Last year out of curiousity and frustration that we
were being told that the average SA property was
R750,000 I added the average houseprice of the midweek
Cape Times property supplement - the average price
available to Capetonians looking for a house was R2.2
million. The average house price in the UK at that
time was R2m - DON'T tell me SA property is cheap. The
salaries and rents here are at least 3 times lower yet
the house prices being advertised are more ... In the
first section of the Weekend Argus property supplement
the average price was even higher at R3.2m OUCH
...
have a nice 2 bedroom duplex in the city bowl, nice
view, security complex. The rent is by no means cheap
- more than a secretary's salary. Yet when I go over
the numbers I would still be a fool to buy.
Lets say I want to stay here for 3 years. What is the
difference if I rent for 3 years or if I buy the house
now and then sell in 3 years.
Well, at present interest rates at a full bond, and
assuming I sold for the same price as I bought, I
would need 11.5 years rent to cover the interest
payment, and 7 years rent to cover the buying and
selling costs. So If I rent I lose 3 years rent, but
if I buy I lose the equivalent of 18.5 years rent -
well that is a no brainer. Ahh, they all cry, the
price will go up. Well lets assume that even though
the prices in Capetown have gone up between 300 and
900% in the last 10 years, these crazy increases will
keep on happening - the house will still have to go up
more than 50% over those 3 years before it becomes
cheaper to buy than to rent. More realistically, the
selling price will drop. If the price is 10% lower
then my 3 years "investment" loses me the equivalent
of 22 years rent, at a 20% drop I lose 25 years rent,
and a 30% crash will lose me 28 years rent.
Wow, this is a toughie - so lets see, I can live here
for 3 years and pay 3 years rent or I can buy and risk
having to end up paying as much as 28 years rent for
exactly the same thing in the hope that the price
increases more than 50 % and I can make a capital
profit.
...
Here's another interesting situation involving the
'foreign investors' - lets say you bought a cape town
flat for R2m last year - your brought over R1.34 m to
cover a 50% deposit and enough to pay the purchase
costs and the 1st years interest on a local bond. The
pound exchange rate is 10.5.
You now decide to sell. You pay selling costs, 5%
foreigners tax, the balence outstanding and then send
the rest home to the UK at 14 to the pound exchange
rate. If you manage to sell at the same price you
bought, your "investment" has lost you R1.1m. OUCH
again. Wait another year and if we get a 30% drop in
price then your losses are now in the R1.7m area if
the exchange rate stays the same.
Alternatively, the investors could have rented the
exact same house and put their deposit in a UK bank at
6 % - the interest would cover the rent and there
would be R50000 left over for spending money - now
that sounds like a better idea than losing a million
or two by buying the exact same property.
If only the rest of my life was as easy as coming up with this entry.
Thanks CJ!
7 comments:
What I would like to see is the monthly price changes in different price brackets. If a house in Mitchels Plain goes from 100,000 to 150,000 that doesn't mean that a home in Camps Bay will go from 6m to 9 m.
Give me the price movements of the homes in the R1m to R3m range and that will give me a better picture of what's really going on in the middle class housing market. My suspicion is that this market is already in negative figures. Anyone know if these figures are out there ?
See this at Moneyweb from the FNB Property Barometer-
"Premium properties, valued at more than R900 000 and less than R2,5m achieved the lowest price growth. Pretoria recorded year-on-year growth of 7%, while prices of luxury homes in Cape Town and Durban grew 4% y/y."
That means in real terms your "middle class" Cape Town properties have dropped 2 %. Add 20% buying / selling costs and 10 % interest on a full bond and your R2m 'investment' from last year would have so far lost you 26% ignoring inflation or 32% in real terms. That would be a useful 10 years rent !
Ok, so the average residential property is supposededly R750 000. This is the average of sold property as far as I know and not advertised. Anyway, lets look at the maths. Im copy/pasting Absa's homeloan calulator "How much have I paid off". Assuming the purchase price is R750000 and purchase costs is 8%. Interest rate at 13% (lets be realistic and take further possible hikes in consideration).
I would like to repay my home loan over 20 years
Required home loan amount R810 000
Purchase price R750000
Interest rate 13%
Show me the balance on my home loan after 3 years
Monthly instalment R9489.76
Total repayments to be made over
the lifetime of your home loan R2 277 543.18
Total interest paid over
the lifetime of your home loan R1 467 543.18
Balance outstanding after 3 years is R778733.86
Total interest paid after 3 years is R310 365.34
Total capital paid after 3 years is R31 266.14
Total payments made after 3 years
is R341 631.36
Ok, so we bought an average house/flat for R750 000, the total loans was about R810 000, assuming we were a first time buyer and received a lovely 108% loan. We paid a whopping R341 000 over the first three years in monthly installments. Lets add rates and taxes, a conservative R750pm. Thats another R27 000. After three years we havent even paid the purchase cost of. After three years we still owe the bank more than what we bought the property for. Of the R341 000 that we paid after 3 years + R27 000 (R368 000), a staggaring R31 266.14 of the capital has been paid off.
Now lets go rent that same place at R4500x36=R162000. So we lost R162000. We take the difference (9500+750 - 4500) and put that part (R5750) away over 3 years at a miserable 5%, we will have R222831.68 at the end of the 3 year period.
So what is the point? If we decide to imigrate in 2009 when the new president is elected, we will go to Australia with R223000 if we rent. If we buy we will have to sell the same 70m2 3bed unit for R1 001 000 (R780 000 + R223 000) to go to Australia with the same amount of startup funds. So if we buy today, we need a 10% y/y growth over the 3 years to equal out. With the current 4% and current situation that looks very unlikely.
Nice number crunching Nortic – however you forgot about deducting the 8% selling fees the agents are going to take at the end (plus of course there are other home ownership costs like house insurance and maintenance, but lets ignore those so that we don’t complicate things too much).
In your scenario (but with the estate agents 8% now included) you are basically saying if you have R10,250 available each month for accommodation, then this is what the possible outcomes are after 3 years --
You can rent, which will enable you to walk away with R223000 still left in your pocket
Or you can buy and if you can sell at a 40 % increase you also will have R223000 left in your pocket.
More realistically, in these bubble trouble times, if you are lucky, you will sell at the same price you purchased for, in which case you end up with nothing in your pocket and a further R 116,000 in additional debts to pay
If you sell at a 10% lower price your debts increase to R185000
At 20 % lower the debts are R254000
At 30% lower the debts are R325000 ( of course by this time you are feeling rather silly because Mr Renter is a cool half a million rand richer than you ).
The scary thing is, the figures you used are actually very conservative and a bit unrealistic. Where I live in the City bowl you sure ain’t going to find a 3 bedroomed house for R750,000. My place costs almost 3 times that yet the rent is still only R4500. This alters your maths substantially. Firstly the rates are going to be at least double, furthermore at this price bracket the buying costs will be more like 12 % than 8 % and then finally, the savings made per month by renting rather than buying are going to be more in the R19000 region rather than your R5750.
It is too late at night to do the exact maths but using these more realistic figures in a 30% crash scenario I roughly calculate Mr Renter now heads off to Aussie around R1.5 richer than Mr House Buyer. As I said before … OUCH
While I will admit that currently renting is financially more sound than buying, I must also say that your calculations are fundamentally flawed and irrelevant.
Firstly, selling a residential property three years after aquiring it, will almost always result in losses. The latest boom times resulted in many people managing to make money this way, but it is certainly not a sustainable strategy. Some investments are inherently longer term vehicles and in this case, basing you calculations on a three year horizon is not suitable.
Secondly, I constantly see people adding and subtracting nominal cash flows at different dates. You can't add 28 years' rent at today's rates and then claim that you lost or made this amount of money. It is meaningless. It is exactly the same when calculating bond repayments and interest payments. You have to discount all your cash flows back to the same date and then compare like with like.
Basically, while applying more sound mathematical practises won't change the fact that right now investing in residential property requires substantial knowledge and care, and is in most cases ill-advised, your calculations exaggerate the situation.
Please illustrate these "more sound mathematical practises"
Engineer – in my situation I anticipate not being in my house longer than 3 years – people ask me why don’t I buy, this is what triggered this number crunching. 3 years is not bad compared to one house up the road that has been bought and sold 4 times in 18 months. Such is the craziness when ‘bubble mania’ abounds.
I don’t quite see your problem with the rents. I used the average rent over 3 years assuming a 10 % increase every year. If I move after 3 years and I have been renting I have lost 3 years average rent – at an average rent of R5500 a month that is R66000 a year or 198000 over 3 years.
If I had bought and then sold 3 years later and subtracted all my costs (buying fees, selling fees, interest payments, rates, bond repayment and capital losses) from my selling price and found out that I was R1.5m poorer than I was at the start, then divided that by the average rent I paid of 66000 a year and said it is the equivalent of 23 years of the average rent I have been paying, this I think is a perfectly valid and accurate way of illustrating the craziness of this present market place.
We could just as easily do the calculations over 6 years – lets assume that the crash has happened and that prices have crawled back up and we finally manage to sell at the same price that we originally purchased the property for. If the average interest rates remain the same as they are now (unlikely) and I work out the average years rent over 6 years (10% annual increase) then we still face losing something like 20 years average rent if I buy, compared to 6 years if I rent.
I agree, if you are feeling brave and can keep your buying and selling costs down, there are still areas playing catch up where there appear to have been decent price rises in recent months – but I suspect when the general market goes over the precipice they also will be nose diving with the best of them.
There is very convincing evidence that the US and UK will crash 40 % in the next few years. It is interesting to see that the UK financial regulation body has recently instructed UK banks to assess whether they could handle a 40% house price crash. These are strange times but then the international property bubble we have seen in the last 6 years has also never happened before. If the US and UK dive then I would be very surprised if it didn’t happen here.
I can simply see no reason to buy when it is far cheaper and a lot less risky to rent. Only if prices drop 40 to 50% would it be feasible to start considering the buying option again. That won’t happen, people say – why not - if a house can go up 900% in ten years when inflation is 100%, why can’t prices fall 50%. The only alternative to not falling is for the price to remain the same for 12 years whilst inflation plays catch up – I myself can’t see this happening but if it did, my calculations show that it would still be far cheaper to rent.
I was glad to see “Rich Dad, Poor Dad” was finally out of the local best seller charts for the first time this week – I believe the book is partly responsible for this present bubble mania where people think you just have to buy a house or two and you will get rich. Robert Kiyosaki was out in South Africa recently and it was refreshing to hear him admit that he would have been out of the South African housing market 2 or 3 years ago. So there you have it – Rich Dad has spoken – the property party is over folks – anyone got a good hangover cure ?
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