Choose a home ahead of a car

The two major purchases most often considered by young people when they first acquire financial independence are a new car and a home - but for many it comes down to a choice between the two, because they can't afford both at once.

“And we strongly believe they should opt for the property - as should more established families who perhaps already own a car and a home, but because of budgetary constraints have to choose either a bigger car or a better home,” says Richard Gray, CEO of Harcourts Africa.

Reacting to the news that new car sales have shot up by more than 30% over the past year, he says: “This is seen as being a good sign for the economy, but I’m concerned that it may not be so great in terms of the financial future of many consumers.

“The fact is that homes appreciate over time, while cars do not. In five years’ time, you will be lucky to get half the purchase price of a car back when you trade it in or resell it. A property, on the other hand, will have increased in value, enabling you to sell at a profit or perhaps access some of the equity you have built up for other purchases.

“For example, if you were to buy a new car worth R150 000 now and finance it with a five-year loan at the current prime interest rate of 9%, you will have paid around R187 000 by the end of the term for an asset that will only be worth about R75 000 by then.

“However for the same monthly repayment of just under R3 200, you could start paying off the R350 000 bond on a property costing R388 000 (assuming a 10% deposit) and even if the value of the property rose only 1% a year for five years, you would then have an asset worth R408 000.”

Such a consideration would also hold good, Gray says, for the financially established family trying to decide how to allocate resources – that is, whether to buy a second car or a second property. “If you buy the property you will not only be able to rent it out for additional income, but will own another appreciating asset.

“In short, although we all love new cars and the temptation may be great to splash out and buy one, this is often short-term gratification at the expense of long-term financial security – not the best plan.”

Article by: www.harcourts.co.za