Renting could be the smartest choice

Since many experts reckon residential property is unlikely to be a hot-performing investment in years to come, renting rather than buying could be the smart choice.

Hennie Vermaak of PSG Asset Management says the poor long-term outlook for house prices means it is "definitely better to rent".

Then use the savings between your rent and what you would have spent repaying a bond to invest in the equity market.

This will require some financial discipline, says Vermaak. If rent increases to a level higher than the mortgage payment, you would have to fund the difference out of the returns the equity investment generates. By renting a flat for 25 years, you would have some R3.2-million more in your pocket than if you had bought, then sold the flat, according to a model built by Vermaak.

The SA residential property sector is steadily gaining traction albeit prices are still well below their pre-recession peak. Even with consumer disposable income rising robustly, house prices are unlikely to repeat their sterling performance from earlier this decade as a result of more people deciding to rent.

According to First National Bank, the House Price Index for June showed a slight acceleration to 2.6% year-on-year growth from a revised 1.8% (2.1%) in May.

Adjusting the nominal growth rate with inflation, real house prices have declined at a rate of -2.5% per annum as at May 2011 with CPI inflation at 4.6% still much higher than property price growth, FNB Strategist John Loos said.

Loos said the slight acceleration in June is believed to be an effect of the last interest rate reduction in November 2010. This growth rate is not expected to be sustained. The average price for residential property recorded in June 2011 is R805759 in real terms, house prices reached a high point in February 2008 at an index value of 194.8 and have retracted to 165.2 in May.

"Therefore, the average house price in real terms is currently more than 15% below the highest point reached three years ago," Loos noted.

The index shows that the housing market is still characterised by a glut, thus the downward pressure on current price levels and real price decline. However, with household disposable income rising by over 5% in the first quarter of the year according to Reserve Bank data, and real house prices declining, it is not far-fetched that the domestic market is on the verge of solid growth over the coming years.

Isaac Matshego, economist at Nedbank, certainly does not think that the recovery heralds another golden era for SA residential property. He told Business Times that: "The recovery in consumer confidence, income and all the other derivatives of it have to be looked at in the context of where we come from. If you go back to 2008/2009 we can see that there was a sharp fall in consumer confidence, business confidence and even consumer income. All these contracted on a real basis. Although they are rising they're still below the levels we saw pre-recession.

"Let me talk about the mid to upper property market, we cannot talk about the low-income bracket as there is plenty of pent-up demand there, but when we look at the middle to top end of the market there's an oversupply because of the boom earlier this decade. So based on that we're not likely to see strong support for prices."

One of SA's largest property companies, Seeff, agrees.

In a research note released by chairman Samuel Seeff, he said: "The volume of distressed properties in the market and the lag in clearing these out is certainly a factor that is weighing down real estate recovery."