|
|
|
|
|
|
| ||||
Buying a home may be the dumbest thing y... Now you really can bank on the Interne... UNIT TRUSTS:Rand Merchant Bank Equit... How to remove the taxman's sting at the ... Moulding a winner from humble beginning... Use your rent money to keep the Receiver... Sales of personal finance software take ... Chequebook is passé in age of PC bankin... How to get a retirement annuity to work ... |
Buying a home may be the dumbest thing you'll ever do
The notion that residential property is a good investment is being challenged, reports TERRY BETTY
Residential property hasn't been a great investment, they say, and high bond repayments squeeze homeowners so tight they never get a chance to build a meaningful asset base for their retirement. The poor performance of residential property is highlighted by the case study of a homeowner who sold her Umhlanga townhouse last month for R400 000, having paid R132 000 for it eight years ago. Our homeowner was suitably impressed with her gain of R268 000 - until a closer study of the figures showed that it had actually been a lousy investment. She would have been better off investing in quality unit trusts and renting a home. Justin Hooper of financial consultancy Fincorp challenges the age-old adage that your house is the first and best investment you'll ever make. Absolute nonsense, he says. "At first glance it seems like the Umhlanga homeowner has done really well, but when you deduct the maintenance and improvement costs, transfer duties, legal fees, agents commission and the like, she earned only a 9% return over the period." The growth in value of the Umhlanga property, after taking costs into account, did not even keep pace with inflation of 11,15% over the period. And if the money had been kept in an average-performing general equity unit trust, it would have earned 18,5%. The Fleming Martin Investment Comparisons Survey shows that from 1976 to 1996 the JSE all-share index grew from a base of 100 to about 3 000, while the house price index grew from a base of 100 to only 600. The report states that since 1985 there has not been a year that property prices have increased meaningfully in real terms. This supports Hooper's view that "a home is not an investment, it is a utility which should be written off". Generally, the lower inflation falls, the more it makes sense to rent rather than buy, because inflation no longer artificially increases the property value. The shift towards renting is a growing international trend. A popular Australian personal finance newsletter recently reported: "Someone who is prepared to take a 20- to 25-year horizon from now has the option of renting a $200 000 home and investing the difference in the stock market - it's going to be the difference between them retiring with probably a million dollars versus half a million dollars." The immediate reaction of many people is that investing in a house, as opposed to the stock market, is a poor comparison because a home is a low-risk investment while stocks are risky. Today, however, property is riskier than it ever was: in fact, investing in a residential property is a far riskier proposition than putting your money into a general equity unit trust. As many Sandton ratepayers know, local government taxes can be increased by a few hundred percent in a single year. Your neighbours could get rights for an office development, a highway could be built nearby and, as people living near the concrete highway in Johannesburg have discovered, this drastically reduces one's property value. And then there's the risk of low- cost housing developments being erected nearby. Investing in residential property, says Hooper, is one of the main reasons why so many people end up in a financially strapped retirement: "The first thing young couples do is buy a home with a large bond which financially throttles them for decades of their working years, and they lose out on saving enough for a comfortable retirement. If they'd concentrated on investing in equities earlier and lived in a rented property, they'd be far better off at the end of the day as they will have built an asset base." Hooper agrees that owning one's own home fulfils an important emotional need, but says this can be satisfied far more cheaply. "What any landlord wants is a good tenant, even if it means renting the place for a slightly lesser amount. And if you want to do improvements or plant a tree, you can probably negotiate something with the landlord." Derek Sumption of Brantam Financial Services says many people are under the illusion that buying a large home is the same as building up a wealth base, and that at retirement they can sell their large home for a fortune, buy a smaller place and live off the rest of the money. "But it doesn't work that way. Townhouses and clusters have become so expensive that there's little capital left to invest." While property as a whole hasn't performed well, there's still money to be made if you buy in more up-market areas and your market timing is right.
|