Property Talk

Date: 2014-08-29

The rent versus buy decision is something that many first time home-buyers content with and a choice that depends to a large extent on the relative affordability of home ownership to the rental alternative. In many instances the average nominal prices of homes relative to the average price of rentals does not provide the full picture. A great measure of the relative affordability of home ownership is to consider the average house price to average rental ratio.

As home prices adjusted downwards following the financial crisis in 2007/2008, this measurement declined as would be expected. Over the last two years it has edged upwards as house price inflation (currently between 7% and 8% per annum) has exceeded the rate at which rentals on average in our property market have been increasing. Our rental inflation hit a low of 4,26% in mid-2012 and is currently 5,16% according to the last CPI survey of June 2014. And yet, we are witnessing a surge in first time home buying activity. To understand why, we need to consider that the property market is largely credit driven, and especially in the first time buying market in which the incidence of 100% loan to value mortgage finance is high.

If instead of the average home price we consider the average priced house mortgage installment relative to the average rental price, a very different picture emerges. What we soon realize when analyzing this data is that there has been a dramatic 40.4% drop-off in this ratio as interest rates dropped sharply after 2008. With such a dramatic relative difference between the cost of homes when credit financed to the average cost of a rental, the scales are firmly tipped in favour of a purchase decision relative to a rental option. Is this sustainable and what can we expect to happen over the next three years? It all depends on the extent to which interest rates are expected to move upwards.

What we do know is that we are now on the upward curve of the next interest rate cycle and that a further increase can be expected before the end of the year. A higher cost of money will translate into less demand from credit dependent first time home-buyers. Home pricing can be expected to accelerate at a lower rate. We have already seen this starting to happen. The FNB home price index has decreased in terms of its year-on-year inflation measure from 8,6% in Jan 2014 to 7,2% in July 2014, the last measure currently available. For every first time home-buyer that decides to hold off on their property purchase, the rental market attracts one more willing participant. More players in the rental market chasing the existing stock can be expected to increase the average rental inflation rate which is predicted by FNB to exceed the 6% level in 2015.

The near term forecast is therefore for rental demand and inflation to increase relative to home prices over the next three years. If you are a residential property investor looking for a good yield then the time to buy is now. If you are a tenant looking to contain your rental increases for the next few years, the time is now to negotiate with your landlord to limit the increases in exchange for a commitment to a long-term lease. If you are a first time home-buyer, be delighted if you are offered finance on reasonable terms and always factor in an increase in interest rates of 2 to 3 percentage points on your cash flow budget.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Seeff KZN Chairman

Principal - Seeff Dolphin Coast

andreasw@seeff.com

Springclean

Enlarge View Link

Nissan T5ekton

Enlarge View Link