Buy or rent? The answer depends on your own situation, as well as on factors like the state of the South African property market and the economy.
However, there are some steps you can take to help you make an objective decision.
Opportunity costs and gains
Conventional wisdom suggests that buying a property is a better long-term investment than renting, but this isn’t always the case.
In a 2015 study, for example, the Reserve Bank of Australia noted that since 1955, “there hasn’t been much difference between renting and buying.” The study stated that, “Despite the constant news of property booms and million-dollar sales in suburbs not known for being expensive, owners and renters over the last 60 years ended up in roughly the same place”.
What does this mean for South Africans? Let’s explore the pros and cons.
Buying – is it a sound long-term investment?
Many people see rent money as lost money, and would prefer to buy a home instead of paying off someone else’s bond.
However, the amount paid on a bond over time generally far exceeds the original value of a home. The longer the loan period, the more you’ll pay the bank.
According to Moneyweb’s research, since the 1960s, the average annual house price growth after inflation has been around 0.9%.
In contrast, the JSE All Share Index (Alsi) has produced a real return (calculated for inflation) of 11% per annum over the last 30 years, and up to 15% return over the last 10 years.
That means that investing in shares could provide better returns over the long term than investing in a property.
Advantages of owning a home
Does this mean that you should forget the white, picket-fence ideal so coveted by the middle class? Not necessarily; buying has pros too, not least of which is leverage.
Owning and paying the mortgage on a home can boost your credit rating and give you the means to borrow more money if necessary. Also, if you borrow money to renovate, you could potentially increase the value of your home by more than the loan amount.
Owning your own home also provides security against being made to move house when doing so won’t suit you or your family.
Example calculation: the real cost of buying a property
As an example, we’ll calculate the cost of buying a R2 million property currently on sale in Cape Town versus renting a similar property.
Using a rent-or buy-calculator, and based on current prices and a bond repayment period of 20 years at a 10% interest rate, here’s what buying the property will cost you.
Initial deposit (of 23%)
Standard conveyancing fee
Home loan registration costs
Total initial cost
Monthly loan repayments
Total loan repayment (20 years)
R3 566 720
Total cost over 20 years
R 4 234 811
If you divide the total cost by 240 months, the cost per month is R17 645.
These calculations exclude homeowners’ running costs, such as maintenance, insurance, municipal rates and levies. So the actual monthly cost of living in this home is higher than shown.
The value of renting
Renting a house can give you more disposable income in the short-term. However, if that’s to work for you in the long term, you’ll need to save or invest the extra income rather than spending it (easier said than done!).
Renting: calculating possible cost savings
The best way to assess the long-term investment value of renting versus buying is to compare the total amount you spend on owning a home with the cost of renting over the same period.
In the calculation above, the total cost of buying a property sold at R2 million is R17 645 per month, over 20 years (excluding homeowner rates and running costs).
To calculate the cost of renting a comparable property, calculate the advertised monthly rental over the same period. Remember to account for inflation when working out likely future rental costs (you’ll have to pay more in rent ten years from now than you do today).
Once you’ve done this, you can compare the estimated costs of buying and renting.
Estimating financial benefits
If there are cost savings, the next step is to determine the potential or likely earnings on a 20-year investment, in shares for example.
Once you’ve estimated the return, you can make a reasonably objective decision – or at least an informed guess – about whether buying or renting is the best long-term investment.
So, what’s the final score?
Both buying and renting have pros and cons. Research and careful calculations are the best way to ensure you make the right decision for you and your family. In the property game, wisdom comes to those who do the sums.
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