Many newcomers to Grahamstown – parents with children at Rhodes or boarding at one of the schools, as well as recently appointed lecturers or support staff are faced with the decision to rent or buy property.
Each option has its pros and cons, but when looking at the buy-or-rent decision as an investment, timing is everything.
Many newcomers to Grahamstown – parents with children at Rhodes or boarding at one of the schools, as well as recently appointed lecturers or support staff are faced with the decision to rent or buy property.
Each option has its pros and cons, but when looking at the buy-or-rent decision as an investment, timing is everything.
Outsiders are soon struck by the difference between the residential property market in Grahamstown and other cities.
For a start, the perception is that prices (relatively speaking) have not fallen in the same way as in the rest of the country.
Ross Marriner, the Registrar of Finance and Operations at Rhodes University even talks about a “Grahamstown premium”. “Grahamstown has an economy of its own, driven by supply
and demand,” he says.
Factors often put forward for Grahamstown being different are the extensive digs market diminishing the pool of available houses; wealthy parents buying flats, townhouses or houses for children at Rhodes; or buying these to use themselves when they visit children at the expensive boarding schools for which the city
is renowned.
Nationally, housing prices have plummeted in the last few years. Absa’s latest house price index report shows that house prices in nominal terms before adjusting for inflation declined very slightly in 2009 compared to 2008. But adjust for inflation and the marginal drop of 0.2% becomes more like a 7% decline.
On his website, respected economist Erwin Rode cautions against any optimism about a recovery in real house prices.
He advances as reasons for his pessimism:
• The grim prospects for the country’s finances, which could mean a rise in taxes,
• Rising unemployment,
• The fact that house prices are in real terms very high,
• Households’ high debt levels, and
• The electricity debacle and the gloomy outlook for the world economy constraining economic growth.
At a Rhodes Investec Business School’s (RIBS) business forum lecture last year, Rhodes Tax Professor Matthew Lester described the housing market as a “disaster” and said that “post a banking crisis” the property market was expected to take about six years to recover.
According to estate agents interviewed by Rhodes students last year, Grahamstown’s residential property market is remarkably resilient, though nominal prices have softened.
That prices have held up better than elsewhere in the country arises from the large student population that has to be housed.
In this way it is similar to Stellenbosch, another university town. Last year Rhodes saw an unforeseen 10% growth in total student enrolments to around 7 000.
University residences can only at present accommodate 3 000 students, though seven more residences are being built in the next three years to balance the numbers of students living in res and those in digs 50/50, according to Marriner.
The increase in demand for accommodation by students last year will have put pressure on rentals. The total number of student enrolments this year is as yet unknown, but that kind of growth is unlikely to be repeated.
The perception that student enrolments will surge again this year and in years to come is unwarranted. Rhodes University plans to grow each year by between two to 3%.
Neither Rhodes nor Grahamstown can cope with soaring student numbers. Indeed, to get back on track with its enrolment plan Rhodes is cutting back this year on the number of first-time entering students.
Already, it could be argued that the rental market has distorted the residential property market in Grahamstown to the extent that lecturers, university support staff and ordinary townspeople who are entering the market sometimes find buying property a stretch.
Prediction is always difficult, and the housing market is no exception, but anyone buying property with an eye for making a profit on resale should be extremely careful.
That includes parents who buy property for their children to live in while they are at university, those who buy second homes to visit their boarding-school children, and anyone buying to let.
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.
Often forgotten are transfer duties; the opportunity cost of tying up the deposit money in property of the bond repayments; maintenance costs; and capital gains tax when the property is eventually sold.
The real risk is of property prices not appreciating sufficiently, after adjusting for inflation, to more than cover costs over the period.
Prof Jane Duncan, a member of the Journalism School who is on a five-year contract and newly arrived at Rhodes, decided after consulting a financial adviser not to buy property she might haveto sell again in five years.
“We estimated that it would be difficult to break even on a property in a five-year period if house price growth trends remained the same,” she says.
The fact is that 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, as well as interest rates.
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.
Of course, the really wealthy who buy for their children or to visit children may be less affected. Property prices may not fall dramatically. But they will probably have a hard time replicating the surge in prices that has made it difficult if not impossible for some would-be first-time home buyers.
