Africa-Press – South-Africa. While people often believe buying is a better option than renting in South Africa, this is not the case for everyone.
For those living in more expensive areas, digital nomads, or those still unsure about their careers, homeownership may not be the ideal or most affordable choice.
However, for some young families and South Africans who choose to live outside of expensive areas, buying may make more sense.
This was explained by Galileo Capital co-founder and financial advisor, Warren Ingram, who spoke on The Money Show with Stephen Grootes.
The debate around buying vs renting is especially relevant today, as the local property market changes and global economic volatility continues to impact South Africa’s inflation and interest rate environment.
If inflation rises, interest rates rise, making home ownership more expensive. Conversely, if inflation starts going down, interest rates will also drop, and home ownership will become a more viable option.
At the same time, Ingram noted that there are periods when banks specifically look to build their mortgage client base and start offering more attractive rates. “I think now is one of those times,” he said.
However, while there are broader macroeconomic factors influencing the property market, Ingram stressed that the decision to buy or rent is never going to be a “one size fits all” answer.
“I think there are times when home ownership is a very good idea and other times when renting is the very best idea.”
While there is a general sentiment that buying is a “must”, he said the concept of “always owning” can be a very bad financial decision for many people.
An important factor which will influence the decision is the location and type of property. For those living in an expensive part of the country, homeownership may simply be unaffordable.
In that case, renting may be a better option. On the other hand, those who are willing to forego some of the conveniences of more fashionable, expensive areas may find that homeownership costs a lot less.
For these individuals, renting may not make sense, and they should really consider homeownership, Ingram explained.
However, this is only one of many factors that should be considered when someone decides whether they should buy or rent.
The true cost of homeownership
While property websites may show the sale price of the property, this figure does not come close to covering the true cost of buying, Ingram said.
Buyers still have to pay for property taxes, transfer duties, and lawyers’ fees, to name a few. “You’re probably looking at around 10% or 12% before you wipe your eyes out, and that’s just going in,” he said.
Once the owner decides to sell the property, they will face another slew of costs, including agent fees. “The transaction costs are just astronomical as far as I’m concerned,” he said.
On top of this, someone buying a home also has to cover the everyday costs associated with homeownership, such as bond repayments, insurance, municipal taxes and rates, and levies, if living in an estate or apartment.
Maintenance costs, such as repainting, repairing flooring, or fixing electrical and plumbing issues, will further rack up homeowners’ bills. “So, homeownership is simply not just the bond. It’s a lot more than that,” he said.
Ingram explained that, at the very low end, it will add an extra 1% of the property’s value to the homeowner’s bill each year.
This is likely the range someone can expect when buying a newly built apartment. On the higher end, such as in an older home, this cost will be closer to 2% a year.
“But 1% to 2% of the value of the home is a good rule of thumb. So, on a R2 million home, you’re probably talking around R20,000 to R40,000 a year,” he warned.
When to buy
Ingram explained that the decision to buy comes down largely to timing. When someone is ready to lock themselves into a property for at least the next 8, but ideally 10, years, that is a signal that they should take buying very seriously.
For many people, this happens when their children start going to school, as they will likely stay in that area for the next 12 years, wanting to give their family stability.
Importantly, he said that when people are starting their career journey, they should not buy the first apartment they move into.
They will likely live there for only a few years at most, until their salary increases, at which point they will move to a bigger, better property.
For those in this moving cycle, it is not the time to buy, precisely because of all the costs associated with becoming a homeowner.
However, this is not the only factor, Ingram said. Prospective buyers also need to ensure they have at least 10% of the house’s value saved as a deposit.
This will give the bank some assurance that the mortgage will be repaid, lead to a better interest rate, and allow the buyer to repay the bond faster.
Another important consideration before buying is whether the person can maintain their monthly bond repayments.
If either the deposit is large enough or the property is cheap enough to match someone’s current monthly rent, buying is probably a good decision.
Finally, Ingram stressed that the potential buyer must have an emergency fund, preferably of around six months, as unexpected costs are inevitable in the early stages of owning a property.
When to rent
While buying may be a good financial decision for many people, Ingram said renting can make a lot more sense for others.
For gig workers and digital nomads, many of whom work all over the country or even the world and aren’t employed in a stable environment with a stable income, renting is a better option than buying.
Similarly, he cautioned that for those still early into their adult life who aren’t sure of their career path, putting down roots too early by purchasing a physical property can be a real burden.
He added that those who aren’t financially strong and disciplined with budgeting are also better off renting until they have their affairs in order. “I think you’ve just got to be very careful that you that that you don’t over-commit to a big debt.”
This is because if someone makes a few mistakes or misses their bond repayments, it could be catastrophic for their finances, especially as banks aren’t likely to be lenient.
Equally, while semigration may be very popular in South Africa, Ingram warned that those nearing the end of their careers who want to move to a small town should be careful.
While they may be eager to leave behind the city of a peaceful town they have fallen in love with, the reality of living there could be very different.
He recommended that those moving to a new city or province should rent first until they are certain they want to commit to the area.
Ingram also advised against buying property as an investment. “You should view your home as an asset only for the purposes of your own little balance sheet, and not as an investment asset or a retirement asset”.
Individuals should buy a home that suits them and their stage of life. “But you should not view it as an opportunity to make money.”
Unfortunately, there are no guarantees that buying a property will yield good returns. Even investing in South Africa’s best-performing property market – Cape Town – does not ensure it will perform well.
“Someone buying into the Cape now, believing that the property market in the Cape will continue for the next decade in exactly the way it’s done for the last decade – that’s called driving by looking in the rear-view mirror.”
“You’re driving forward at 120 kilometres an hour, and the only thing you’re focused on is the rear view mirror.”
“It’s a fallacy to expect that whatever happened in a market, whether it’s a stock market or a property market, will just repeat itself forever. It just doesn’t do that.”
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