The age-old debate: to buy or not to buy a home

By Janice Roberts

By Tristan Naidoo, Legal Advisor, Old Mutual Personal Finance.

What’s in the news?
Data from FNB’s House Price Index for the month of October showed mild year-on-year growth – at 4.3% – noticeably lower than both consumer price and rental inflation. This implies that the Price-Rent Ratio – a common measure of “real” house prices – continues its downward trend.

What does a lower Price-Rent Ratio mean?
The Price-Rent Ratio attempts to rate how costly buying a home is relative to renting. At its most basic level, the Price-Rent Ratio is a benchmark for understanding whether it may be better to rent or buy a property and whether owning or renting makes better financial sense. The lower the ratio, the smaller the gap between the cost of buying a home and the annualised rental, and the more attractive the decision to buy a home is.

A general rule of thumb is that renting is preferable if the Price-Rent Ratio is greater than 20, while buying is better if the ratio is less than 15. Buying also makes more sense if the ratio is between 15 and 20 if you intend to live in the house for an extended period of time.

However, you should always consider the decision to rent or purchase in light of a holistic financial plan that is aligned to your medium and long term goals. Saving up for a deposit will require a specific plan and timeline while considerations such as your credit record, home loan and bond applications as well as career plans will also impact on your decision.

How does this impact South Africans?
While a lower Price-Rent Ratio may indicate a market favourable for buying, it is important to note that this ratio is still correcting itself from the pre-2008 house price boom which left the ratio at extreme highs compared to historic trends. This means that house price growth may very well remain below rental and overall CPI inflation over the short term, further lowering the Price-Rent Ratio in the future.

On a personal note…
Regardless of the current Price-Rent Ratio or how the property market is performing, the decision to buy or rent a home will always depend largely on your personal financial situation and goals. There are many variables that come into play when making a decision of this magnitude. Working with a financial adviser can help you take all the costs and factors associated with buying a house into account – and ensure you make the right decision at the right time.

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