Buying a House - Good Idea

History shows that, as a fairly general rule, home values in South Africa appreciate around fifteen percent a year. Some years will be more, as in the past three years when house prices increased around 25% per year, but some years the appreciation may be less. The value appreciation figure will vary from neighbourhood to neighbourhood, and region to region.

A fifteen percent increase may not seem like that much at first. Shares and bonds traded on the stock exchange may at times appreciate much more, and you could even earn more than that with a very safe investment elsewhere. But if you look closely, you'd realise that you are earning your five percent on someone else's money!

What Is So Great About Real Estate?

If you bought a R200 000 house, you would most probably not pay cash for the home. You would get a mortgage bond for most of that R200 000. Suppose you did pay a deposit, the usual deposit amount would be 10% of the purchase price. But for our example, we'll assume a big deposit of 20%. That would be an investment of R40 000 of your own money.

I hope some bank managers will comment on this article, but I feel quite secure in saying that you would have to look quite far for the bank manager that would be willing to lend you R200 000 to invest in shares. They might do this for exceptional customers, but they would usually require additional security for the loan, other than the shares you plan on buying.

There is a reason for the saying, "Safe as houses". Banks are willing to loan people large sums of money, as long as the loan is secured against the title of a piece of real estate. House prices do not fluctuate wildly, as some stocks and shares tend to do. If something unforeseeable goes wrong, the banks can be reasonably certain that they would be able to recoup a large chunk, if not all, of the money they lent you.

The Return On Your Investment

So lets look at an example. At an appreciation rate of 15% annually, a R200 000 home would increase in value R30 000 during the first year. Very simplified, that means you earned R30 000 with an investment of R40 000. Your annual "return on investment" would be a whopping seventy-five percent.

Of course, you would be making mortgage payments and paying property taxes, along with a couple of other costs. However, with good tax planning, some of the interest on your mortgage bond and your property taxes can become tax-deductible expenses. This would mean that the government would be "subsidizing" your home purchase.

Also remember that, had you been able to get a loan to invest in shares on the stock exchange, you would still have to pay interest. But the interest rate for such a loan would most probably be much higher than you would pay for a home loan.

Also, had you invested your R40 000 in stocks, you would still have to live somewhere, so you would also have rent payments to make every month. But these rent payments would not be helping you pay back your investment loan.