If you are reading Entrepreneur, chances are you are considering a multitude of options to protect, grow and nurture your wealth. We all know how hard it is to build assets, but the bigger challenge is protecting them from marauders. The most common destroyers of wealth are inept governments, taxes and the slow killer inflation, but even more dangerous are those overzealous men in suits selling dodgy funds and schemes that are impossible to understand, but offer such delectable returns that they are just too hard to stay away from.
I am a property addict, completely hooked, and will do my best to convince you that fixed property is a great place to create wealth. This month I will unpack the basics of home ownership, before we delve into the more complex areas of property as an investment in subsequent columns.
Property investment is a broad topic covering a multitude of subjects, so let’s kick off with the most common, and that is home ownership. Chances are you already own your own home and if you do then good on you. Home ownership is the pillar of a strong vibrant economy and a great vehicle for wealth preservation. It provides shelter and stability for your family, and it’s an asset that can provide security for other investments, an emergency or for education.
Ultimately, owning your own home should be one investment that is part of your life plan. If anyone tells you otherwise, consider the graph below.
The graph shows that house prices on average increased in value at a faster rate than gold (apart from the period 2005 to 2009), the JSE all-share index, fixed deposit, or CPI inflation, measured over 19 years, 14 years, nine years and four years.
Owning a home is certainly not going to make you famously rich. In fact, current statics show that the average home in 2011 is barely keeping up with inflation. House price growth minus inflation is expected to be around 1,5% for 2011, not a great yield by any standards, but with an improved outlook. And remember that this is a broad average.
Protect Your Wealth
So, what this shows is that houses are not going to appreciate in the next year or so. If you are not a homeowner, there is time to search and find the right property to buy. And hidden in the broad averages there will be great deals — homes that sell for a fraction of their replacement value. If you have done alterations recently you will know what I am saying.
The replacement cost of a home is roughly 34% more than the value of that home, the result of sellers selling at the best price that a buyer in a weak market is prepared to pay. The result of this is that developers stop building new stock, decreasing the supply. When demand picks up as it inevitably will, prices will rise until it is more viable to build new. Remember the bubble of 2007 and you will see that for a period it was cheaper to build than buy an existing home — it also created an oversupply of newly built stock.
What you also need to take into consideration is the inflation predictions and the effect that will have on price. There is no doubt that this will compound the problem of widening the gap between cost to build and cost of existing property, further pulling the price of your home up. As we know, inflation erodes our savings, but at the same time the economy adjusts to counter the loss of spending power. Increased salaries and wages improve the other fundamental affecting our house prices, which is affordability. Higher salaries mean we can afford higher priced homes and so can the other buyers searching for the same house type, pushing the house price further. If you have a home loan the interest rate may go up as government takes actions to curb inflation but the capital value stays the same, so devaluing by inflation. In effect your debt shrinks.
If you have any doubt that owning your own home is a great way to protect your wealth, look around you and see how many elderly folk facing retirement find that their home is their biggest asset. Your home is the ultimate insurance policy.