Home buying has nothing to do with profit

All the articles on the property market last week did not properly answer the question that most South Africans are asking: "Is it the right time to purchase a residential property?"

So I am going to give it my best shot.

In my opinion, the answer has blow-all to do with the increase in property prices. We are missing the point. In financial planning terms, one never buys a home to sell it at a profit.

Most South Africans buy a home so that they can make home loan payments instead of paying rent, in the hope that one fine day they will live rent-free.

Selling the property has nothing to do with that equation.

Most sellers find that the profit is swallowed up by estate agents' commission, transfer duty and moving costs.

So even the increase in property prices is misleading.

Over the past five years, everything has been working in favour of home ownership. We had inflation in salaries and rents, coupled with substantial interest-rate reductions and, the cherry on the top, a drop in the average tax rate of between 6% and 12% for most homeowners.

All of these benefits blended together to allow the homeowner to push the envelope when buying a new house. Just overcome the first months of home loan payments and they quickly became a smaller and smaller part of the monthly budget.

But we are at the end of that cycle now.

I don't hear anyone speculating about Reserve Bank governor Tito Mboweni dropping interest rates. But there is intense speculation about rates increasing.

I don't foresee that interest rates will do a 1980s or 1990s Chris Stals on us and return to the levels we have experienced.

Finance Minister Trevor Manuel certainly does not have an over-collection of tax mysteriously hidden away in the National Treasury.

I am sure he is sooner or later going to have to dig up some family silver to make South Africa's ends meet. So, if we get tax reductions in the next couple of years, it will be quite easy to spend them in one place. At worst, my position is that we could see an increase in the super tax levels next year.

Inflation levels are down and that is already reflected in rentals declining in parts of the country.

So the gap between rent and buy on the monthly budget is increasing again.

In spite of all of the above, I still reckon a well-considered investment in South African property is a good idea.

But homeowners need caution. Either fix the rate on the home loan or take an "at worst" position.

My guideline is, can you afford your home loan payments if interest rates rise by 4% in the next 24 months without taking in laundry?

The biggest threat to the South African property owner is not a significant drop in house prices. The cost of being forced to sell and downsize will do far more damage. So, if in any doubt, sit tight for a while and let all the markets find themselves again.

  • Lester is professor of taxation studies at Rhodes University, Grahamstown, which is celebrating 100 years of success this weekend