Buying vs renting a home
House prices and interest rates have fallen to such a great extent, that the monthly cost of owning a home is now more affordable than at any point in the past 15 years and less expensive than renting in a number of South African suburbs, according to Auction Alliance CEO Rael Levitt.
Auction Alliance's third quarter analysis of housing market conditions in the country's three largest metropolitan areas found that home values declined in all markets, while residential rentals had risen across the country.
Interest rates, which are hovering at around 9%, are at their lowest levels in three decades, and as a result, monthly bond payments on median priced homes are becoming lower than the average rent levels in many middle income areas. "It does remain less expensive to rent than to buy in most popular suburbs, but we are reaching the stage that if a buyer has a 10% deposit, it is cheaper to buy than rent on properties under R750, 000".
However, affordability hasn't done much to lift the sagging housing sector because many would-be buyers are unwilling to purchase a home or unable to qualify for a bond.
"It's one of the most striking developments of the housing downturn. The initial building blocks for a recovery are in place, but the legacy of the recession is acutely preventing households from taking advantage,"“says Levitt.
In the East Rand of Johannesburg, which had the most favourable values for owning versus renting, the monthly payment on the average home was R1 800 assuming a 20% down payment during the third quarter. By contrast, the average asking rent stood at R2 000, according to Auction Alliance.
However, real estate agents and economists assert that the trend hasn't boosted demand, because affordability alone hasn't been enough to overcome the obstacles impeding the housing recovery. Some homeowners who would like to move up to larger properties are stuck because they can't sell their homes. Also, while the monthly carrying costs on a bond are lower than average rents in several suburbs, home ownership carries other costs which are increasing, a factor which may dissuade some potential owners.
Other would-be buyers can't qualify for mortgage bonds because lending conditions are tighter or because they don't have enough equity in their current homes to use as a deposit.
Levitt says the reality of coming up with a deposit and the loan-qualification standards, makes things difficult for many new home owners. "Even those who may qualify remain skittish about buying property in a market where prices could fall amid growing financial distress and weak employment growth."
Another reason why home ownership is also looking more affordable is, after several years of house price declines, rentals are growing as demand from entry level tenants increases in an under-housed South Africa. Suburbs where owning is now cheaper than renting include Kraaifontein, Kempton Park, Vereeniging, as well as the Johannesburg and Pretoria.
Even cities where it is still cheaper to rent than own have seen big boosts in property affordability. Due to a weak residential market and high building costs, the inventory of brand new homes on the market has fallen from levels seen three years ago, as prices and interest rates continue to decline. In Cape Town, the monthly cost of owning a home has averaged around 83% more than renting over the past two decades. During the third quarter of this year, owning was 22% more expensive than renting according to Levitt.
In 1997, a R3 000 mortgage bond payment allowed a borrower to take out a R200 000 mortgage. Today, it gets that home owner a R350 000 loan, a 77% increase in borrowing power, says Levitt. At the same time, low mortgage rates aren't spurring sales because few analysts expect rates to rise imminently. The Reserve Bank recently indicated that it would keep rates at low levels for the short term future. In a normal interest rate cycle, 'when they go low, they don't stay for very long, and people jump in. However, this time there is no urgency'.
According to property economist Erwin Rode, interest on a mortgage bond was about 20% in 1997, and by 2011, this had halved to 10%. Rode argues that at first blush this would have increased the borrower’s ‘borrowing power’ tremendously. However, he contends that with regard to new purchases, this is tragically not true, because the dramatic drop in interest rates was partially responsible for the even more spectacular rise in house prices.
A typical house, according to the Absa House Price Index, rose in value from about R200 000 in 1997 to about R1, 1 million in 2011 (an astonishing 12, 8% per annum). As a result, the instalment on a new purchase (assuming a 100% loan) increased from R3 400 in 1997, to about R10 600 per month in 2011. In sum, over this period, instalments on new purchases grew at a compound rate of 8, 5% per annum, compared with an inflation rate (CPI) of only 5, 8%. Rode argues that the difference of 2, 7% points is more or less equal to the posited rise in real incomes, which means that house owners do not necessarily find it more difficult to own a house now than 14 years ago.
Levitt maintains that affordability could continue to improve as prices slide even lower in coming months. “Further price declines are likely because the share of distressed sales tend to rise in the new year. Banks are often more eager to cut prices in an effort to unload properties quickly, which means that; the greater the share of distressed sales, the more prices tend to fall”.
Lower inventories at the bottom end of the market have spurred more bidding wars at recent auctions as investors compete for homes that they can convert into rentals. One hopeful sign is that houses on the market have fallen from their bloated levels of a year ago.
"A glance at the property pages sees homes currently listed for sale at prices substantially lower than a year ago, when markets were reeling with a substantial overhang of properties amid a big drop in demand, and visible inventory was down sharply in several markets", says Levitt.