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!
I would take the flat - it must be at least partially paid for already and you don't have to deal with estate agents and all their tricks, nor do you have to pay a deposit. Depending on how long the flat was purchased ago it probably already has seen growth over and above the bond on it. Finally, its also yours. So you can upgrade and modify it to your liking and really make it your home.
Even though technically correct Mr Rode. My opinion is that its always best to buy. Why pay someone elses bond when you can pay your own and still have all that capital availble to you at any point in time. You are correct in saying that we can expect significantly lower capital growth over the next few years. However even though at the end of the day one is making the bank richer but so are you enriching yourself because you are acquiring an asset (that doesnt generally depreciate in most instances at all). Important about property purchases is timing (even short term), price and place.
Mr Reader, you are young ... accumulate your wealth now.
Oh boy, people still thinks, brick & mortar houses are assets? I blame this on accounting and economics for giving an artificial definition of an asset.
@Gore: If there's no bank loan, how is it not an asset?
@gore, Always easy to complain about stuff ou boet. Why don't you give us a definition of an asset. And then also mention whether it is a cash flow, accounting, economic or layman defintion. They would presumably all be different/
@Gore finances 101 fixed property is a "fixed ASSET"
Last thing you want to do is place your marriage under financial stress off the starting block. What is not mentioned in the above advice are costs of transfer duties, conveyancing fees, bank deposits and loan origination fees. The flat option is your best starting point.
Totally agree in this case - rent now - it seems like the parents will be willing to sell the house to them at a later stage at the outstanding value of the house bond. "Rent-to-buy" option - very good! In essence already paying the bond, while not carrying any risk or as said the transfer fees.
If renting is 25-30% less than the interest you are going to pay then rent, if not then buy.
Gore, please give us the correct definition of an asset
I can't say i fully agree with this advice.
Yes the housing market isn't expected to grow, but they buying a home, not a rental-investment. So yes, they won't see much growth. But buying below your line and paying off your house quickly will leave you much better off financially than renting. We all know we not gonna save that 20% less on rental. Buy and then in 4 years time you'll have a good deposit for a new bigger home for you's to settle for the next 20 years.
But look, it's difficult, because there are really alot of options. Just remember rental goes up by 10% a year! Bond repayments go up with interest rates. Bond repayments give you ownership/capitial, rental gives u nothing.
Just be warned upfront...any money you put into a savings account will be taxed! Renting at R6000pm for 12 months only means R72K you have paid into someone elses pocket. If I had rented the past few years instead of buying a house, I would STILL be paying rent into someone elses pocket. Instead, I have PAID OFF my bond and now live RENT FREE. Yes it took some dedication and deprivation to pay the bond off in 8 years instead of 20years, but WOW, the benefits are huge!
I've been renting a flat for the last 6 years. All i have to show now is nothing for all those years. I belive if you buy small now and keep paying the bond, you'll be better off in 5years when you want to buy big. thus me and my wife decided to get ourselves a house and pay it off...like other readers have been saying, it's better to pay your own bond than to help pay another persons.
I don't think newlyweds should make this decision without some serious long-term family planning. Buying today to re-sell once the triplets arrive is the worst choice guaranteed.
All the yada yada about paying someone else's bond is just nonsense. I see very decent places that rent out for at least 2 - 3k pm (or more) less than bond payments. The tenant has no municipal tax to pay nor levies. Deduct that from the rent and tell me just how much the home owner is making? Then include the cost of fixing leaking taps/geysers etc all on the owner's tab. Lets not get started on the bond.
Please, the couple is (probably) young, will have a very flexible income and can move at the drop of a hat if they need too - think job opportunities etc without having to sell the property or look for tenants.
And yes, a house is not an asset. An asset generates income. A house, one lives in, spends money on. Unless one has more than one house as the primary residence being rented out, it is not an asset.