It's heart versus head in the great rent or buy debate
The experts agree that stocks are a better investment than property, but emotions may sway the issue, writes LEIGH ROBERTS
TO BUY or to rent your home: it's an intensely personal decision, and one that must be made with one's eyes open. In February this year, BT Money fuelled a furore with a front-page story quoting the controversial view of two leading financial experts. They suggested it may be a better long-term investment option not to buy a home, but rather to rent one and invest the spare cash (which you get from not paying off a high-interest mortgage bond) in the stock market.
Their argument was that come retirement, you'll be a few million rands richer than if you had followed the traditional path set by our parents and invested most of your money in residential property - your home.
The media debate that followed our story was taken one step further on Thursday night in a Sandton hotel, when two prominent financial advisers pitted their wits (and the prowess of their research teams) against each other in attacking the issue.
Justin Hooper, managing director of Fincorp - armed to the hilt with graphs, facts and figures - firmly stood by his view that renting and investing in the stock market was a better investment option.
Magnus Heystek, columnist and managing director of Magnus Heystek Investments, took the opposing view that it was still best to buy a house.
A lively battle ensued as barbed remarks hit home and were returned with equal vigour - all to the amusement of the 200-odd audience, which comprised vested interest groups (estate agents were out in full force), and enquiring investors, some of whom seemed to be lost in the sophistication of the argument.
Hooper's presentation was based on a masterpiece table of figures, which showed that over 20 years (using certain assumptions), a person can retire R2-million richer than had he or she invested in a home.
Hooper's assumptions were based on the historical returns of the different asset classes, namely that residential property has produced negative real capital returns in the past, and is likely to continue to devalue at 3% a year. Equity returns have beaten all other asset types in the past and will continue to gain 14% a year. As to the real cost of lending (the mortgage bond rate less inflation), Hooper assumed this to be higher than in the past, at 7%.
The crux of Hooper's argument lay in his round-up comments: "I'm not saying sell your house.
"I'm saying there is an emotional side in buying property. And each of us has to consider whether we can afford the long-term cost of making this emotional decision - given that the stock market is likely to deliver better future returns.
"My advice is that you have to diversify among asset classes.
"If your property is more than 40% of your total assets then you cannot afford to own your own house."
Much of Heystek's argument centred on the "flesh and blood issues" of human behaviour. He actually agreed that if you rent and invest your spare cash in the stock market for over 20 years, you will be financially independent one day.
Humans, however, want to own their homes and all decisions cannot be taken "like an accountant" on facts alone.
Heystek also spoke of the behavioural patterns of investors running scared in a bear market, and of their not being disciplined enough to stop themselves withdrawing their funds.
The other main angle of Heystek's argument rested on property returns. He produced figures showing that over the last 20 years, property had indeed rendered a real total return (both capital and income) - and was likely to produce good total returns in the future.
In his round-up, Heystek said: "I think property ownership is part of what you get out of life. You can get great returns from property if you know what you are doing - and there are better times to buy than others. My advice to young couples is to go out and buy now - this is probably the last window of opportunity."
The questions from the floor were limited to a few specific issues. The first hurdle to clear was the use of average figures. Both presentations relied on average house price figures based on available indices (which exclude above-average investment opportunities). And Heystek's future expectations for property are based on an optimistic economic outlook.
Several questions centred on Hooper's assumption that it's cheaper to rent rather than buy a home (these from the estate agent contingent). Hooper's reply was that he had assumed an average rental across all properties of 9% of the capital value.
On the inevitable issue of gearing - that it's easy to get a bank loan to buy property - Hooper replied that an investor could similarly use derivatives to gear equity investments.
With subsidised housing loans, Hooper agreed that as they lowered the cost of lending, they did affect his calculations.
The sensitivity of the property and stock markets to a downturn in interest rates was considered in a bid to determine future performance. Both men agreed the equity market was likely to benefit more than property.
But then there's the unanswerable issue of the long-term stability of South Africa.
ý The top graph is a comparison of capital values; income is ignored. Top of page