Many prospective South African homebuyers are asking the question: "Is now the right time to purchase a residential property?"
The short answer to that question is: "It is always a good time to buy your own home". The increase or decrease in property prices makes no difference to the equation. First time homebuyers who are trying to "time the property market" are missing the point.
Home buying is not about profit
Why do South Africans buy residential property?
A homebuyer's financial planning should never be aimed at buying a home to sell it at a profit.
The idea behind buying an own home is to eventually own the house outright, and to live rent-free.
Most South Africans buy residential property so that they can make home loan payments on their own property, instead of paying rent, which almost equates to making home loan repayments on someone else's property. And once that mortgage is paid off, the homeowner can hopefully end up living rent-free, one fine day.
Selling a residential property at a high price has nothing to do with this ideal of owning your own home.
What happens to home selling profits?
Home sellers usually find that estate agentsâ?? commission, transfer duty, moving costs, and the high price of buying a new home swallow up the profit they make on their old home! If you sell your home, you have to buy something in its place, after all!
So, keeping an eye on the increase in property prices, to time the purchase of your own home, is a mistake that can cost you a lot.
The South African property market
History shows that South African property prices increase over time. There is hardly ever a period where property prices decrease! So, waiting for a more favourable residential property market is not a good idea.
The fact is, most homebuyers buy property that fit their budget, while property prices increase and decrease, based on the demand for those properties. So, if more people earn more money, but the number of residential properties on the market doesnâ??t increase accordingly, those properties will cost more.
Recent years have been very favourable for increases in residential property prices, because the available money and the available buyers have increased.
This means that the demand for property has increased. And we all know that higher demand puts upward pressure on prices. Whether we are talking peanuts of houses, when demand increases, so do prices (usually).
The market will usually react to higher demand for property and higher property prices, by increasing the supply of property. A number of people might see a period of high demand as the ideal time to make a profit from their homes, and thus increase the supply of property.
The house building industry in South Africa has also stepped up to try and meet the increased demand for residential homes, but judging by residential property price increases, they havenâ??t been able to keep up.
Homebuyer behaviour
House buyers tend to "push the envelope" when buying a new house.
House buyers typically buy the most house they can afford, and even a bit more (if they can get someone to give them a big enough loan).
Buyers are not stupid, and tend to realise that they only have to overcome those first few months of struggling to make the home loan repayments. Soon the repayments become a smaller and smaller part of the monthly budget, as salaries increase.
The end of property price hikes?
Many people feel that we are at the end of this cycle of favourable conditions for property price increases. One does not hear financial analysts speculating that Reserve Bank governor, Tito Mboweni, will be dropping interest rates any further. There is, however, intense speculation that interest rates might increase soon.
There has not been a newly liberated army of home seekers who will boost the demand for residential property. In fact, most of the first time homebuyers from previously disadvantaged communities in South Africa might already have found the homes of their dreams.
Inflation levels in South Africa are under control, so salary increases will be less than spectacular in the immediate future. Low inflation levels are already reflected in declining rental increases. Relatively low rents give South Africans a viable alternative to buying their own residential property.
The bulk of the possible tax savings for individual taxpayers have already been granted. And I hear that most people's rich relatives plan on living for some time still! So, unless we all get money from the lottery, most South African homebuyers will not be in a position to pay higher prices for homes.
Continued property price increases
In spite of all of the factors that point to an end to property price increases, I see residential property prices increasing in the foreseeable future. Residential property prices will at least match inflation.
So, a well-considered investment in South African residential property is a good idea.
Caution is needed when buying a home
Homebuyers need to be cautious, and rather spend a little less on a new home, or fix the interest rate on the home loan.
Interest rates can reach a turning point at any time, or suddenly jump. Brand new homeowners don't want to end up losing their new homes because an interest rate increase has pushed the home loan repayments out of reach of their budgets. So, budget for interest rate increases BEFORE they happen!
The biggest threat to the South African property owner is not a significant drop in house prices. Rather, the cost of being forced to sell your home, and either rent or downsize, will be much harder on new homeowners.
So, make sure that your budget can handle a sudden interest rate hike!
Home buying is not about profit
Buying a residential home for yourself and your family should not be about the possible profit that could be realised when selling it in the future. A residential house is a home that will give the owners so much more in the way of personal enjoyment. And that is very hard to quantify into a monetary value.
The challenge for South African homeowners will be KEEPING their property, in the higher interest rate conditions that may follow...
