Over 20 years, buying a house produces a better return on investment than renting and investing the difference in the JSE Top 40.
The rising interest rates have put many South African homeowners under pressure as they have to deal with higher bond payments and lower disposable income.
With the prime rate rising to 10.75%, many people wonder whether it is worth it to buy a house and deal with high monthly payments.
Many commentators are punting the benefits of renting, including avoiding costs like maintenance, levies, and rates and taxes.
To see which option provides the best return, Daily Investor used a luxury 2-bedroom apartment in Midstream Estate that is both for sale and to let.
The apartment has a selling price of R3.09 million and can be rented for R22,000 per month, making it a good like-for-like comparison between renting and buying.
Buying assumptions and structure
For this comparison, we used a 20-year bond payment period and, although unrealistic, that the prime rate would remain unchanged.
Using BetterBond’s transfer cost and bond registration calculator, the estimated transfer costs and registration fees are R216,883.
This amount is handled like an initial lump sum investment made in the JSE Top 40 for the renting option.
The property has levies of R2,840 per month and rates and taxes of R2,604 per month. General maintenance of R1,000 per month is also added.
These costs are further adjusted for inflation over the measurement period.
According to the South African housing market index, properties in South Africa experienced an annualised price growth increase of 7.99% over the past 20 years.
It is assumed to hold true for the following 20 years, which means the house will be worth R15.2 million at the end of the repayment period.
Renting assumptions and structure
The rent of R22,000 per month is also adjusted for inflation on an annual basis.
The difference between the bond payment and other costs and the rental expense is invested in the JSE Top 40 over the 20 years.
The initial difference between renting and buying is R15,815. This amount is adjusted each year and invested in the JSE Top 40 each month.
What the numbers show
The final investment for the home buyer is R15.2 million, significantly higher than the renter whose JSE Top 40 investment is worth R9.4 million.
The home buyer made R7.5 million in bond payments, and the cost associated with owning the home was R2.43 million over 20 years.
The renter paid R8.3 million to its landlord in monthly rent. The savings which were invested were, therefore, not enough to outperform the homeowner’s capital growth.
It should be noted that there are numerous considerations when deciding whether to buy or rent.
These include the area which will determine the difference in rent versus bond repayments, how long you will stay in a house and personal circumstances.
Whether renting or buying is the best will depend on all these factors and should be done for each person individually.
|All other costs
|Top 40 investments
|Wealth after 20 years
|Wealth after 20 years