Change in CPI basket could boost buy-to-let market
News > news - 03 Dec 2008
A new measurement for living costs that starts in January could make South Africans “shed our obsession with house price and its delusions of wealth’” says Andrew Schaefer, MD of national property managers Trafalgar, in a company media release.

“Rents and yields could become more important than price,” he adds. “And that would be a healthy step forward in what could be the world’s fastest growing asset class – buy to let.”

Stats SA is dropping homeloan interest payments from its basket of goods making up cost price inflation (CPI) and replacing it with “Owners equivalent rent (OER).” Together with water, electricity, other service costs and repairs, OER will make up nearly 22% of CPI.

“Owners equivalent rent is the rent a homeowner is foregoing by living in his home and not letting it out to a tenant,” says Schaefer. “It will be created by measuring the rent paid by the quarter of SA households who rent rather than own their homes.

“This could have a big effect on inflation. For instance, rents are rising by around 10% a year. This could add 1% or more to CPI. That will get our attention and South Africa will start taking a closer look at rental income in property and what is happening to it.”

Schaefer says many property owners will realise that income is the dominant factor in property investment and wealth creation. “Recently risk managers Lightstone showed in a property annual that net income made up about 50% of the return on property investments in less than five years,” notes Schaefer. “And institutional investors with large property portfolios will tell you that income can make up 85% of the return on property over 15 or 20 years – far outweighing capital gain.

“The loss of that rental income to a homeowner doesn’t eliminate an investment contribution by his property. But it turns the home into a comfort or lifestyle purchase rather than a serious investment. OER will bring that point to the fore.”

He says an important lifestyle trend might also encourage some homeowners “at the margins” to rent their properties out and rent their homes. This increases the flexibility of both property investment and lifestyle. “For instance, you can rent a luxury home in Sandton or Cape Town CBD at half the cost of owning it and you can buy property in Johannesburg at twice the investment yield of Cape Town.”

He says greater awareness of the income factor in property could encourage more people to enter the buy-to-let market over the next decade. “This will continue to be the world’s fastest growing asset class, particularly so if investors concentrate on the compounding growth of their rentals and keep their property debt in control to ensure constant income.”
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