Recent articles by South African economists advising people to rent rather than to buy homes on the grounds that rents are still usually pitched well below what the bond repayment rate on the same home would be and capital appreciation on homes in the next few years will be slow, make little sense no matter how you juggle the figures. This was said recently by Mike van Alphen, National Manager for the Rawson Property Group’s bond originators, Rawson Finance.
“Quite apart from the fact that the figures of many commentators, when analysed, do not tie up with ours’,” said van Alphen, “what really matters is that in our experience people who commit themselves to cash savings rather than to bond payments often do not live up to their commitments.”
Looking at a typical case, van Alphen said that an individual renting a R800,000 home would probably pay R5,000 a month for it today. If he was buying the home on a 100% bond at prime over 20 years he would be paying in the region of R6,900 per month. If he then saved the difference between the rental amount and what he would be paying on the bond, at say R1,900 per month, it would mean he would be putting away R22,800 per annum, on which with a 5% per annum fixed deposit account would increase to roughly R300,000 over ten years. This in theory would put him in a position to put down a very substantial deposit on a new home. However, it has to be realized that the R800,000 home would probably cost him in the region R1,6 million after ten years and his deposit, therefore, would only be 18% of the total, leaving him to pay approximately R11,000 or R12,000 per month on his bond, i.e. almost double what he would have been paying previously.
“Admittedly our capital appreciation rate in this example is higher than the rate that the more pessimistic analysts would work on,” said van Alphen, “but the plain truth is that homes below R1 million will, in the next few years, see significant capital growth — it is, in fact, already evident.”
“Whichever way you look at it,” added van Alphen, “unless the person saving the money has access to fast appreciating shares or another source of quick revenue, he is going to lose out by delaying his decision to purchase a home. The old maxim remains: it pays to buy at almost any time in the market and the sooner you do so, the better off you will be in the end.”