The Property Game - A return to basics.

All this talk of a property bubble, heightened by fears of Mr Mboweni slapping Joe Consumer with a rate increase just before Christmas, gripes about affordability and slowing of sales in the upper end of the market all seem to detract from property as an investment. It is prudent to go back to the reasoning behind purchasing property and to compare that to other types of investments you might make.

Investment or a home
People often mistake the argument of property as an investment when compared to other asset classes with the reality of wanting or needing somewhere to live. These 'needs' have to be separated before any rational discussion can be had as to the merits and follies of property as a 'pure' investment.

Unless we wish to remain forever in our parents' home, including our spouses and offspring, it is essential that we leave the nest and establish a place of our own in which to kick off our shoes and read the paper.

The question then remains as to whether we rent or buy our castle. Some property commentators have tried to make the point that it is more prudent to sell your home and rent at this stage of the property cycle (assuming that it is indeed at the top end of the cycle), while waiting for the boom to either bust or retract significantly. The argument is flawed and here is an explanation of the fallacy of the numbers that have been used to justify them.

If you don't yet own, it might make sense to hold out for a while if your perception is that property prices are stagnating and are about to drop. The chances of bargains are then more likely. Over the last thirty years there has only been one year in which property prices have declined and that was by 6 %. So waiting for prices to come down might lead to a long wait.

The buy-to-let market or property investment market is different in that the cost of ownership or the gap that exists between repayments and rentals is now almost historically huge. This means that rental yields are down and it might make sense to view alternative asset classes if this is your intention.

Affordability
Everyone is griping about the price of property. Any Capetonian will laugh at the prices that people say are unsustainable in Johannesburg and wonder when last they tried to get a 2-bedroomed place in Cape Town for less than R1 Million. R500 thousand is very sustainable in Johannesburg.

Wanting the price of property to come down doesn't make it happen. Wishful thinking doesn't affect the market, while a complex interaction of building costs, supply of houses and demand for properties do affect prices. These are also self-correcting in our capitalist market with the developers only building if there is a profit to be realized. When there isn't, the lack of new developments 'shrinks' the market and elevates demand that in turn dictates a higher price. A vicious cycle but that's capitalism.

Unless the supply-demand equation is seriously affected, things will continue as they have been. Too much new stock will flood the supply side of the equation while an interest rate hike and the consequent decrease in affordability and the concurrent pessimism affect demand.

Property is not a short-term investment
All this to-ing and fro-ing on these issues is meaningless in the longer term though. The deciding factor as to whether you purchase a property should never be whether the price is going to be significantly higher within a year, but rather whether it is worth investing into a life-style that you want to enjoy at ever decreasing costs to you (in the longer term) while at the same time taking cognisance of shorter term impacts to affordability like interest rates.

Article by: Dave Welmans - (www.thepropertygame.co.za)