Personal finance storm clouds loom on horizon

Looking through the 2010 soccer euphoria gripping South Africa, financial trouble is looming on the horizon for many households.

If you are buying a home now, consider opting for a smaller or cheaper property and keep some slack in your monthly budget to cope with home loan and household costs - which are set to rise, some maybe even dramatically. If you're staying put, revise your spending habits and start thinking of ways to prune your bills. You'll be paying a lot more for the basics in future, is the forecast from some economic experts.

FNB's top-notch property economist John Loos politely terms these financial storm clouds gathering on the horizon as the "new housing affordability challenge".

The announcement of a 25% electricity hike for next year, and more, steep price increases to follow, is a blow to consumers because it will push up the costs of all the goods and services you buy much more than you might have expected.

Eskom's electricity bill shocker is not the only problem. In a report, Loos says Eskom has been a "key driver" of housing-related inflation which, at 7% is above the upper CPI (Consumer Price Inflation) target limit of 6%. Far behind, "but still troublesomely high, is the sub-index for ‘water and other' services, which also includes municipal assessment rates, showing year-on-year inflation of 9.4%".

Helping many consumers, meanwhile, have been residential property investors who have kept a lid on rent increases. Says Loos: "Keeping the overall housing and utilities index from skyrocketing out of control was a very weak rental market, as tenants feel the stress from the recent recession as much as home-owners." The rental sub-index, as a result, "inflated by a mere 4.9%." (For more on this, click here to read Punished!SA property investors)

The good times are unlikely to continue for tenants. Rent is expected to increase by more in future, is the message from Loos.

All these rising costs mean that inflation will become harder to keep within the SA Reserve Bank's 3-6% target - and that in turn suggests new SA Reserve Bank governor Gill Marcus will find it increasingly difficult not to increase the repo rate, which leads commercial bank interest rate increases. In other words: interest rates are likely to rise in the not-too-distant future.

Also not helpful to the bank balances of the astonishingly low number of taxpayers who contribute the most to government coffers was new finance minister Pravin Gordhan's stingy budget, which he presented to Parliament last month. Tweaks to the personal income tax tables are unlikely to compensate for the ravaging effect of inflation on purchasing power, and the few remaining tax perks - like car and insurance allowances - were reined in even further. Salaried taxpayers are getting less and less for their tax money, which means they must pay so more of their disposable income for expenses like private healthcare, security and decent education for their children.

If you are tired of your landlord or would rather pay off your own property asset than someone else's, now may be a good time to buy a home because you are likely to find it easier to get money from a bank now. Interest rates are unlikely to fall much, if at all from here, and when interest rates go up, banks put less money into mortgages. Of course, the flipside is your home will cost more before rents catch up with what you are likely to repay on your loan each month. In time, though, you will find that you are paying less for your property debt than you would have been paying as a tenant.

Loos encourages home buyers to ask the question: "'What if interest rates were to rise by the usual 4-5 percentage points? Could I still afford the bond repayment?' If the answer is "no", says Loos, perhaps look to buy a cheaper home. (Click here to calculate your repayments).

He cautions, too, that your interest bill is just one of many costs to take into consideration. Whether you are considering buying a property or aiming to generally improve your financial wellbeing, don't ignore all the other costs that go into running a home. Says Loos: "The affordability issue now clearly extends far beyond merely the cost of servicing a bond, to the issue of these sharply escalating costs related to housing. Assessment rates and utilities tariffs to homes are largely unavoidable, and with all these entities being monopolies, and their charges being compulsory, the consumer has limited alternative. Besides electricity and water saving measures, the only alternative is to buy a smaller home (to reduce operating costs) or cheaper house (to reduce assessment rates).

"Prospective home buyers would do well to do the scenario planning in the area of rates and tariffs too, therefore, planning their purchase on the assumption that the current rates and tariffs paid on the targeted property will probably rise dramatically in the next few years," he urges.

Budgeting tips

  • Itemise all your monthly essential bills, items you "need", that are fixed costs - like rent, transport to work, school fees, childcare fees.
  • Itemise all your essential bills that fluctuate, like food and electricity.
  • List all the bills you pay that you regard as important, but not essential, like extra activities and cellphone airtime for your children.
  • Compare your income to your expenditure. The difference is the amount by which you must reduce your spending.
  • Cut or drastically reduce the non-essentials first.
  • Decide on budgets for essentials, like food, and do not spend more than you can afford in the supermarket.
  • Pay off your credit card debt; avoid your budget facility.
  • Don't be a snob. Many people can't manage within their means because they like to show off to their neighbours.
  • If you still can't match what you earn with what you owe, seriously consider moving to a smaller, cheaper home.

Article by: Jackie Cameron - www.realestateweb.co.za