rates going up, consumers' financial stress, seasonality and the effect of the National Credit Act have left me with a high level of uncertainty on whether to buy or rent.
Between us, my fiancée and I have R6 500 to R8 000 per month to spend on a house.
We can probably stretch this monthly payment to R9 000 per month in a year's time with annual increases.
I was given the option of living in my parents' flat, where I will have to pay them roughly R6 000 per month to cover the existing bond. My parents have also given me the option of taking over the flat whenever we feel we are ready.
Is it better to buy a place in the current economic climate? Is the property market going to get better?
What's the worst-case scenario for interest rates?
With rates heading higher, along with volatile fuel prices as well as inflation hotting up, I really do not want to find myself stuck in the mud after making what I think would be the biggest investment of my life.
Erwin Rode, a property valuer and economist at Rode & Associates, responds:
The property cycle is very long – think 15 years or so on average.
This means there are long periods when property prices are not moving much, and then there are short periods during which prices burst through the long-term trend.
Between about 2004 to 2008 we had our short, sharp rally, with prices ending up well above replacement costs. Yes, the unfortunates who bought in this period were paying, um, too much.
Thus, we are now in the long period of correction. Disregarding the coming pressure on the poor over-stretched consumer, and disregarding a few other niggles, this suggests that for the next few years prices will grow at a rate lower than inflation.
This means one should realistically not buy a house with a capital growth expectation; rather see a roof over your head as just that. A roof one can buy or rent, just like a photocopier. Renting currently is cheaper - much cheaper - than buying, never mind the coming interest rate rises (think two percentage points).
My advice, purely from a utilitarian point of view, is to rent the roof. Calculate how much you would have paid the bank per month if you had bought a house (go to any bank's website), deduct your rent, and save this difference religiously.
The chances of the house market showing significant capital growth over the next few years are slim.
Thus, after about four or five years of renting and saving on the instalment you would otherwise have paid the bank, you will be better off from a capital point of view, and you will be able to put down a sizeable deposit on a house. However, because this advice is gratis, you will nevertheless buy today and make the bank rather than the landlord rich.
But then, you are young and want to knock out that wall, renovate the kitchen, hammer new nails into those walls still standing, and so on. How I envy you!