Now is an ideal time to buy a home, but are you ready?
Conditions appear to be perfect, with the lending rate at a 50-year low, house prices in decline and enough stock in the market
It’s an excellent time to buy property. The lending rate is at its lowest in about 50 years, house prices have declined in real terms and there’s more stock on the market than there are qualified buyers. But are you ready to buy?
Whether you’re planning to buy your first home or planning to buy to let, conditions appear to be perfect now.
Carl Coetzee, CEO of BetterBond, says that at the current prime lending rate of 7%, bond repayments could be less than rent for the same property. For example, the monthly bond repayment for a R1m property is about R7,750 at the prime rate, whereas the average monthly rent [for such a property] is about R7,800, he says.
“While a homeowner will incur additional costs, such as rates and taxes, a straight comparison of bond repayments with the monthly rental suggests that owning a home may actually be more cost effective. Also, the benefits of owning an appreciating asset that serves as a long-term investment far outweigh paying off someone else’s bond each month with rental payments,” Coetzee says.
The lending rate has made it easier for first-time buyers to qualify for a bond and pushed up this demand, he says.
“Bond applications from first-time home buyers accounted for 70% of BetterBond’s applications for the past year to date, up significantly from the 60% received during the same period last year,” says Coetzee.
BetterBond’s average approved bond size is just under R1m, suggesting that the bulk of sales activity is at the lower end of the market. Almost 45% of BetterBond’s formal grants for July year-to-date were in the R500,000-R1m price range, followed by 19% for homes between R1m and R1.5m.
In July the company saw increased activity in the R2m-R2.5m market, with an almost 4% year-on-year increase in applications for homes in this range, despite reports that the upper end of the market was showing signs of muted activity.
Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, says the current lending climate should encourage investment in property and a shift away from renting. “For those who can afford to do so, there really has never been a better time to enter the market than right now.”
Berry Everitt, CEO of Chas Everitt, says that over the next few months the market will present “the best purchase opportunities seen in more than a decade”.
Before you jump into the market, test your readiness by answering the following questions financial planners say you must be able to answer:
- Can I cope with interest rate hikes? “At some point the rate-cutting cycle will end and interest rates will go up again. You need to be sure what you can afford in an upward cycle, and build in a margin of safety,” says Katlego Mei, a financial planner at Verso Wealth. Craig Gradidge, a certified financial planner at GM Investments, says you need to stress-test your budget and work out what your repayments will be if interest rates increased by 5%.
- Can I cover the transaction costs? Have you budgeted for bond registration and transfer costs? “Don’t make the mistake of using any emergency savings to fund these costs,” Mei says.
- Do I have a deposit? Having a deposit makes you a better proposition when shopping for finance. The lower the loan-to-deposit ratio, the better your chances of a good interest rate; and the lower your rate the less you pay over the term.
- Do I have a healthy credit score? If you haven’t built up a credit score, it’s worth doing so before you buy. And if your score is weak, you will pay more to borrow.
- Do I have emergency savings? An emergency fund is essential so you can absorb future shocks, which you must expect when you own an asset that needs maintaining. If you’re stretched to the limit and can’t handle an expensive shock, you could lose your property.
- Can I afford essential costs? Municipal rates and the cost of water and electricity are increasing faster than inflation and can add significantly to your costs, Gradidge says. If you’re buying in sectional title, factor in the cost of a levy. And if you’re buying freehold, you might need to pay for security services.
- Can I afford insurance? Consider how much you will pay for insurance on your dwelling and your household contents.
- Can you afford it? Before you go hunting for a property, find out from your bank how much you would qualify for, so you don’t set your heart on something you can’t afford, Gradidge advises.
Mei says be careful where and what you buy. If you’re young, think about whether you plan to get married and have children. Think of proximity to schools and your place of work. You pay costs when you buy and sell property.
He says if you sell too soon after you’ve bought, you don’t realise any cost benefit as the costs eat into your capital appreciation. “You need to keep the property for eight to 10 years for it to make sense [from a cost perspective].”
A word of caution to buy-to-let investors. FNB is expecting a significant deterioration in the payment performance of residential tenants in 2020.
FNB property strategist John Loos says while the deterioration in tenant performance in response to an economic shock can be swift, the full recovery process can take a lot longer.
He says a rapid initial improvement in tenant performance can probably be expected late in the year, assuming lockdowns come to an end and incomes are restored. But the second stage of tenant recovery could take a few years, and full recovery could take up to three and a half years.
FNB is also expecting average rental deflation of -3% in 2020 and -4% in 2021.
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