Bond vs Rent

[Cius]

Just had a surreal thing happen. I am a trustee in my complex and friendly with a few people. One resident of the complex told me she had friends that wanted to rent inside the complex so when my neighbor moved out into a larger house and said he wanted to rent his unit out I put them in touch with each other. Turned out the rent asking price was too steep for the couple. When I inquired how much the rent was it was R8000pm for a 120sqm place. I know for a fact that the property itself is worth about R900K to buy. Levies would be around R1300 I guess.

The thing that boggled my mind is that I have a similar sized unit that I bought two years ago and the rent is significantly more than i pay for my bond + levies + electricity + property tax. Is rent getting crazy high right now or is it just me? From what I have seen property prices have been flat for the past 2-3 years yet rent keeps going up by 6% each year. It now seems its cheaper to buy than rent! It really can't keep going like this. I mean who can afford that kind of rent for a little 3 bedroom unit???

Checking the maths if you bought a 900K place with a 10% deposit and prime -1.5% you would pay R6500 pm. Add R1300 for levies and R400 for property tax and you are paying R8400 pm. That is so close to the rental its ridiculous. Even if you got the loan at prime it means the debit order would be around R7200 pm. Even if it works out a little more than renting within a few short years inflation will "lower" your monthly repayments while increasing rent dramatically. Seriously. Why rent unless you know you are not around for long? The only reason I can think of is that people can't get the deposit saved up perhaps or can't get bond approval? Curious to know from anyone who is renting what is holding them back? Do you prefer renting or would you like to buy but can't due to some reason?

[ChocolateBadger]

If you wanna be permanent, buy. If you planning on moving in the near future or don't like where you are, rent. Renting IMO is a waste of money. You paying to live there and some places have crazy rules by the land lord. If you like the place, buy it.

[srothman]

We bought about a year ago, and discounting the levies and property tax, the bond installment is roughly the same as what we paid when we were renting. I don't regret taking the plunge for one minute. Like CB mentioned, it depends on your plans for the next, at least, 5 - 7 years.

[Mike Hoxbig]

Never saw the point in pissing money away to pay off somebody else's bond.

There was an argument here a while back that if one was disciplined, then the savings accrued by renting could be invested to yield a large return in 20 years time. My problem with this argument is that it's only valid if it is assumed that the price of rent remains constant, which it doesn't. At the moment, the chances of an annual increase in rent is higher than a proportional increase in the prime lending rate. And even that may be averted by moving to a fixed rate plan, especially now when it is low.

[ChocolateBadger]

To put it simply:

Buy > pay off > asset

Rent > pay > pay > pay > and so goes on (also take yearly inflation into account)

[Cius]

From what I understand in a normal economy and environment the cost to rent a unit should be 10-20% lower than the cost of owning the unit with 100% finance. Thing is due to the property price bubble property prices have stagnated for the past few years but I have not noticed a similar stagnation in rental prices (perhaps I am wrong there???). Hence rent seems to be overtaking the cost of ownership which is a ridiculous notion. Even if ownership is innitially more expensive by 10-20% in a high inflation environment like SA inflation will be eating away at the value of your debt making it easier to pay off by increasing your salary while the bond stays the same. I remember the first place I rented. Rent was about R4500 I think, the landlord told me his bond was about R1800 pm. He bought the place 10 years before. That just shows what happens to rent and bond repayments given a little time.

[noxibox]

Normal would be an environment in which it is always possible to build more housing, anyone who wants to buy can get the necessary loan and people would buy wherever housing is available. Currently we have a situation where loans are harder to come by. Many people renting might be doing so because the bank will not lend them money or they'd be required to pay a high interest rate.

In the UK in the 80s the Tory government took steps intended to increase rents, so their property-owning voters could earn more from their property. Today the prime problem they face is never-ending opposition to development. On the one hand you have the so-called greens who would rather nothing is ever built anywhere while on the other you have country-dwelling Tory voters to keep happy. So no matter which party holds power you have an artificially created and unnecessary restriction on housing expansion.

[blunomore]

If the amount to rent versus the amount to buy the same place is virtually the same, then obviously buying would win hands down.

[Dolby]

In the case above, I think it's the R140,000.00 lumpsum that may prevent people buying - even though monthly they're similar

[Paul_S]

In the case above, I think it's the R140,000.00 lumpsum that may prevent people buying - even though monthly they're similar

Which in most cases is a result of poor saving habits.
i.e. Buying a Golf GTI and then wondering why you have no spare money lying around to use as a deposit for a house.
Obviously there are exceptions but I see a lot of youngsters driving flashy cars (R300K+) that I wouldn't even look at.

[srothman]

Which in most cases is a result of poor saving habits.
i.e. Buying a Golf GTI and then wondering why you have no spare money lying around to use as a deposit for a house.
Obviously there are exceptions but I see a lot of youngsters driving flashy cars (R300K+) that I wouldn't even look at.

+1000!!!

It amazes me how a person would prefer spending more on a car in which they spend maybe 2-3 hours a day, vs. spending on a house in which you potentially spend 12+ hours per day.

[Dolby]

I know you get the guys you mention, but sometimes one doesn't earn enough to simply away that sum of money - whether they have a GTI or Yaris

[The_Mowgs]

I recently received 100% loan with a interest rate of 9.84% from the bank. Is this a good interest rate or should I try to get it lower? This is my first house that I want to buy.

[Paul_S]

I recently received 100% loan with a interest rate of 9.84% from the bank. Is this a good interest rate or should I try to get it lower? This is my first house that I want to buy.

An excellent rate is prime minus anything.
A good rate is prime (9%)
An okay rate is prime plus, up to +1.0
Anything higher than prime plus 1.0% is not a good rate.
Of course this is just my opinion.

It all depends on your risk profile and the yield that the bank expects to make out of the interest.
Higher value bonds (over R1 million) tend to get lower rates (prime minus 0.5 to 1.0) regardless of one's risk profile.

[The_Mowgs]

Thanks for the feeedback, really appreciate it!