Does the saying “safe as houses” still ring true? Given recent interest rate hikes, property price growth that has hardly kept pace with inflation across most provinces and ever-higher municipal rates and other running costs, the rent-or-buy debate is still relevant. The FM has asked two property experts for their thoughts.
It just isn’t that simple
John Loos, independent economist
You can’t make blanket assumptions regarding which option is more financially beneficial. Renting and buying both exist precisely because the choice makes sense to different people at different times. At times, the total financial return on owning a home — income return plus capital growth — will exceed the cost of mortgage borrowing, and so make financial sense.
This was probably the case for many homeowners who bought homes early in the property bubble of 2000–2008, when capital growth rocketed. This was less true for those buying homes in the last stages of that bubble when real (inflation-adjusted) prices had become extremely high by South African standards.
Likewise, the total return on Western Cape homes has likely been good for many; this has not been the reality for homeowners in the mediocre markets in much of the rest of the country. However, mounting unaffordability in many parts of the Western Cape suggests that its capital growth outperformance will end at some point. And so housing markets move in cycles.
But even when the asset class doesn’t perform well — and some financial experts do financial calculations to say you’d be better off renting and investing the money that you save on transaction costs and bond repayment costs in equities, for instance — buying a house can still be a useful financial investment.
The reason is that buying a house and committing contractually to pay off a home loan and other home-related costs impose a financial discipline on a homeowner that may not be there if they were a tenant. I have never met a person who rents and does a monthly calculation on what they’re saving by not having bought a house, then diligently puts that difference into an investment. Very often, I suspect, the savings would be spent on consumer goods and services with zero financial return.
By comparison, the homeowner who has paid off the mortgage debt has an asset worth a significant amount of money in many instances, even if the capital appreciation hasn’t been that good.
Therefore, even in cases where the rental option may theoretically save a person money, it may only leave them better off if they have the discipline to put that savings into investments.
But there is a lot more to think about. It is always difficult to time the cycles right, not only because forecasting is a hazardous business, but also because for most of us home-buying decisions are more about our life circumstances and needs at a specific point.
For some, either in the early stages of their careers or doing work which requires a high degree of mobility and flexibility, buying a home with its huge related costs might make little sense, because buying and selling homes frequently would be extremely costly. The higher flexibility that the rental option brings suits such people.
On the other hand, homeownership has the benefit of stability. For a person or couple starting a family and planning to settle down somewhere for the long term, homeownership means they get to determine their own date of departure as opposed to a landlord determining it for them.
Therefore, when doing cost estimates, you should bear in mind that the rental option could carry more frequent and unexpected relocation costs than long-term homeownership.
In addition, renting usually means that the occupants cannot make additions, alterations and upgrades to suit their needs and desires.
Life stage/circumstances are thus important considerations in the buy vs rent decision.
Lastly, people should be aware of the costs involved in either.
When buying, the myriad transaction costs need to be understood. Then there are the monthly municipal rates, utilities and levies.
Many of these costs — notably electricity, water and municipal rates — are escalating at rates well above general inflation, so it’s probably wise to plan around a few steep inflation assumptions in these items.
And given the unpredictable nature of interest rates over the many years that loans run, some “what if” scenario planning there may be wise too.
Finally, insurance and maintenance costs need to be understood; full-title ownership perhaps being more challenging to estimate than sectional-title levy-driven maintenance services.
When renting trumps buying
Jonathan Kohler, CEO of Landsdowne Properties
For years, people have asked me how someone who makes a living in property could choose to rent rather than own a home. My answer has always been simple: just because you can afford to buy a property doesn’t mean it’s a good financial decision.
I rented in Joburg for years because the numbers made sense. I’ve recently decided to buy, but that hasn’t changed my view that renting can often be the better financial option, particularly if you’re disciplined about investing what you save.
The rent vs buy debate depends on what you’re buying, where you’re buying, the cost of renting something comparable and the prospects for capital appreciation.
Take a R6m home in Bryanston. You could potentially rent it for R30,000 a month. Buy it with a 100% bond over 20 years at a current interest rate of 10.75%, and your repayment would be about R61,000, excluding rates, levies, maintenance and insurance.
That’s more than R30,000 every month you could invest elsewhere.
Put R30,000 monthly into an ETF that provides exposure to major US companies and an assumed annual return of 8% in rand would grow your investment to about R5.5m over 10 years, before tax and fees. You would have contributed R3.6m and earned around R1.9m in investment growth.
Of course, property owners build equity as they repay their bonds, while renters face annual increases. Investment returns aren’t guaranteed either. But the opportunity cost of ownership, particularly where property prices are barely moving, deserves serious consideration.
I believe this argument is becoming increasingly relevant in parts of Cape Town, where property prices have risen substantially.
Consider a two-bedroom Sea Point apartment selling for R8m. You might rent something comparable for R35,000–R40,000 monthly, representing a gross rental yield of 5.25%–6%.
Finance that purchase over 20 years at 10.75%, and the bond repayment alone would be around R81,000 a month. With the added levies, rates and maintenance, ownership becomes considerably more expensive.
When you rent the same apartment for R40,000 and invest R40,000 of the monthly saving at an assumed annual return of 8% in rand, you could accumulate about R7.3m over 10 years, before tax and fees.
I’m also cautious about valuations in certain Cape Town markets. In developments we manage around Somerset West, Gordon’s Bay and other outlying areas, rental demand is softening. Properties that previously let almost immediately are taking longer to find tenants.
As landlords compete for tenants, achievable rentals come under pressure, potentially affecting what investors are prepared to pay. My concern is that this could gradually extend towards the City Bowl and parts of the Atlantic Seaboard, although established coastal markets may prove more resilient.
At the lower end of the market, however, buying can make sense. A R700,000 apartment might rent for R6,800 monthly, against a bond repayment of about R7,100. Ownership costs more once rates and levies are included, but you’re gradually building equity. For a first-time buyer intending to stay several years, that’s worth considering.
So why have I recently bought?
Because I believe Joburg’s residential property market is beginning to turn. Across our business, we’re seeing stronger buyer interest, increased activity and better prices in certain developments.
Years of weak capital growth and negative sentiment around municipal services and infrastructure have weighed on valuations. I believe much of that pessimism is already reflected in prices, while even modest improvements in service delivery and confidence could support meaningful capital appreciation.
My purchase reflects that particular opportunity, rather than a fundamental change in how I view property investment.
Ultimately, the value of a home should be measured against what it costs to own, what it would cost to rent and what your money could earn elsewhere.
For me, renting was the smarter financial decision for many years. Buying now reflects a change in market conditions, not a change in principle. The best investment decision is the one supported by the numbers, even when that means choosing not to own the property you call home.
