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You are at:Home»Uncategorized»Buy to let
Uncategorized

Buy to let

Grocott's MailBy Grocott's MailNovember 12, 2009No Comments3 Mins Read
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Timing is everything, as the saying goes, and this certainly applies to buying property for investment – as opposed to buying a home to live in.

Nationally, housing has been hit hard in the last few years. The average house price, though it has started to rise again, is still lower than it was nine years ago, according to Absa’s House Price Index.

Timing is everything, as the saying goes, and this certainly applies to buying property for investment – as opposed to buying a home to live in.

Nationally, housing has been hit hard in the last few years. The average house price, though it has started to rise again, is still lower than it was nine years ago, according to Absa’s House Price Index.

It is always difficult to predict, and the housing market is no exception.

However, Absa’s Fourth Quarter Housing Review remarks that prices are forecast to decline somewhat further after adjusting for inflation next year.

At a Rhodes Investec Business School’s (RIBS) business forum lecture earlier this year, Rhodes University tax professor Matthew Lester described the housing market as a "disaster" and said that after the banking crisis the property market was expected to take about six years to recover.

Buy-to-let opportunities are often sold on the basis of the profit from capital appreciation rather than profit from rental income.

Put down a 20% deposit on a R600 000 flat, for instance, let the tenants pay your R4 800 bond off, and after 10 or 20 years, sell the flat at an enormous profit. In other words, rentals pay the monthly bond payment or part of the payment, but the real money is made from the increased price of the property in the long term.

However, what is forgotten is transfer duties; the opportunity cost of tying up the deposit money in property; maintenance costs; capital gains tax when the property if eventually sold. The real risk is of property prices not appreciating sufficiently, after adjusting for inflation, to more than cover costs over the period.

Grahamstown’s residential property market does differ from the rest of the country. Price rises in Grahamstown have been propelled by the need for an ever-increasing number of students to find digs, as well as for a time by low interest rates on the back of low inflation.

In other words, the residential property market is highly exposed to decisions around the university, and around higher education.

When it comes to interest rates, Grahamstown’s property market is affected in the same way as the rest of the country. Thanks to electricity price and other cost pressures, it looks like inflation will continue to prove problematic.

If the Reserve Bank continues to fight inflation with high interest rates, which seems likely, residential property prices, even in Grahamstown, will be hit.

Property prices may not fall dramatically. But they will have a hard time replicating the surge in prices that has put buying a house out of the reach of ordinary, working Grahamstown residents who are first-time buyers.

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