The Truth About Property

The Truth About Property

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Home ownership is one of the fundamentals of a free economy, and in many ways the activity in residential property markets correlates with the health of the economy of that country. But have recent developments challenged this thinking?

Investor’s paradise?

I just returned from the US where I found the market conditions very interesting. In fact, purchasing a rental type property, specifically two-bedroom apartments or townhouses, is cheaper than renting in 74% of the 50 largest US cities. Sounds like an investment paradise doesn’t it?

Only a few years ago some of these same cities were practically owned by investors, with the investment gurus like Robert Kiosaki and Dolf de Roos proclaiming them perfect buy-to-let destinations. Prices rose in these cities pushed by frenzied demand and easy cash pumping from banks awash with paper.

Many lost fortunes when the bubble finally burst and prices corrected, in some cases dropping to half the peak value. But as it is with so many boom-bust cycles, those same cities now look rather attractive again.

For those of you new to all this, it means that houses are so cheap that if you buy at current prices the rental income that you can earn will cover 100% of the bond and a whole lot more. And the same opportunities are out there right here in South Africa.

Disrupted markets

Many reports suggest that there has been a mind-set change that will radically disrupt property markets around the world for years to come, brought on by aggressive house price correction that has plagued many developed countries. If the average person had lost confidence in property, prices would stay flat for years to come, creating a very unattractive investment scenario.

To establish how badly this mind-set change had affected South Africans, we set out to find out what they really think about property: is it still a sound investment, what trends are influencing buying or renting
decisions, and why?

Related: Need-to-Know Property Rules

The local scene

We found some very interesting facts.

According to a survey (conducted by Private Property in association with market research company Columinate), the biggest myth that we bust was that almost all South Africans still believe strongly in property.

In fact, 74% thought that buying a property even in today’s uncertain economic climate was a prudent investment, but an even bigger majority of 93% said that they would prefer to buy rather than rent if they could afford to. Overall, owning property had a far more positive association than renting.

Generally owning was associated with investment and assets, while renting property was perceived to be unwise and irresponsible by those in the survey.

So why don’t the respondent’s buy? The broad answer is that they cannot afford to buy, or they could not afford to buy the same amenities that they could rent. We know that the banks that traditionally loaned money to home buyers are lending very cautiously at the moment and this comes out clearly in the survey.

Applying for a homeloan is the most stressful event in the home buying process. A remarkably low 15% of tenants suggested that they preferred to rent because they could get better returns in other investments.

Other important factors that influenced the buying decisions of potential buyers were the price (67%), the proximity to work (44%), the proximity to good schools (42%), and the proximity to shopping centres (35%).

But one of the most interesting points to note was the need for good security. When asked what the most important factor which influenced the choice of area for both buying and selling the answer came out very clearly in favour of good security. Nearly 44% of respondent’s suggested that the crime rate, the security presence and the cleanliness of the area were the strongest influences when deciding on an area.

Pent-up demand

To sum it all up, nothing has really changed my view on buy-to-let property investment. I will continue to look for affordable two-bedroom units in good areas, within a secure complex.

The banks and the state of the economy will continue to control the volume of tenants who become owners but we now have confirmation that there is huge pent-up demand for affordable good housing. If you love the idea of owning property, you are not one of the crazy ones. If you can but don’t choose to invest in property, maybe you are.

Related: Why Property Demand is Exceeding Supply

Justin Clarke
Justin Clarke is the executive chairman of Private Property Holdings and co-founder of Private Property, taking the company from a raw concept internet start-up to being the major player in the internet space today.