An analysis by BusinessTech found that buying a house produces a better return on investment over 20 years than renting and investing the difference in the S&P 500.
Many people think that buying and owning property is a great way to generate wealth.
However, renowned economist Dawie Roodt recently said property in South Africa is not a good option from an investment point of view.
Roodt said that although there are good reasons to buy property in South Africa, such as hedging against inflation, there are also many negatives.
These include the transaction costs of buying property, rates and taxes, levies, and maintenance costs.
He suggested that South Africans rather invest their money in a listed property stock but highlighted that a big bargain on a house may change the picture.
To compare the return on investment over two decades, BusinessTech used a luxury 2-bedroom Ascend to a Midstream apartment in Midstream Estates, Gauteng.
The apartment can be bought for R3.09 million or rented for R22,000 monthly. We had to make several assumptions to determine the final cost, which we outline below.
Buying vs renting assumptions
We assumed a 20-year bond payment period and a fixed prime rate of 10.1% over that same period for the buyer.
BetterBond’s calculator then provided an estimated transfer cost and bond registration cost of R200,123 for the apartment.
For the renter, this amount was treated as an initial lump sum investment made in the S&P 500.
Levies, rates, and taxes totalled another R5,444 per month for the buyer, and we added an additional R1,000 each month to account for general maintenance.
These figures were adjusted for inflation over the 20-year period using the South African Reserve Bank’s (SARB) target inflation rate of 4.5%, too.
Combined with the bond of R30,024.18, the monthly payments for the apartment started at R36,468.18 (R14,468.18 more than the monthly rent).
According to FNB’s Property Barometer (FNB Repeat Sales House Price Index), we estimated house prices would increase by 8% per year.
The results
Around 15 years into the payments, the rent payment amount begins to exceed the buyer’s monthly payments (bond, rates, taxes, levies, and maintenance). This is because the bond payment is a fixed amount, while the R22,000 initial rental amount rises with inflation, reaching R50,772.93 after 20 years.
At this point, the buyers’ monthly costs are lower than the renter’s payments, and the difference is invested into the S&P 500 – amounting to a final value of R214,683 after five years – counting in the buyer’s favour.
However, in the 15 years prior to this, the monthly costs for the renter were lower than the monthly costs for the buyer.
This difference was invested into the S&P 500 every month at a compounded annual growth rate of 13.37% (based on the actual rand return of the S&P 500 over the last 20 years), counting in the renter’s favour.
Our calculations showed that the final value of the renter’s S&P 500 investments was R13.21 million, while the final value of the apartment after 20 years was R15.19 million.
The buyer also benefitted from their smaller S&P 500 investment, totalling R214,683 and putting their total wealth at R15.40 million.
The buyer was the clear winner, with a final wealth 16.63% higher than the renter.
It is worth noting that these results are estimates based on several reasonable assumptions.
| Buying option | Renting option | ||
|---|---|---|---|
| Total bond costs | R7 205 804 | Total renting costs | R8 282 055 |
| Other monthly costs (rates, taxes, etc.) | R2 425 889 | Total S&P 500 investment payments | R1 723 702 |
| Buyer’s final wealth | R15 403 760 | Renter’s final wealth | R13 207 711 |
Data compiled by Drikus Greyling