Great opportunity for tenants to buy property
By Andró Griessel
18 July 2020
The prime lending rate has been reduced to 7.25% on 22 May – the lowest it’s been in 50 years! This has been done in an effort to uphold an economy, which is hanging by a thread like a beat-up boxer, to prevent it from collapsing.
The significant reductions in interest rates over the past two years are a worldwide phenomenon that has been the tailwinds of a variety of asset classes. However, if we look at the performance of South African residential property over the past decade, the impact of this is not clear.
By making use of the analysis program, Lightstone, I have had a look at the performance of some of the bigger towns and cities (total of 34) in South Africa over the past decade. As with any set of data, more than one conclusion can be made by looking at the same information. Therefore, please take my conclusions with your own pinch of salt.
My observations: (2010 to 2020):
If we take into account that the prime lending rate was 10% in 2010 and that inflation (therefore also the average salary increase) has been roughly 5.16% per annum since 2010, someone who could afford to pay R20 000 per month mortgage payment, would have been able to apply for a mortgage of R2 072 492 in 2010.
That same person, given inflationary salary increases and the decrease in interest rates, would now be able to afford a mortgage of R4 185 063. This represents a total increase of 102% compared to the 71% by which the median price has increased. It suggests that the “average” person’s property has declined by roughly 30% in real terms.
At first glance this all looks very simple, but these investors should remember that a) for a long period of time, the rental income only covers the interest component of the bond repayment and not so much the capital component and b) in the absence of capital growth, the real value added using this strategy is questionably low over the longer term.
I have seen this approach go wrong when the location in which the property is situated is deteriorating, which leads to capital losses.
Where to from here for property?
What this will most probably lead to is that most tenants will become homeowners since the amount that they pay as rent is now close to the amount they will be paying towards their mortgage for the same property.
Andró Griessel is a certified financial planner and director of ProVérte Wealth and Risk Management. Contact him at firstname.lastname@example.org.
Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.
True to company culture, Samuel strives to build solid long term relationships with clients and has a meticulous way of identifying needs, defining goals and compiling an executable plan to reach one's goals. He firmly believes that one has to be a specialist in one's field to be able to add value, and continuous training & education is therefore paramount. To be objective and to have an independent approach to a client's planning is critical to make a difference.
Born & bred on a farm in the Montague region, Samuel matriculated in 2001 from Montague High School. He completed his BComm Honours degree in Business Management as well as his Postgraduate & Advanced Diploma in Financial Planning. Samuel is a CFP charter holder. Apart from a short stint at an agricultural company Samuel has spent his whole working career with ProVérte. Samuel is a shareholder and valuable member of the board of directors of ProVérte.