Debunking the advantages of residential rental

Taking issue with residential property economists who have been advocating renting rather than buying, is Michael Bauer, general manager of IHFM, a property management company.

The main proposition supporting the rental view is because residential property may lose value “in real terms” in the next 18 to 24 months.

“These economists tend,” said Bauer, “to forget three fundamental things.  The first is that short-term price fluctuations generally do not matter in property because property investments are medium to long-term and current prices are at an all-time low.  The motto “buy low to sell high” is absolutely relevant now.

“The second fact overlooked is that interest rates, now at an all-time low, will not stay at these levels for ever, and a buyer has today the option to fix the interest rate for 12, 18, 24, 36 or 48 months at very low levels.  There is a real risk that a loan negotiated in 2013 might be at a 1 to 1,5% higher rate than one secured now.

“And, thirdly, experience has shown that, although there is some logic in the concept of renting now so as to save for a big deposit later, this is very seldom done by tenants.  All too often those who rent use up all their spare cash to finance their high-flying lifestyles and save little or nothing – whereas the obligation to pay off a bond, with severe penalties incurred for late or missed bond repayments, almost always results in the bond payer exercising restraint, budgeting and disciplining his monthly outlays.”

Worldwide, but especially in Germany, says Bauer, it has been found that those who have not owned or paid off their homes by the time they retire or can no longer work tend to end up paying 50 to 70% of their pensions for rent.

“Rent, even in bad times, will almost always rise year by year whereas pensions move up very slowly, if at all.  If you wish to avoid hardship in your old age and to have an asset you can pass on to your children, plan now to own and pay off for your home before or by the time you retire.”
Bauer added that right now is a good time to apply for a home loan because the banks’ appetite for lending has increased in line with their greatly improved skills in assessing a creditor’s financial position and credit records.

“This, of course, means that those with a poor payment history should very definitely put matters right before applying for a home loan – but if their financial and job positions are sound, they now stand a better chance of being successful.”

A majority of today’s new homeowners, said Bauer, are targeting the R400 000 to R700 000 market and this, he says, is also the sector in which capital growth is fastest with the price escalation exceeding inflation.
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