In recent times, the debate over whether buying or renting a property is a more lucrative investment has gained significant traction. While many believe in the traditional wisdom that homeownership leads to wealth generation, renowned economist Dawie Roodt challenges this notion, particularly in the South African context. This analysis delves into the intricacies of the South African property market, considering factors such as transaction costs, rates, taxes, and maintenance. By comparing the long-term return on investment for buying a property versus renting and investing the difference in the S&P 500, we aim to provide valuable insights for South Africans contemplating their investment choices.
Before delving into the financial analysis, it’s crucial to understand the unique dynamics of the South African property market. While property ownership is often viewed as a hedge against inflation, Dawie Roodt emphasizes the potential downsides, including transaction costs, rates, taxes, levies, and maintenance expenses. Roodt suggests an alternative approach: considering listed property stocks, unless a compelling opportunity arises in the housing market.
To assess the long-term financial implications of buying versus renting, BusinessTech conducted a detailed analysis using a luxury 2-bedroom Ascend to a Midstream apartment in Midstream Estates, Gauteng, as a case study. The property could be purchased for R3.09 million or rented for R22,000 monthly. The analysis covered a 20-year period, assuming a fixed prime rate of 10.1% for the buyer.
The analysis made several assumptions, including a 20-year bond payment period, a fixed prime rate, estimated transfer and bond registration costs, monthly levies, rates, taxes, and maintenance costs. FNB’s Property Barometer, estimating an 8% annual increase in house prices, was used to project future values. Monthly costs were adjusted for inflation using the South African Reserve Bank’s target inflation rate of 4.5%.
The analysis revealed that around 15 years into the payments, the renter’s monthly costs exceeded the buyer’s costs. However, during the initial 15 years, the renter benefited from lower monthly expenses. The difference was invested in the S&P 500, resulting in a final value of R13.21 million for the renter’s investments. In comparison, the final value of the apartment after 20 years was R15.19 million. The buyer, with a smaller S&P 500 investment totaling R214,683, had a total wealth of R15.40 million, making them the clear winner with a final wealth 16.63% higher than the renter.
While the results favor buying a property in the South African context, it is essential to note that these findings are based on various assumptions. Real estate markets are dynamic, and individual circumstances may differ. South Africans considering their long-term wealth-building strategies should carefully weigh the pros and cons of buying versus renting, taking into account factors such as market conditions, personal financial goals, and potential investment opportunities. As the property market continues to evolve, informed decision-making becomes increasingly crucial for those seeking financial prosperity in the South African real estate landscape.