Nkandla's lessons for homeowners

President Jacob Zuma learnt a lesson this week that homeowners everywhere battle with every day: property ownership is a financial millstone. Not only does it cost a fortune to buy - courtesy of transfer duties and lawyers' fees - but municipal rates are increasingly prohibitive, security costs a fortune, and don't get me started on the price of chlorine to keep the Whitfield firepool all sparkly bright.

And when you come to sell it, the South African Revenue Service wants to know whether you made a capital gain - and the estate agent takes a chunk for showing it to a few people.

The president this week finally agreed to "pay back (some of) the money" just days before a Constitutional Court hearing on the matter, his state of the nation address - disrupted by the EFF last year over the Nkandla issue - and the threat of imminent local government elections.

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The brutal reality of property is that it's hard to make money out of your primary residence - and this year is going to be particularly tough. Two leading property experts, Jacques du Toit at Absa and John Loos at FNB, are expecting average prices to rise by just 5%. Considering that the Reserve Bank is warning that inflation could top 7% this year, Loos and Du Toit's predictions mean the value of the roof over your head is declining in value in real terms.

Property researchers Lightstone are warning that the possibility of a recession, lower employment and higher interest rates means that fewer people will be trading up or even renovating, so prices will cool.

If you think the roof over your head is an investment, think again: investors - or, more accurately, property buyers - overestimate the returns from housing, and underestimate the variability of returns over the long term.

Treating your primary residence as an investment is a mug's game, which is why financial advisers tell you to exclude the value of your home from your asset base when calculating the affordability of your impending retirement.

Although many savvy investors make money in boom times, the reality is that, for the vast majority of us, our "investment" barely keeps pace with inflation.

This has been proved by the Herengracht index - an index of house prices from 1620 of properties along the Herengracht canal in Amsterdam. Maastricht University economics Professor Piet Eichholtz chose the Herengracht because the quality of the structures along the waterway has remained consistently high and sought-after.

Like every asset class, property is subject to booms and busts. For example, valuations along the Herengracht doubled in the five years between 1628 and 1633 as Amsterdam expanded rapidly. But prices plummeted to 1628 levels just four years later in the aftermath of a plague that killed 20% of the city's inhabitants and the collapse of the tulip market.

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The biggest downturn was between 1792 and 1814, when they fell 74% after Napoleon's occupation of Amsterdam. But when the French emperor was defeated in 1815 and the Industrial Revolution began, the economy - and the housing market with it - boomed.

Such are the dynamics of cycles. Buy low and sell high and you make money. Do it the other way round and you can lose your shirt. On average, though, property barely outperforms cash in the bank.

In 2007, the Dutch newspaper Handelsblad reported: "The average house on the Herengracht now costs à2.6-million. That is, on an inflation-adjusted basis, just a bit less than in 1736, when house prices along the Herengracht were at their historic high. If house prices keep rising at their current tempo, the 271-year-old record will be tied in 2008."

And Herengracht house prices did match the record the next year - before being knocked back 20% in the global financial crisis.

The Nkandla story has the same lessons: be wary of overcapitalis ing; make sure you have the right architect and builder; it's a good idea to have a quantity surveyor involved; and always keep some cash spare for those unexpected expenses.

Whitfield is Sanlam financial journalist of the year