IS IT BETTER TO RENT OR BUY?

26 May 2009

Piet van der Walt - Managing director of Sanlam Home Solutions shares his views on buying versus renting property.

The recent turmoil in housing markets worldwide coupled with increasing mortgage stress locally has many potential home owners wondering whether to buy or rent?
This debate is not something new and while there are definite long-term advantages of owning your own home, not everything is a bed of roses.
A major determinant is affordability. For first time buyers, access to credit has become almost impossible without having saved up to 20% of the value of the home you want to buy.
Other factors that may to a large extent play a role in the decision to buy or rent would be the individual's credit profile and increasing uncertainty over employment.
Any potential home buyer needs access to a professional financial adviser or broker who can do comprehensive financial needs analyses in respect of their current and future financial needs.
What is crucial in rethinking the buy decision is that you cannot take a short-term view when investing in residential property. On the other hand you should not even consider the option of buying when your debt ratio is not within norms.

Buying a home
Pros
Building equity and personal wealth
Good performing long-term asset type from investment perspective
Sense of belonging to community, stability and security
Credit profile - improve ability to access funding as track record of repayment of loan will benefit individual
Free to within building regulations change décor and landscaping etc
Not dependent on landlord to maintain property - own responsibility
Best tax-free saving if additional payments are made into loan account
Respect and recognition from society - human needs hierarchy
Property can serve as security for other lending purposes e.g. starting own business
Inheritance value to family members
Paid equity and appreciation in value

Cons
Not very liquid asset - especially when economy is down and the owner wants to sell quickly
Cost of ownership - rates and taxes, insurance, maintenance, improvements, security etc
Responsible for maintenance and tenure
Possibility of loss of equity and foreclosure - risk in economic recession etc
Less mobility than renting - time to find buyer linked to state of industry/economy
2nd or investment properties can become cost burden in economic downswings and can lead to financial ruin in extreme cases
Cost of life and disability cover required to pay outstanding bond in case of death/disability
Location most important factor when investing in residential property
Thorough planning needed before investment decision taken - location, location, location.
Huge responsibility and possibly some sacrifice initially
Liquidity and cash-flow considerations to be taken into account

Renting a home
Pros
Flexibility to move in times of uncertainty - e.g. job instability or security or possible transfers/relocations due to nature of work/profession. Some rental contracts may however require a long notice period for cancellation.
Limited or no responsibility for maintenance of property
Insurance costs - only content - landlord responsible for home-owners' insurance cover.
Renting higher value property than what you will be able to afford when buying - market conditions determine
No property rates, taxes or levies payable - landlord responsible
No home-owner association costs
Other funds can be used for other investments - not tied up in equity in property and difficult to access
Potentially/initially cheaper to rent than to buy - installment vs. rent
When relocating create opportunity to study market and not take hasty investment decision
No interest-rate risk - market conditions/ increases
Good option if you don't expect to be in one place too long

Cons
Paying off landlord's debt on his behalf
Landlord reluctant to maintain property
No equity/wealth creation
Little control over rental escalations
No guarantee of tenure after contract expires.
No return on investment
Cannot offer as security for other lending purposes
Permission from landlord for any alterations/improvements etc
Rental increases annually normally linked to inflation - at one point cost to rent may break even and can even exceed cost of owning
Deposits required by landlord, local authority
Can get caught in so-called rental spiral - never become a home-owner

RESIDENTIAL PROPERTIES ERODING VALUE

Realestateweb Reporter
25 May 2009

House prices declined for the first time on a year-on-year basis since late 1986 and are expected to decline further - property analyst.

Nominal house prices declined for the first time on a year-on-year basis since late 1986 because of inflation trends, according to the Absa Q1 2009 house prices.
Jacques du Toit, senior property analyst at Absa Home Loans, says the average nominal price of affordable housing increased by 4.5% year-on-year in Q1 2009 compared with price growth of 5.9% in Q4 2008. In real terms, prices declined by 3.6% y/y in the first quarter of 2009.
DuToit says a further real decline in house prices is expected in 2009, based on projected consumer price inflation trends and declining prices. Levels of activity in all segments of the market are forecast to drop by 3% - 4% in nominal terms this year.
The South African economy contracted at a rate of 1.8% in the fourth quarter of 2008. In view of the contracting economy and many households still experiencing some financial strain, the residential property market is expected to remain depressed until late this year, says Du Toit.
The average nominal price of luxury properties valued at R3.1m and R11.5m increased by 4.5% in the first quarter of 2009 while in real terms, house prices in this segment dropped by 3.6% y/y in the first quarter.
Du Toit adds that prices in the luxury segment of the market performed better in recent quarters compared to the middle segment where prices are declining over a wide front in nominal terms. He says this may be the result of the upper end of the market being less affected by trends in economic factors including inflation, interest rates and employment.
Middle-segment house prices dropped by a nominal 0.3% y/y in the first quarter of 2009 after increasing marginally by 0.2% in Q4 2008. In real terms, prices dropped by 8.0% y/y in Q1 2009 from 9.2% in Q4 2008.
Affordable housing, normally priced at R430 000 or less recorded an increase in nominal terms of 4.5% y/y while in real terms, the average price of affordable housing declined by 3.6% compared to 4.1% decline in Q4 2008.
Nominal y/y house price growth was negative in five provinces, the Eastern Cape, Gauteng, KwaZulu-Natal, Mpumalanga and the Western Cape. In East London, prices increased by 3.0% and in the coast, house prices dropped by an average of 3.3% y/y in nominal terms. - news@realestateweb.co.za

TITO: BANKS UNDERMINE RATE CUTS

May 20 2009 22:25
Evan Pickworth
Midrand - South African Reserve Bank (SARB) Governor Tito Mboweni said on Wednesday evening that higher credit lending standards by commercial banks has the unfortunate effect of reducing the effectiveness of monetary policy initiatives taken by central banks to stimulate the economy.
However, he added that the behaviour of commercial banks is quite understandable, given the origins of the current economic situation.
"However, it also underlines the procyclical nature of their actions: banks are more keen to offer credit when times are good, but become somewhat reluctant to advance credit facilities during times of uncertainty and economic slowdown," he said.
Mboweni noted in a prepared speech that the BER/Ernst & Young Financial Services Index has also found evidence that domestic banks have also raised their lending standards and criteria.
"It also appears that domestic banks are charging higher spreads relative to prime than was previously the case," he added.
Elsewhere in the prepared speech he said that models are unable to predict reliably the exchange rate during periods of extremely volatile and unpredictable capital movements.
He said one of the assumptions in the April MPC meeting was that the real effective exchange rate is expected to depreciate by 4.25% in 2009 and to remain unchanged in 2010.
"The exchange rate is possibly one of the most difficult variables to estimate in the model and usually includes some sort of interest rate parity measure which allows for the domestic exchange rate to appreciate if the interest rate differential moves in its favour," he said.
He was speaking at the Sake24 economist of the year awards at the Theatre on the Track in Kyalami, just outside Johannesburg.
- I-Net Bridge

HOME LOANS DEPEND ON PRICES

May 20 2009 09:52
Elma Kloppers
Johannesburg - Capital for banks has become a scarce resource.
It has become increasingly expensive for banks to get capital to fund their asset books, especially those assets requiring long-term finance, such as mortgage loans.
This was the reaction on Monday by Gavin Opperman, Absa's group chief executive for securitised loans in the retail division, to the prevailing debate in which banks are being accused from every quarter of smothering the housing market with their lending criteria.
There are currently two issues being debated: banks' stricter lending criteria, in which prospective homebuyers are required to put down a deposit of 10% to 20%, and the interest rate at which banks are advancing money to clients.
Although the prime lending rate is currently 12%, this is not necessarily the rate that all clients pay. Historically some clients secured loans at rates of prime minus two, which no longer offered as an option.
Sean O'Sullivan, head of sales and marketing at First National Bank (FNB), says that in the current market of declining house prices, it is sensible to advance loans more conservatively.
As far as the stricter lending criteria are concerned, both reckon that this is not the time to relax them. "We are still applying a conservative lending strategy because of the falling house prices, but at the same time we are keeping a close eye on the market for any signs of improvement," notes O'Sullivan.
Opperman believes that since the residential market has not yet turned, banks are currently in no position to review their lending criteria.
"As soon as there are indications of improvement, we want to be in a position to review our lending policy and advance money more aggressively than currently."
- Sake24.com

HAVE RATES FALLEN BELOW YOUR FIXED BOND INTEREST RATE?

Denise Mhlanga
18 May 2009

Question
I have a home loan at Absa and I fixed the bond rate last year for ten years. Now the interest rate is already lower than my fixed rate. What do you suggest I do?
Answer
A fixed rate bond is a mortgage loan where the customer enters a contract with the bank to have their interest rate fixed for a predetermined period, said Luthando Vutula, managing executive of Absa home loans.
He said the customer has an option to fix the interest rate on the mortgage loan for a period of between one and ten years. A fixed rate cannot be adjusted if the term has not expired. The customer can request to terminate the fixed rate agreement and the bank has the discretion to approve or decline the request.
Vutula explained that the customer needs to understand that should the prime rate decline below the level of the fixed rate, they could be paying a higher bond repayment amount than the variable rate. Customers who find themselves in this situation may request the bank to consider allowing them to opt out of the fixed rate product. This decision is not automatically granted by the bank.
The fixed rate agreement is an excellent method of providing customers with certainty when the interest rate outlook looks uncertain and is likely to negatively impact on a customer's cash flow, he said.
Customers need to consider the term over which they wish to fix their interest rates carefully to provide them with sufficient protection through the interest rate cycle.
Furthermore, Vutula said if the customer's mortgage loan is based on a fixed interest rate, fluctuations in prime does not affect their monthly bond repayments. If the mortgage loan has a variable interest rate, the monthly repayment will move in the same direction as prime. This means that if the prime rate increases, the monthly repayment will also increase and vice versa.
He said in an upward interest rate cycle, customers are advised to consider a fixed interest rate to provide certainty on their monthly repayment particularly if they need to hedge against higher demands on their available cash flow.
In a case where the customer opts to remain with a variable interest rate, they need to monitor the monthly repayment for any changes (especially where prime has increased) to ensure they have sufficient funds in their transactional account (where a debit order payment is used) to accommodate the increased monthly instalment.