Buy whatever you can afford, as soon as possible
Category RealADVICE
First-time buyers attracted by historically low interest rates have been streaming into the real estate market for the past two years, but now that the prime rate is getting close to double digits again, should young people still be buying rather than renting?
The answer is a definite "yes", says Gerhard Kotzé, MD of the RealNet estate agency group, simply because the younger you are when you pay off a mortgage and no longer have to pay for your accommodation, the greater the flexibility and financial freedom you will have when it comes to educating your children, looking after your parents if necessary and providing for your own retirement.
"Of course, many young people are worried about not being able to make their bond repayments if they lose their job or there is a drastic downturn in the economy again. Others are concerned that homeownership, as opposed to renting, will restrict their travel plans, marriage plans or their ability to relocate if they are offered a better job somewhere else."
He notes that affordability was also an increasing challenge for young, first-time buyers in the years before the Covid-19 pandemic, and that this led to the average age of first-time buyers rising as high as 37 by 2019.
"However, there was clearly a desire to buy among a significant and increasing percentage of young people, with the Lightstone property data company reporting recently that the percentage of buyers under-35 rose from 25% in 2018 to 34% in 2021, the year of the lowest interest rates in almost four decades.
"And the reason, we believe, is that there is a growing appreciation of the fact that paying off a home loan is one of the best ways of achieving an excellent - and tax-free - return on your money, and starting to build up your personal wealth.
"We find that young people also have a much better understanding now of the need to build equity in their first home as fast as possible, so that even if they do have to sell in order to work elsewhere, or to accommodate a growing family, they have a good chance of doing so at a profit they can then use as a deposit on their next home. This has definitely boosted the demand over the past two years for smaller, less expensive 'starter' homes that can be paid off more quickly."
Kotzé also says that the sooner one becomes a homeowner, the more cost effective this choice becomes compared to renting. "Rent will usually rise every year, no matter what, while home loan repayments will be influenced by interest rates. And even when interest rates rise, a portion of your monthly bond repayment will still be going towards paying off the outstanding capital and acquiring your own asset.
"On the other hand, home prices will continue to rise, even if it is only at a slow rate. This means that the longer you wait to buy your first home, the bigger the home loan you will need, and the bigger the salary you will need to qualify for that loan, especially if interest rates continue to rise. So if you don't want to be shut out of the market as a young person, you should be aiming to get a foothold on the property ladder as soon as you start earning."
He does caution, however, that home buying has become more complex in recent years because of legislation requiring additional disclosure forms, FICA declarations, safety certifications and tax clearances, so it is highly advisable for prospective buyers to work only with reputable estate agents and home loan consultants.
Author: RealNet
