My previous article, ‘Debilitating Inflation’ in the July 2017 issue of ASA, was a warning not to assess growth in absolute rand terms but rather in percentage growth. Despite this, I found myself falling into this trap again.
We’ve acquired a couple of new neighbours in the last year and being the sociable street that we are, it’s public knowledge how much those houses were purchased for. Some of them being homes that required a substantial amount of renovation. I was quite astounded. Those selling prices are significantly more than what we paid for our home a mere five years ago. ‘Wow!’ I thought, ‘I’m sitting on a gold mine. I could sell my house for such a profit … But then the voice of reason kicks in (my husband). Taking out a calculator and working it out, our home has increased in value at an annual compounded rate of 9%. That’s beating inflation, great, but it’s not the most fantastic return. And I’ve been paying interest on top of my monthly instalments. Makes one consider whether buying is a better option than renting …
So I did a bit of investigating. The results were quite interesting and probably deserve a lengthy article, so here I’m just sharing some high-level considerations … but ultimately, the jury is still out on this one for me.
Some factual points are that my total instalments that I’ve paid equate to 50% of the purchase price. Yet, I’ve only paid off a fraction of that purchase price (interest again). When I add up the total amount I’ve spent on maintaining the home (yes, I keep detailed records, so I have this information), it’s a staggering number. Painting, sanding, varnishing, pool repairs, faulty lights, electric fence repairs, irrigation, the list goes on. These costs would not have been payable by me if I was renting.
And then there are rates and taxes, which just go up and up with each property valuation. Owning a home does not come cheaply.
Furthermore, the more I travel, the more I question the concept of owning your property. Partly, because I’ve realised it’s very much a South African thing (as is driving expensive cars). But, on the other end of the spectrum, houses are slightly more affordable in South Africa (comparatively speaking). Your bond repayments are variable to the interest rate, but barring that, they remain fairly stable over time. Rent, on the other hand, just goes up each year (by more than inflation).
As I said, I haven’t come to a conclusion on this one. Think it’s very dependent on your neighbourhood and family situation. But, it’s something worth considering.
I know a man, in his seventies, who has been renting property his entire life. Not because he couldn’t afford to buy a home, but because he chose not to. He’s a bachelor, so enjoyed being able to move every couple of years and explore a new neighbourhood. But most importantly, he made an active decision to save the differential between his rent payable and what he would have paid on bond instalments. Fast forward many years, he’s sitting with a healthy sum of money and is still never required to pay anything when the toilet breaks.
Gizelle Willows CA(SA) Senior Lecturer in Financial Reporting at the University of Cape Town