Is your house an in­vest­ment?

Finweek English Edition - - Contents - By Schalk Louw Schalk Louw

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. ■ ed­i­to­rial@fin­ is a port­fo­lio man­ager at PSG Wealth.

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