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.