The mind of an economist is an incredible tool when it comes to decision making. Rather than get bogged down by emotions, economists have learned to put them aside and rely on data to guide the process. When it comes to making big financial decisions – like buying property – having this tool at your disposal can mean the difference between a smart investment and an expensive mistake. We sat down with Jacques du Toit, Absa property economist, to pick his brain.
Don’t ignore the current economic climate, but don’t be crippled by it
“With #JunkStatus and now a recession – confidence is low at the moment and this affects household expenditure, the demand for credit, and the growth in credit”, says du Toit. This influences the buyers’ willingness to spend large sums of money, as well as the banks’ willingness to lend without security. For first time buyers, saving for the deposit needed, might make owning a house seem impossible, however, there are creative options. The Family Springboard allows a friend or family member to provide collateral which will remain invested – and earning interest – until that portion of the home loan is paid off. This is a great option, if you need to plug the shortfall in funds for the deposit and transaction costs.
However, du Toit points out that: “There can still be a mismatch between pocket and mind. Even with the financially stable, there is an unwillingness to spend.” But if you have the means, a difficult economic climate can create a buyer’s market where you can capitalise on people who are desperate to sell – thus finding great deals.
Balance your needs vs. your aspirations
Your current life stage will inform your needs – young families needing more space, retirees looking to downsize or a new job that requires a move – but you should always be honest about what you really need and what you just want. Du Toit recommends buying the most affordable home in the best location. “When you over-capitalise in the wrong area, you might not get your money back further down the line. A less expensive purchase in a good area means that you can always expand, upgrade or renovate as your needs change.”
Tip: As of the February 2017 #BudgetSpeech, there is no transfer duty on houses under the value of R900 000. Many older, established suburbs, have houses around this value, on larger stands with room to grow, which can be renovated and modernised.
Du Toit also recommends looking for houses that already have entertainment spaces, like a braai area, as South Africans are spending more and more time entertaining at home, due to rising costs and security concerns. This will ensure that you get the most from your investment. If the kitchen and bathrooms don’t need updating – even better! Both these rooms incur some of the highest building costs to renovate.
Don’t just buy for the moment – think to the future
When you are house hunting, be mindful of how your needs might change and how a property could be adapted to suit these changes. A townhouse might seem like a solid investment, but remember that you can’t do anything more with that property – given the space and body corporate restrictions. So, if you can’t get capital growth on it, then it’s not an investment. Land is always valuable – you could build a granny flat (Airbnb) to create a rental income or even subdivide to make two properties for when you’re ready to downsize. Green additions, such as solar panels and water-wise upgrades, are also very popular, but always check with a property expert or estate agent which upgrades would add value to your property.
Tip: A Re Advance or Further Advance can fund green technology additions using the equity in your current house and home loan. A solar geyser, for example, can last more than ten years and pay itself off, in electricity savings, in half that time.
Do your calculations
Du Toit stresses the importance of working out what the financial impact of buying a house would have on your financial health. This goes beyond the cost of sale – there are transactional costs, operating costs (such as home maintenance and the cost of the move), rates and taxes, electricity and water. Work these out at the start, as the overall amount you can afford each month will be finite. Weigh this against your needs and aspirations to find what is realistic.
Tip: Save with face brick. Whilst houses that are plastered and painted, need repainting every three years, due to South Africa’s weather conditions, face brick houses don’t. Do the math!
Equip yourself for the best and worst case scenarios
Do some simple stress-testing to ensure affordability across various circumstances. While you can’t predict the future, you can still prepare for all possibilities. Your salary could increase or decrease, as could interest rates. So, doing the calculations for the best and worst case scenarios will further inform whether you can afford to buy.
Call in the experts
Your bank is always at hand to offer sound financial advice when you’re looking to buy, or have already bought but are heading towards financial difficulty. As du Toit says, “Banks are not in the business of owning houses. We’re in the business of lending money so that you can own one – so come and speak to us, should you find yourself trending towards distress.”
Tip: Always weigh up the cost of buying vs. renting vs. expanding. There are many rental deals to be had, where the monthly rental is much less than the bond repayment that the owner is servicing on that same property – this is before maintenance costs! But be smart, make sure you are investing these savings, elsewhere. Expanding your current home to suit your changing needs is usually more affordable than buying a new home.
Tip: For many, buying a new house means that you are selling your current home, to afford the purchase. Ensure that your existing property is correctly priced for the current market, to ensure a quick sale. A local estate agent will be able to provide advice and an evaluation for your area.
This piece, is part of our “shop like an economist” series. For more tips on how to shop like an economist, see “how to shop for groceries, like an economist”
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.