Is it better to rent or buy?

Investing in property can be a contentious issue, especially when you consider slumps in the housing market and rising interest rates in a volatile economy. Two issues in particular have fed the debate regarding whether it’s better to buy property or merely rent it. It’s a matter of some significance, especially in South Africa, where interest rates seem to be stuck in an up-hill climb, and consumers are faced with the rising prices of everything from food to fuel.

Two financial experts in South Africa, Justin Hooper (managing director of Fincorp) and Magnus Heystek (managing director of Magnus Heystek Investments) took to the podium in the Sandton Hotel in the hopes of settling the debate once and for all.

Hooper argued in favour of renting and investing in the stock market. Using an array of tables and statistics, he showed that by investing in the stock market for 20 years, you could in fact retire R2 million richer than if you had spent that time investing in a house. Which sounds like such nice news, after all, who wouldn’t want to come out with an extra R2 million?

But what happens next? Do you continue to invest that money so that you can afford to rent a place to live in for the rest of your life? Or do you use that money to then enter the property market? If it’s the latter, R2 million won’t get you very far. In many places in South Africa, Cape Town in particular, R2 million will currently get you something nice and comfortable. In 20 years time it’ll probably only get you the very basics, like two bedrooms and one bathroom, and maybe a lockup garage. By the time your investments have matured, you’ll be in your 40s or 50s, and will probably want a little more than the basics, especially if you’ve been renting the basics in the interim. R2 million suddenly looks rather paltry.

Heystek argued in favour of investing in property. He acknowledged that investing in the stock market rather than housing may one day result in financial independence, but countered that human nature makes this outcome rather unlikely. He says that few people actually make decisions like accountants do, and that when it comes to buying a house, there are larger considerations at play than just the facts. People who are not familiar with the stock market may be timid when it comes to high-risk, high-yield investments, and may choose safer, lower-yield options. They may also withdraw funds as and when they need them, rather than waiting for them to mature.

Heystek’s points are valid. Investing in the stock market while renting can be more expensive than simply paying off your bond every month. Many people barely make ends meet after they’ve paid their rent for the month. After their children have been clothed and educated, and food put on the table, scraping money together for an investment may seem like a bit of a luxury.

And even if people can afford to invest money every month, how many of them would actually do so? People can be very casual about their future, mainly because it hasn’t happened yet. Many believe that the future will take care of itself or at the very least, that their children will take care of them in the future. Immediate needs are met with little thought of the years still to come. If you want proof, all you need to do is take a look at South Africa’s disastrous national savings rate.

There is pride in ownership, in knowing that the sweat of your back puts a roof over your head. A roof that belongs to you and that no one can take away. There is pride in maintaining your home, in making it comfortable for you and your family, which is missing when every nail and coat of paint has to be approved by a landlord. Home-ownership also fosters accountability. Because your home is your responsibility, leaking pipes and an overgrown lawn become your problems and not someone else’s. Some may find all of this responsibility daunting and shy away from it, while others will rise to meet the challenges that owning a home brings.

In the end, the debate rages on, and all we can do is follow our instincts and do the best that our financial circumstances allow.

Recommended sites:

http://www.btimes.co.za/97/0615/btmoney/btmoney.htm

http://www.realestateweb.co.za/realestateweb/view/realestateweb/en/page196?oid=9316&sn=Detail

Sandra wrote this article for the online marketers Trafalgar property managers leading specialists in property management, residential letting and property insurance.