The economy grew by a minuscule 0.2% during 2019. It is the weakest performance since 2009. The SA economy is expected to shrink by as much as 6.4% this year, mainly due to the adverse effects of the COVID-19 pandemic, said Finance Minister Tito Mboweni.
He seems to have forgotten the role Government debt plays. Downgrading the economy to junk status damaged our economy further. Houses sold for less than the asking price and took longer to sell.
Surely this is bad news all round? Should we hold on to our properties, no matter what, since it is currently a ‘buyer’s market’? Should we put ourselves in debt and buy a property now? With all the economic insecurity people from all walks of life are facing, is using real estate as a form of passive income still a reliable investment?
It all depends …
It is easy to get the question of buy a property to live in muddled up with buying property as an investment for setting up a passive income. For this reason, this blog post will be the first of two – we will deal with the question of buying a house to live in first. Though your present financial stress may make this feel like something to be done right now it is vital to see both of these considerations as essentially long term activities.
When we look at real estate we need to consider which portion of the property market you are looking at. There is, in fact, good news for some. There are economic factors that makes owning a house a possibility for many and even puts buyers at an advantage. However, there are also factors to consider when you are needing to buy property for the purposes of downsizing.
Housing has been a hot-button issue in South Africa for a long time
There has always been a huge shortage of affordable housing options for the ‘working poor’ (those who have employment yet cannot afford adequate basic necessities, such as formal housing). This still remains difficult for those who find themselves in the working class, or those who want to buy their first home. Due to high debt levels, even those from the middle class find owning their own homes unaffordable. That which is available is often of substandard quality.
Political parties have repeatedly used the economic disparities in our country as election fodder. For most, little has changed. The need keeps growing, the promises keep growing, but the delivery remains abysmal. However, low inflation, low lending rates, and it being a buyer’s market right now have made it possible for some people to get a foot in the door.
Homes in the under R2 million bracket
Gerhard Kotzé, managing director of the RealNet estate agency group states that the demand for homes in this price is ‘very lively’ in 2021. These homes are accessible for large numbers of first-time buyers or those who are scaling back in order to free up resources and bring their debt under control.
Unfortunately, we will see the actual transactions start to slow down as the Coronavirus after-shocks reverberate through the economy. This has already made the banks more cautious. Fewer home loans are being approved – particularly 100% mortgages.
- We know the prime lending rate had been artificially driven down by the Reserve Bank to help the economy survive.
- The slow reopening of the economy and the fact that we reverted back to stricter lockdown measures on the one hand whilst relief packages coming to an end on the other means that more South Africans are expected to lose their jobs without a safety net (as was present during the hard lockdown) to soften the blow.
Kotze says that despite the above, we can expect price growth and possibly even real (after inflation) price growth in the under-R2m market, especially at the lower end of this sector.
Homes in the R2.5 million to R4 million bracket
This is considered to be the second tier of the market. Middle-income consumers are expected to be hard hit in 2021. Should you want to sell your property, now is the time to put it up for sale. Few will see a salary raise this year. Everything is becoming more expensive, with major hikes in electricity, medical aid, transport being forecasted. Fortunately the collection rate by SARS has increased to take the pressure off the possibility of a tax increase.
Home owners in distress
Whether you are just feeling the pressure to contain expenses or are unable to meet your mortgage obligations, you may find that you will have difficulty getting more than 85% to 90% of the asking price of your property in this bracket. This may even drop as low as 80%. In real terms this could mean that you will be left with less cash than you hoped.
Three pieces of advice
- Use bond affordability calculators – the major banks have calculators on their websites that will do the number crunching for you. Remember, these will give you ball-park figures. There are various factors that could influence the amount of interest you will have to pay and there are different options in terms of the length of time you take to pay off your home loan. Therefore, this does not constitute financial advice but will give you a good place to start. Here are the links to two of these calculators:
If you want a calculator that is not attached to a particular bank, consider using the one offered below
- If you find yourself in trouble, speak to your mortgage lender – If you are struggling to make ends meet, speak up! Lenders are much more willing to help you if you come to them BEFORE there is a crisis. There may be a number of ways they can help you. You would not know unless you ask!
- Location, location, location – Do your research! Speak to a variety of estate agents. Research the areas you are considering not only in terms of properties available but also consider things like proximity to work, transport, amenities, and so on. Find out what the average rate of sales has been in the area. This will tell you how stable the community is. Look at what the properties have gone for in the past. This will help you to form a picture of how value has increased or decreased in the past. Investigate future developments that may be in the pipeline.
No blog can substitute professional advice
If at all possible, take your time when you do your homework. Draw on credible sources of information –in terms of your on-line searches but also in terms of your financial advisor who can help you determine what is not only possible, given your resources, circumstances and needs. Such a person would be much better at helping you come to a conclusion in terms of what would be the most advantageous for you in the short, medium and longer term.