Investing in residential property
Levels of activity and price growth in the South African residential property market have slowed down considerably over the past year on the back of sharply rising inflation, which caused interest rates to have been hiked by a cumulative 500 basis points since June 2006; the full implementation of the National Credit Act about a year ago; and the recent tightening of credit criteria by some banks. In view of the impact of these developments on the property market, many people, including homeowners and prospective homebuyers, have become uncertain whether residential property can still be regarded as a sound investment.
An important consideration with regard to any investment is the return (a regular income and/or a capital gain after taking into account the effect of inflation). Although nominal house prices in the middle segment of the market (houses of 80 m² - 400 m², up to R2,9 million) have increased by about 12% per annum over the past twenty years, real prices have risen by only about 4% per annum over this period, mainly as a result of high levels of inflation at certain stages during this period (see table). Over the past few years since the property market recovered in 2000 after a long period of mediocre performance, house prices have surged by about 19% per annum in nominal terms, while in real terms, prices have risen by around 13% per annum. The past eight years since 2000 were marked by significantly lower inflation compared with the 1980s and 1990s.
Residential property has performed particularly well in comparison with other asset classes over the past number of years, based on the gross internal rate of return (IRR), which excludes deductions for maintenance costs, commissions and rates and taxes. The IRR includes the capital appreciation as well as the income that can be derived from the asset. Over periods of five, ten, fifteen and twenty years, an investment in residential property in South Africa has beaten most other asset classes, as well as inflation (see table and graph on the IRR by asset class). This only applies to the situation where a house is rented in order to earn an income.
Based on the latest trends in house prices, as measured...
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