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It’s always a good time to buy

“90% Of all millionaires become so by owning real estate”, the words of Andrew Carnegie, at the time one of the richest people in the world. Even when acknowledging that the credit crunch and other factors have made home ownership more challenging, the gist of this quote is still true. Property ownership is crucial for creating wealth.

The only problem these days is the global economic crisis which does make one beg the question: is it a good idea to buy property now?

The media is inundated with comments by economists, analysts and property experts giving excellent advice to investors. Erwin Rode of Rode and Associates advises consumers to rent instead of buy, correctly indicating that over the next few years that might be the cheaper option; arguing that the mortgage payment will be higher than the rental paid. Other arguments show that better returns are available in property funds and such like.

Investors therefore should think twice; buying a second home to let might only be a better option down the line. To the bulk of South Africans who have historically been very proud to own their own homes, I don’t think this applies.

Owning property over the medium and long term always has been, and currently still is, one of the few, if not only, means through which wealth can be accumulated by the general public.  If you opt to rent for now you may save some money. However, most consumers will very rarely manage to save for a future investment and same will probably go towards debt reduction or to the accumulation of consumer items. 

Normal homeowners look for several things: their own home to which they can make improvements and which they know will create long term wealth.
Stability in terms of not having to move around. Psychologists rate the psychological impact of relocating just below divorce and death. It’s also expensive to move with removal costs adding up.

The average consumer rarely spends the time, and normally doesn’t have the acumen, to monitor the market regularly so as to be fully aware of when the next boom starts – which is inevitable.  Should they now go for the rental option and miss the boat the consequences could be dire.  Many stories can be told in this regard from previous upswings.

The advice from the experts is even more problematic for current homeowners. The normal reasons to move apply – transfers, promotions, divorce, deaths, etc.  This does not present a problem because while the market is rather subdued and you sell for less you of course buy for less.  Should you wait to get more for your property of course you will pay more.

Should current homeowners in this position take the advice of Erwin Rode and his colleagues they would now rent in the interim, face all the normal consequences and go through all the turmoil again in a couple of years when they buy again, hoping to catch the upswing from the start.

One must also not forget that most of the mortgage repayments over the first five years go towards interest; only after that period does capital reduction really apply.  Homeowners will therefore eventually start paying off their mortgages whereas tenants waiting for an opportunity to buy always start anew.

According to the theory proposed by Rode the following will happen: prospective buyers will rent instead of buy, rental prices will go up and property prices will go down – equilibrium will be restored. Unfortunately this works in laboratories, not in real life.  Ultimately Mark Twain gave the best advice: “Buy land, they’re not making it anymore.”


 


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