Res­i­den tial proper ty: Now is the time to buy

Finweek English Edition - - FRONT PAGE - BY GLENDA WIL­LIAMS

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.

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