Residen tial proper ty: Now is the time to buy
Inf lation is lower, South Africans have more disposable income – caused in part by the collapse in oil prices – and the repo rate is holding steady, but are these positive factors reason enough to consider buying residential property now?
Yes, says Warren Ingram, director at Galileo Capital. A surprising answer because Ingram is normally not the biggest fan of residential property as an investment asset class. But Ingram is not suggesting selling everything and buying houses. He is not talking about speculators, or those looking to buy a property now and sell it in three years. In this scenario, he says, the transaction costs of buying the property, registering the bond, etc. are far too high to trade the property in a short period.
Ingram directs his comments to those who have perhaps been debating the merits of purchasing a home as their primary residence that they aim to live in for the next eight years or longer.
So, why exactly does Ingram believe that potential homeowners should give serious consideration to purchasing residential property now? His logic is this:
1. It’s a very beni gn en viron - men t for peo ple with debt
“If we listen to the Reserve Bank,” says Ingram, “we are unlikely to have a major cycle of interest rate hikes in the next year or three. While we may see interest rates rising at some point, the pressure is not on to increase rates now because we do not, for instance, have a major inf lation problem that would be a reason for a rate hike.”
2. The artificial situation unlocked
“Whether house prices were going up or down, you physically could not sell houses because the willing buyers could not get bonds,” says Ingram. “Nowadays, the banks have become more lenient in terms of their credit criteria and are lending again.”
After the f inancial crisis, banks clamped down on granting mortgages. If you weren’t among the well-heeled, it was no easy task qualifying for a mortgage. And needing to put down a 25% or 30% deposit made it even more difficult.
Despite still needing a sizeable deposit, banks are becoming more reasonable in granting home loans. “Although a 15%25% deposit is still steep, at least now there is the ability to get a mortgage,” says Ingram. “With this situation unlocking itself I think there will be a period of pent-up demand that will begin to be satisfied. Whenever demand is artificially blocked, once released you might find that prices start to rise, especially because you can’t increase the amount of available properties overnight.”
3. An asset class that should no w mo ve no rma lly an d bea t inflation
Thus far, the stock market and specifically listed property have been great places for investors. But commodities are now under pressure. And listed property, which has outperformed most other sectors, “is unlikely to continue to go up and outperform forever”, says Ingram. It’s a cycle, he says, that has to change. “This is the last factor that swings it for me.”
Compared to other main asset classes, residential property underperformed dramatically. But the debate about where to place your money is leaning towards residential property, which Ingram believes will now move in a more normal fashion. “If you were sitting with a lump sum of money or extra cash f low and were considering buying a home, which to date you have avoided because the stock market and the listed property market has been a great place to put your money, then that argument might now be swinging towards residential property.
“I am certainly not thinking that residential property is going to shoot up 15% in the next year. Appreciating at around 1.5% or 2% above inf lation is, I believe, the long-term return on property. As a forecast that is a good indicator and a sound benchmark to use,” he says. “And if the stock market is going to do nothing and listed property is going to do nothing, then it might be the time to redirect your cash f low into an asset which tracks or beats inflation,” says Ingram.