It is better to buy a house than rent one, for now

Buying a house is currently more attractive than renting one but this trend could change within the next months as interest rates go up and the cost of borrowing increases.

According to the Property Barometer released by the First National Bank, the House Price/Income Ratio Index is quite high by historic standards and this is causing concern that house prices must be due for a downward correction.

“It hasn’t happened in a big way yet, due to the low interest rates that translate into a Home Instalment/Rental Ratio Index level that is at its lowest level since the late-1970s,” FNB says.

The nominal prices of houses in the middle segment went up by 8.5 percent in the first seven months of this year, according to the ABSA House Price Index.

Lending rates have gone up twice so far this year by 50 basis points in January and 25 basis points in July with the repo rate, the rate at which the Reserve Bank lends to commercial banks, now at 5.75 percent.

Banks are lending to the public at 9.25 percent but ABSA says this is expected to increase to 9.5 percent by the end of this year and further to 10.5 percent by next year.

The repo rate is, however, still below inflation which dropped to 6.3 percent in July.

The increase in lending rates will make houses less affordable to many as they will be required to earn more to qualify for bonds.

As an example, the average small house in the middle segment currently costs R826 000. To qualify for a bond at the current rate of 9.25 percent, one needs to earn about R25 000 a month. A couple can aggregate their salaries to qualify.

If the lending rate goes up to 10.5 percent as predicted, one would need to earn about R27 500 to qualify for the same bond.

Saving money has nothing to do with how much you earn!

Most people believe that they have nothing to save because they earn very little. Their incomes are not even enough to meet their basic requirements. But saving has nothing to do with how much you earn. It is about how you use the money you earn.

Economists Steven Venti and David Wise, from the United States, argue that “Saving is more of a choice than a game of chance.”

In their study: “Choice, Chance and Wealth Dispersion at Retirement”, they found that it was not only families with low incomes that saved very little but a significant number of those with high incomes also saved very little.

At the same time a substantial proportion of those with low incomes saved a great deal. Saving was therefore not by chance by but choice. “Some (people) choose to save more and spend less over their working lives while others choose to save little and spend more while working.”

Saving is therefore a choice that you have to make. It is a state of the mind. You have to consciously adjust the way you spend your money and make sure that you live within your means.

Tahira Hira, another US expert on personal finance and consumer economist says, “The best way to save money is to first have a good understanding of how you are spending it. You should not take any drastic steps. Take time to review your current spending and see where you can cut costs or reduce expenses.” She continues with, “the first thing is to reduce impulse buying”.

She recommends that for four weeks record everything you spend money on daily. Review your records at the end of each week. This will enable you to see things that you are spending money on when you shouldn’t. It is only when you start spending less than you earn that you can start saving.

Jack Milne, a South African, wrote in his book Streetwise Investor, “That it is better to put your money under your mattress than not to save at all.”

Milne ended in disgrace when he got greedy but his advice still makes sense. If you put aside R5 a day, you will have R1 825 by the end of the year. How many of us have this money in our savings accounts?

Imagine how much more you could save if you really sit down and plan how to save your money! If you save R200 a month you will have R2 400 at the end of the year. You can afford to save this kind of money even if you are earning R2 000. This is just 10 percent of your salary, money that you would normally pay as tithes to your church, or money that you can easily blow on drinks or ice cream, sometimes over a weekend.

 If you save 30 percent of your income, or R600 a month on a salary of R2 000 a month, you will save R7 200 by the end of the year. In two years you will save R14 000, enough to pay a 20 percent deposit on a house loan of R60 000, the maximum you are allowed on a salary of R2 000 a month.

Here we are assuming that you will be putting your money under the mattress where it will not earn any interest. But by putting your money under your mattress, you may indeed be saving, but someone can steal that money and you lose all your savings. So rather put the money into a savings account. At least it will earn a little interest, but more importantly it will be safe. Once you have adopted the culture of saving, it will be easier to look for better ways to maximise your interest.

Milne has a simple explanation for saving. He says it is better to put your money under your mattress than not to save at all. It is better to take the money from under your mattress and put it into a savings account. At least you will earn some interest. 

But it is even better to move your money from a savings account into a fixed deposit account, because the interest is higher. You can move it from a fixed deposit into a call account or a notice deposit or an even an investment account, the interest rates are usually higher and this is usually for shorter periods, but they require you to invest sizeable amounts.

In other words when you put your money into a savings account, you earn interest which is anything between 0.20 percent to 4.7 percent depending on the amount and the length of period you leave that money in the bank. You can open a savings account with as little as R50.

But the moment you have R10 000 in your savings account, it is no longer wise to keep it all there because you can earn higher interest by moving it into a fixed deposit. In other words, you can have two accounts with some of the money in a savings account and the bulk in a fixed deposit.

Once you get to R20 000, you have to look at investment options with higher rates than the fixed deposit. Retail bonds, for example, offer higher interest rates but you have to invest for a minimum of two years.

Although there are other options you can use to earn higher interest rates, we are not going to look at them here because this book is not about investment options; it is about ways you can save money to buy a house.

We are therefore assuming that you are not going to save for more than two years before you buy a house because you have to remember that while you are saving money the price of houses is also rising and usually at a much faster rate than the interest you earn on your savings. 

We therefore advocate that you sacrifice some of the luxuries that you normally enjoy for a few months to save enough to buy the house that you can afford.

This was excerpted from Chapter 4 of our book: How to buy a house for half the price.