Should you buy a property or rent it, which is better ?

I am often asked the question whether it is better to buy or rent one’s home. This can be an emotive issue as many people have the view that it is “better to pay off your own bond than someone else’s bond”. We have seen over the last four to five years that interest rates have fallen and property prices have risen dramatically. This has, amongst other things, caused the following:

A person, who was renting a property four to five years ago because the monthly mortgage repayment then would have been unaffordable at higher interest rates, would have in many cases been able to purchase the property that they were living in when interest rates declined. This is not necessarily the case in 2006  due to the increases in property prices.

Rising property prices attracted many people to become property investors. This has caused an oversupply of rental properties in many areas. One of the consequences of the oversupply of rental properties is that rentals have not risen at the same rate as property prices have and in some instances, property owners have had to reduce rentals in order to keep their tenants. What does this mean for people who are currently renting, but are thinking about buying a property? At the moment, the average tenant will be able to rent the property that he is living in more cheaply than the monthly mortgage payment would be costing him due to the factors described above. This means that this person would in fact be saving money on a monthly basis because they are not paying the higher mortgage payment and they generally do not need to cover any of the property’s expenses like rates and taxes or a levy for a sectional title property. The downside of paying rental is that you are obviously not the owner of the property and therefore will never enjoy the benefits of your property going up in value over time either.

A smart tenant would look to invest the money that he or she is saving on a monthly basis by paying a rental that is less than their monthly mortgage repayment would be. The advantage would be that the tenant is paying less on a monthly basis whilst building an investment which will hopefully escalate in value over time. The one problem is that people are generally undisciplined and either spend the difference that they are saving or couldn’t be bothered to invest the extra money that they have in their pockets. The result is that they land up not owning their property and have no investments either.

The decision to rent or buy is very dependant upon an individual person’s circumstances. In my opinion, there is no hard and fast answer to the question as to whether or not one should buy or rent. All I can say is that I do not think that property is going to get any cheaper over time.

Source: Graeme Jay lectures the Financial Management and Decision Making and Corporate Finance modules on the MBA programme at Milpark Business School. He also runs various short course programmes in property and finance for both the private and public sectors which can be viewed at www.cpmd.co.za. Graeme is contactable at graemej@milpark.co.za.