JOAN MULLER: Why it’s better to rent than buy a home now — despite rate cuts
Asking prices for rentals have fallen for the first time in a decade. That’s bad news for landlords, but great news for tenants
Is it really cheaper to buy than to rent right now? That’s the story that residential property experts are sticking to — but I’m not convinced.
Admittedly, last year’s three percentage point rate cuts, pushing interest rates to near 50-year lows, have made it more affordable to pay off a home loan.
This means, as Carl Coetzee, CEO of mortgage originator BetterBond, points out, that the average SA homeowner saved about R28,000 on bond repayments in 2020.That is based on the change in banks’ prime lending rate from 10% to 7% between January and December, on a mortgage of R1.2m – the average house price in SA.
Put differently, the savings on monthly repayments on a R1m mortgage comes to R1,897 (at a prime lending rate of 7% repaid over the standard 20 years). On a R2m bond the monthly saving is double that, at R3,794; and on R3m, it’s R5,692 a month.
Clearly, those home loan reductions are large, and it makes the case for homeownership that much more compelling than it was a year or two ago.
So, it’s not surprising that mortgage originators and banks have reported a spike in home loan applications among first-time homebuyers: BetterBond, for example, saw home loan applications for this group rise 17% year on year in the second half of 2020.
Coetzee expects this trajectory to continue well into 2021. It’s a forecast based partly on the premise that it is now cheaper to buy a property than it is to rent one of the same value.
In this article on online portal eProp, Coetzee says: “The average monthly rental on a R1m property is about R7,800. At a prime lending rate of 7%, the monthly bond repayment on the same property would be comparatively less at R7,753.”
Based on Coetzee’s estimates, the gross rental yield — the annual rental as a percentage of market value — is about 9.4%.
He concedes there are additional costs associated with owning a house, but he argues that ownership also gives you an asset that generally appreciates over time.
That may well be so. And owning your own home — instead of paying off someone else’s bond — has emotional and other benefits too.
But the flipside is that renting incurs far lower monthly running costs. In my rent-vs-buy experience, the bar comes down in favour of renting.
The house that I own and rent out in Fourways, Joburg, costs me an average of R8,765 per month in running costs — including levies, municipal rates and utilities (electricity, water, sewerage and refuse removal).
And, if I had just bought the house, the monthly bond repayment would be R28,399 — based on the current market value of R3.7m and a 90% home loan, taken out at a prime rate of 7% over 20 years.
Together, it means I’d be laying out R37,164 per month for the pleasure of ownership, in bond repayments and running costs.
By contrast, it costs my tenants about R10,000 – or 28% — a month less to rent this property. Their total monthly occupation costs come to R27,120, including a market-related rental of R23,000 and an average R4,120 for electricity and utilities.
Where am I living, you ask. Well, I’m now renting a townhouse in a lower price bracket, also in Fourways. And it costs me about 25% less than if I’d bought the sectional-title property, after laying down a 10% deposit.
And there’s another factor: the chunk of cash you need to pay for transactional costs when you buy, instead of rent. Again, using my R3.7m house as an example, a quick tally on Ooba’s transfer cost calculator shows that total bond registration costs on a mortgage loan of R3.33m plus transfer fees would come to R324,358. That excludes the 10% deposit of R37,000.
To make the thesis that much more compelling, there is now an oversupply of flats and houses to let in most cities, which has placed pressure on rental prices.
Credit bureau TPN’s latest residential rental survey, released this week, shows that vacancy rates jumped from 7.5% in the first quarter of 2020 to 13% in the fourth quarter.
Posh suburbs where rental prices typically exceed R25,000 per month have seen the largest increase in the number of properties standing empty. Cape Town’s Atlantic seaboard, for instance, now has a vacancy of 24.4%; Sandton sits at 22.4%.
Michelle Dickens, CEO of TPN, ascribes the sharp rise in vacancies to pandemic-induced job losses and salary cuts, which have forced cash-strapped tenants to beat a hasty retreat to the backyards of family and friends.
“Though debt became cheaper as the prime interest rate plummeted, with millions of jobs lost, temporarily or permanently, consumers are poorer overall,’’ she says.
Dickens argues the situation has been exacerbated by property developers bringing a large inventory of new housing stock to the market last year, particularly in Gauteng.
The result: asking prices for rentals have fallen for the first time in a decade — by an average of 0.75% in the fourth quarter year on year, according to TPN.
That’s bad news for landlords. But, dare I say, there’s a rather positive upshot for tenants: you can pick and choose among a larger pool of properties and negotiate a discount on your rental.
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