Home sweet home — Should you rent or buy? The answer might surprise you

11 Dec 2024

Conventional wisdom suggests buying your own home is better, but renting is actually the best for some.

Buying a home is the most significant financial commitment that most people will make. Conventional wisdom is you should buy your home instead of paying rent that your landlord will use to pay off their mortgage. Conventional wisdom can be entirely wrong, so you should carefully consider your home-buying decision.

Residential property prices

Older people who bought their homes when they were young often believe their house was an excellent investment. House prices tend to rise marginally more quickly than inflation rates. That means the current price of their home is much higher than the purchase price because of the compound effect of inflation. But your house price could grow slower than inflation when you include the impact of transaction costs, property taxes, levies, maintenance and interest rates.

Some areas might experience periods of very high house price growth (Cape Town over the past decade), but the opposite can also be true. Just ask someone who has owned a house in the northern suburbs of Johannesburg over the past decade. Using recent house price growth as a reason for buying a home could be a mistake.

Time is important

How long you plan to live there is the most significant factor in determining whether to buy a home. You should rent if you plan to move into a bigger home every few years. If you plan to live in a particular house for eight years or longer, think about buying it.

Even with all the costs of ownership, there is a point where renting the same property for long periods could be more expensive. This is because rentals increase every year. If you were to rent a house at a starting rental of R100,000 a year, you would likely be paying R180,000 after 10 years. However, your mortgage repayment will remain unchanged if interest rates don’t change. In other words, mortgage repayments don’t escalate with inflation.

Financial discipline

If you are not a good saver and tend to spend all your extra money, it might be worth considering home ownership. If you know that you will pay off your mortgage and maintain the property, buying a home could be a method of forced saving. There are many caveats to this suggestion, including affordability and the duration of your stay, so be cautious.

This strategy only works if you know you will pay your mortgage as required and have the financial capacity to carry all the ownership costs.

For financially disciplined people, renting a home and investing the difference between your rent and the total cost of home ownership could be a better strategy. You can build up your investment assets over time, forming a solid asset base to fund your future rentals.

Lifestyle factors

You might decide to buy a home even if it is not the best financial option. Sometimes, the lifestyle choice of owning a home overrides the financial implications. If the house is affordable, it might be the correct decision even if you could get better growth elsewhere.

High cost of ownership

New homeowners are surprised by the costs of home ownership. You must pay property taxes, levies (if you live in an apartment), maintenance, legal fees, mortgage interest and insurance. You might also need to buy furniture, curtains and other paraphernalia for the house.

If you plan to buy an apartment or townhouse that is sectional title, you will have to deal with a body corporate, and you must do homework on the body corporate’s financial position. You should avoid buying in an apartment block that has not been adequately maintained or where many owners are not paying levies. Poorly managed body corporates can be a nightmare for owners because you will eventually have to pay extra levies for maintenance and potentially legal fees to sue the owners who are not paying.

Emergency fund

There is no simple way to decide whether to buy or rent a home. If you choose to become a homeowner, ensure you have enough money in your emergency fund to cover the total monthly costs for at least six months.

Being a homeowner can be a fantastic experience, especially for families, but I am not convinced it is a great financial decision for everyone. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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