Why investing in property is the best way to go?
When you buy your first home the usual motivation is to acquire your own property, rather than paying someone else’s bond and of course you then have your independence. Most youngsters seek freedom from living at home and having to abide by family household rules. “The very idea of buying their own home is exciting and they often do not realise what a wonderful investment they are making. This is the start of their financial independence” Craig Hutchison, CEO of Engel & Völkers Southern Africa stated. So what influences cause property values to increase?
According to the FNB House Price Index, the average house price for April 2015 rose 5.0% year-on-year. Despite the nominal house price inflation slowdown, however, recent months’ house prices continue to grow positively in real terms, when adjusted for CPI inflation. Due to the slower house price growth, this creates opportunities for the lower income buyers as the prices stay achievable. Property still stays an excellent investment channel. Therefore now is a good time to buy, especially after the recent decision by the SA Reserve Bank to raise the transfer duty thresholds on property transactions – costs on transactions below R2,25 million have actually been reduced.
Particularly the millennials (age group under 30) find that this is normally the time that their financial awareness starts, and an investment into property is what they should consider. A wise investment at this age could set them up for life.
There are different options for buyers to consider when looking at a property purchase, either as a primary residence, or in a buy-to-let scenario. Both scenarios create different opportunities:
- A rental property producing a good yield (as an income generating property) will bring in the necessary monthly rental which if managed wisely, can generate enough profit to buy yet an additional property to rent out. This process can be until the investor has a portfolio of rental properties paying for themselves.
- They could choose to stay in a rental property costing less per month than their own home (and which they rent out), and very likely result in a saving from the rental income, because their rent could be lower than their home monthly bond payments.
- There is a constant growth in the requirement for accommodation, so a sound property investment will be a guaranteed asset for ever and possibly the start of their property portfolio.
This financial leveraging emphasises how important it is to keep your credit history untarnished, because when you apply for a home loan your history regarding your personal instalment payments, leasing finance, mortgage loans, credit card debt, overdrafts and general loans are all considered. Consumers’ credit-risk profiles impact their access to credit.
Which factors influence property values?
According to Absa’s Housing Review for the second quarter 2015 “The residential property market will always be driven by economic trends, household finances and consumer confidence, which will affect the affordability of housing and the accessibility of and demand for mortgage finance.
This means that property prices will invariably change with inflation over the years, particularly if the property is in an area or suburb that is sought-after. Craig further advises that it is essential to research your area of choice properly before you invest in a home, and not just because it appeals to you. Craig said that aspects to consider include the historic investment growth in an area, proximity to commercial offices, proposed new developments, schools, and also the general state of the neighbourhood. It is also a known fact that the more popular suburbs appreciate at a higher rate than the rest, so your investigation will highlight this fact. The annual appreciation of your property is therefore affected by the inflation rate, general demand and also the infrastructure of the suburb. Together these factors can ensure property appreciation of more than 15% per annum, which is much higher than any fixed deposit investment.
It is also important to maintain your home although it feels like a never ending and on-going evil. Money spent on maintenance should be budgeted for and properly planned. “However, remember that when you eventually sell your home, a renovated and modernised home will always attract the current market value from buyers” Craig concluded.
Current macro-economic factors affect property prices, both up and down. Increased interest rates, fuel prices, water and electricity always tighten household budgets and owners may have to sell due to affordability. The irony here is that this creates opportunities for cash flush buyers to invest in and the affected sellers have to sell their properties to downscale to more affordable homes or rent until the situation improves.