Is your house an investment?
sWith growth of inflation plus 3% over the past 15 years, your house has definitely been more than just a roof over your head. But it is also important to ensure that it is not your only investment.
outh Africans like to consider their homes to be an investment. But as with all investments, it is worth revisiting your assumptions from time to time. At the moment there is a lot of debate about the prices of properties, especially residential ones. The FNB South African House Price Index shows us that house prices have declined by 21% in real terms since August 2007. This leaves countless individuals on the edge of their seats, waiting for the appearance of possible “bargains” in the residential property sector.
But the reality is that it is not about how high or low these prices are, it is about whether the South African public can actually afford to buy these properties.
Salaries have not increased by much more than inflation since 2007, which means that it will take young South Africans much longer to reach the point of being able to afford their first properties, and when that day finally comes, the debt ratio will be so high that they will have much less to save.
South African net personal savings expressed as a percentage of personal disposable income has decreased from 11.3% to -0.2% over the last 25 years, and I strongly believe that one of the major causes of this problem may very well be the increase in house prices.
According to FNB (data as at May 2018), the average price of a house in a middle-class area is around R895 000.
At a prime lending rate of 10% per year and a repayment period of 20 years, the buyer would have to cough up just over R8 600 a month.
And this is where I believe the root of the problem lies.
It is generally accepted that the contribution towards your monthly mortgage payment should make up no more than 30% of your gross monthly income.
This means that in order to afford a house in a middle-class area at an average price of R895 000, you would have to earn a gross income of at least R28 700 per month.
According to Stats SA, however, the average salary at the moment is only R19 858 per month (data as at 31 March 2018). So the average South African breadwinner who, on his own, wants to buy a house in a middle-class area, would have to pay over 43% of his gross income towards a mortgage every month.
As bad as this sounds, the situation actually looks much better than it did 11 years ago (in 2007), when the average middle-class house in South Africa cost around R622 000. At that time, the average gross salary was only R8 750. Eleven years ago, the average home owner was willing to spend 66% of his salary on a mortgage payment each month, so it is no surprise that house prices today are cheaper in real terms than they were in 2007.
When discussing the future, the argument in favour of buying a house as opposed to renting one will almost always be made for couples who earn a combined income, as long as they remain within the limits of what they can afford.
Never cash in your savings in exchange for a house that will leave you with a debt that is way above your pay grade.
With growth of inflation plus 3% over the past 15 years, your house has definitely been more than just a roof over your head. It was a steady investment during very challenging times. But it does not have to be the last investment you will ever make. Compared to local shares, it underperformed by 7% per year.
It performed at the same rate as local bonds during the same turbulent market conditions, which highlights the fact that you should not always follow the masses and make your house your only investment.
Exploring other investment options, besides your primary residence, may prove to be quite fruitful. ■ email@example.com is a portfolio manager at PSG Wealth.