Buying vs renting in South Africa – the winner is clear

While there are upsides to renting and buying property in South Africa, buying a home offers greater long-term financial benefits and security.

This was explained by Samuel Seeff, chairman of the Seeff Property Group, who stated that the decision between buying and renting is crucial for many South Africans.

Renting a home has several benefits. It provides flexibility and fewer upfront responsibilities. For many people who cannot afford to buy property or may not be able to settle in a specific location, renting is an ideal option.

However, over the long term, buying a property offers more financial upsides. First, Seeff said that purchasing a home involves making payments toward an asset you own rather than paying rent to a landlord.

“It allows you to build equity with each mortgage payment, while paying monthly rent offers no return on investment as it is purely an expense.”

He explained that you accumulate wealth as your loan balance decreases and the property value increases.

“Homeownership turns a monthly expense into long-term savings and investment. It helps create an asset of considerable value which can be leveraged for future financial goals.”

Importantly, Seeff said that owning your home offers stability and value growth. It also provides the flexibility of making future changes to your living space, which is not easily possible in a rental.

“You can, therefore, upgrade the home and add comfort to your lifestyle while increasing the value of the asset,” Seeff added.

Owning a home also creates important stability as it removes the uncertainty associated with renting. “You do not have to deal with lease renewals, rent increases, or the landlord selling the property.”

Property as an asset class has historically been a good investment and an effective inflation hedge, but it always depends on where you buy and how much you pay for the property.

A growing investment

Seeff explained that as living costs rise, property values typically increase. As a result, homeowners benefit from their capital investment being preserved.

Where rents tend to go up annually, long-term homeownership can lower your monthly costs as the loan repayments will largely stay the same, subject to interest rate fluctuation.

You can also invest all spare cash, bonuses, and the like into your home loan to reduce it or accumulate savings for future use. This creates financial security and can serve as collateral when needed.

However, Seeff cautioned that purchasing a home requires careful planning and a significant financial commitment, as there are numerous associated costs.

The shift from tenant to homeowner involves going from paying for temporary accommodation to investing in a fixed asset, building long-term equity, and establishing a stable residence.

“A major benefit in South Africa is that you can finance your property purchase with a home loan over twenty to thirty years, depending on your age and credit profile.”

A recent survey by Ooba Home Loans showed that first-time home buyers remain a considerable part of the property market.

Around 46.5% of their home loans over the last few months were from first-time buyers. “It remains a favourable time for those who are financially secure to invest in their own homes,” Seeff said.

“The banks remain supportive, and many are still granting full 100% mortgage loans, sometimes still with costs on top of that. The longer you wait, the more you will likely pay as property prices continue appreciating.”

The data

Earlier this year, Daily Investor analysed the data to determine whether buying or renting provides the best return on a person’s financial investment.

The analysis was done using two identical 2-bedroom apartments in the popular Midstream Estate in Centurion. The average purchase price is R3.04 million, while renting costs R24,000 per month.

The buyer is assumed to finance the property with a 100% loan at an 11.25% interest rate over 20 years, resulting in monthly instalments of R32,569.

Bond registration and transfer costs total R204,339. Rates and taxes start at R2,054 and grow with property value, which increases by an average of 8.13% per year, according to FNB data.

Maintenance, estimated at 1% of the property’s value, starts at R2,587 per month and also rises over time. Rent is adjusted annually to maintain a 9.3% yield.

At the same time, savings are invested in the JSE ALSI, starting with the R204,339 the buyer paid upfront. As rental costs rise, savings decrease. After 7 years, the renter’s monthly expenses match the buyer’s.

Beyond this point, any excess rental cost is allocated to the buyer’s “wealth.” After 20 years, the buyer ends up with R17.6 million, while the renter has R5.6 million.

If the renter had invested in the S&P 500 instead of the ALSI, their wealth would grow to R16.2 million. However, the buyer would still come out ahead at R19.5 million.