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Category:
Insurance
News /
Investments /
ABSA Home Loans
/ June 2007
Who wants to be a millionaire?
Selling to realise investment value is very enticing
 Homeowners are getting jittery. They want to know if the time is
right to jump out of property into other investment opportunities.
The short answer is a yes – and no.
A house is the biggest financial
commitment most people will ever make, so when the property market
starts slowing down it is reasonable for homeowners to start
thinking about re-jigging their investment portfolio.
When you consider how much some properties have soared in value,
there is a very good – and tempting - case to be made for selling
your home now and realising some of the historical capital growth in
the investment. Alternatively, homeowners can reduce their exposure
to their home as an asset class and diversify into other
investments.
The
latest economic indicators show that nominal house price growth will
probably average 13.1% (2006: 15.3%) in 2007. In real terms, (in
other words, after accounting for inflation) this comes to 7.2%
(2006:10.2%).
Despite continuing demand in the property market, inflationary
pressures are taking their toll in the form of slower growth in
price increases. This trend may persist for the next few years,
following several years of robust increases in the price of
residential properties.
South African homeowners have become used to buying property, both
as homes and as a store of wealth, and earning a return within a
short period that topped any other investment opportunity in the SA
market.
So
at first glance, it is probably a good time to sell – homeowners can
translate the increase in the value of their homes into cash, and
use the money either to upgrade to a bigger, better home or to
redeploy the profits into other asset classes, while scaling down to
a small property.
But, as in all things related to living, working and investing in
South Africa, it is a bit more complicated than that. Like other
emerging economies, the property market is more volatile than in
developed countries, such as Britain or America. This means that
while price growth may be slower this year, it could rebound
quickly.
Investors considering alternative asset classes must also bear in
mind that equity markets are very volatile. While this offers
opportunities for nimble investors to make gains, it also means
constantly monitoring fluctuations to ensure you aren’t
short-changed.
At
the same time, ongoing drama in the crude oil market is adding to
domestic inflationary pressures, which will make it more difficult
for local companies to match their previous corporate results. This
normally has a knock-on effect on their share prices, dampening the
overall performance of the stock market.
Probably the most significant impact on the domestic market in 2007
will be what the SA Reserve Bank (SARB) decides about interest
rates. Absa’s view is that the cost of borrowing may be raised by
the SARB this year, and higher interest rates are usually followed
by a decline in activity in the home loan market.
Other issues also need to be factored into the equation. On the
positive side, household incomes continue to grow, which puts more
money in the hands of people who want to purchase properties. The
economy as a whole is still delivering satisfactory growth, but
there has been a worrying decline in business confidence.
The
concerns that have been raised include the rapid escalation in
building costs, unacceptably high levels of household debt, and
unresolved problems with unlocking sufficient appropriate land for
residential development.
None of the above means, however, that the focus of investors has –
nor should – move off residential property as an investment option.
Despite a perception that the housing market is subdued, growth in
value remains robust and demand high in some categories.
For
example, in the lower end of the market, which dominates volumes in
both numbers of properties sold and home loans secured, price growth
has remained firm at over 18% in April, year-on-year. In the luxury
segment, however, the trend has softened to around 6%.
Recent reports in the media have suggested, however, that the
average house price will top R1-million in the next year or so. On
paper, that would seem to put home ownership well out of the reach
of most South Africans and certainly first-time buyers, as household
income would need to be at least R30 000 to afford the bond.
However, these statistics don’t tell the full picture, because in
South Africa’s upwardly-trending property market, it would seem that
it will probably not be a ‘bad time to buy’ any time soon.
Furthermore, while it is true that the average two or three bedroom
house is averaging over R900 000 currently, there are still many
affordable smaller properties, like bachelor flats or one-bedroom
apartments. And it is still the case that the sooner you get into
the property market, the bigger your returns are likely to be – and
you will also have a place to call home.
Looking at the current returns from owning a property, an asset that
provides a nominal return of between 13% and 15% from the escalation
in value remains a good investment.
Selling to realise investment value is very enticing but owners must
remember that there are many costs incurred in moving home. Transfer
fees, estate agent commission, relocation costs, and, of course,
whether you are able to find a new home in an area that has a
reasonable power supply or phone connection.
There is also an emotional investment in homes, and moving out of a
place you love just for the monetary gain can make you unhappy in
the long term.
There is a lot to be said for staying put, and investing in the
quality of the home you already own. Upgrading the fittings will add
to its value, and is easier to do than, say building from scratch in
a market that is plagued by high materials costs and rapidly
dwindling numbers of qualified artisans.
At
Absa, we maintain that investing in your property is still the best
investment you can make, even it is only a lick of paint. And it is
always important to remember that your house is a home - it is more
than just an asset. It is where you raise a family and entertain
friends. And it is about what makes you happy. Don’t fall into the
money trap to the detriment of everything else.
Opinion piece by Gavin Opperman, Managing Executive Absa Home Loans
Source: ITInews – Insurance
Times and Investments Online
www.itinews.co.za
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