The Fallacy of Homeownership

Many people have a weird obsession with homeownership.

When it comes to buying a house, they are willing to overlook, or even completely throw out, a bunch of financial values and principles they claim to hold dear.

The unfortunate truth is, for many middle-class folks, buying a house is often a very silly financial decision, especially if they are young (in their 20s or early 30s), or have a low net worth.

A well diversified portfolio

The most mind-boggling thing I’ve come across is that most people who punt the importance and wisdom of home ownership, will also tell you they believe you should have a well diversified investment portfolio.

You know…

“Spread your investments over many asset classes.”

“Don’t put all your eggs in one basket.”

And so on.

Well, for the average middle-class-30-year-old Joe, buying a house is akin to gathering up all his eggs, borrowing another 9 times as many, and putting them all together into one basket.

Not only is the the average middle-class-30-year-old-home-owner Joe way over-invested in exactly one asset class (residential property), he is also completely undiversified within that asset class, since he owns exactly one property, in exactly one area, based in exactly one town, located in exactly one country.

In short, it’s just about the most undiversified investment portfolio a person could dream up and manage to get himself into.

Leverage

Leverage basically comes down to borrowing money to invest in something.

If you invest R1,000,000 in something, but you borrow R900,000 and only use R100,000 of your own money, then you have an investment in which you are leveraged 10:1.

That 10:1 is called the leverage ratio of your investment. And it is 10:1, since the thing you’re investing in is worth 10 times as much as the cash you put in.

Leverage is great if the thing you invested in grows a lot in value over a short period of time, because it allows you to make a lot of money by investing only a small portion of your own cash!

Unfortunately, the reverse is also true.

If the thing you invested in loses value, then it is very easy for you to lose a lot of money – even more than the initial amount you put in!

While Warren Buffet’s ethics may be a stinker, I do agree with his views on employing leverage:

If you’re smart, you don’t need leverage. If you’re dumb, you have no business using it.
Warren Buffet

Even though, over the long-term, returns made on equities outperformed returns made on property, by far, almost no sane person will leverage themselves 10:1 to invest in equities (i.e. shares).

For most people, this is way too nerve wrecking to even consider. If you suggest such a thing, you might be labelled a gambler, or worse, a madman.

And yet, everyday, average middle-class-30-year-old Joes all around me are buying properties in which they are leveraged 10:1 (and even more), without a second thought.

After spending many months thinking about this phenomenon I can only put it down to the fact that the truth doesn’t matter.

It’s just another asset class

In case you think I have a deluded and deep seated mistrust of property that most likely stems from a childhood nightmare of being swallowed by a house, let me just make my position official:

I have zero issues with investing in residential property.

Residential property is just another asset class.

I don’t currently, but I have in the past allocated a portion of my investment portfolio to residential property (both locally and abroad), by buying shares in publicly listed companies whose business it is to buy and rent out houses and flats.

I just don’t view residential property as a magic-unicorn-galloping-over-a-rainbow-of-profits type of investment with which “you can never go wrong”.

I’ve spent a significant portion of my adult life looking for investments like those, but unfortunately I haven’t found one yet.

Liability and Liquidity

If you are still adamant that you want to invest in residential property, then I have a great suggestion for you:

Why don’t you just buy some shares in publicly listed companies whose business it is to buy and rent out residential properties?

If you do some research and choose a good one, chances are that they are better than you at spotting and buying well-priced properties and collecting rent, because that is what the people who work for those companies do for a living.

There are also some other advantages about investing in residential property by buying shares in publicly listed companies.

  • You can have a more diversified investment portfolio: By only buying a few shares you are able to limit your exposure to residential property to a reasonable percentage of your net worth.
  • You have limited liability: If the company goes bust, you will not be liable for any losses. Comparatively, if you buy a property using debt and, for whatever reason, become bankrupt and can’t afford to make the bond payments, then you most likely have quite a few years of hell to look forward to.
  • Shares in publicly listed companies are liquid: If you ever need to do so in a hurry, it will only take you about 5 minutes and a few key-strokes to sell all the shares you hold in almost any publicly listed company. Selling a house, on the other hand, is a ludicrously expensive multi-month administrative nightmare.
  • Shares in publicly listed companies don’t require you to actively do any work: You don’t have to advertise for tenants, upgrade the facilities or repair broken toilets. Instead you can spend your time and effort on whatever it is you do best.

Interest rates and timing your property purchase

Residential property is an asset class that is very directly influenced by the cost of borrowing money.

In our society, it is considered a perfectly normal and responsible thing for a person to finance the purchase of a house by getting a 20-year loan from a bank.

In fact, it is considered such a normal thing for the average middle-class-30-year-old Joe to be a debt slave for most of his life, that if you had to suggest to him that he should save up for a house and only purchase it once he had saved up enough money to buy it outright, using cash, he will probably think that you are crazy to even suggest such a thing.

But, I digress.

My point is, the vast majority of residential properties are paid for using borrowed money.

Because of this, when interest rates go up, so do monthly bond payments. When bond payments go up, some people can’t afford to make their bond payments and they are forced to sell their homes, or default on their bond. A few actually do default, resulting in a seizure and forced sale of their properties by the bank.

To summarize: When interest rates go up, property prices fall (or increase very slowly, usually at a rate lower than inflation), because the available supply of residential properties increases, while at the same time the demand for residential properties decreases. Conversely, when interest rates go down, residential property prices usually go up quickly, because more people can afford to take out bigger loans!

The first rule of business is: buy low, sell high.

This is such an obvious concept and yet, in practice, it is very difficult to do, because it usually means doing the exact opposite to what everyone around you is doing.

If you are going to buy a property, for whatever reason, then at least buy it at the best possible time.

And when would that be?

Well, of course, a few months after interest rates hit their peak after having risen quickly for two or three years in a row.

Take a look at the graph below, which shows the prime interest rate in South Africa over the last few decades.



2014 started with interest rates at record lows and just entering an upward cycle.

In my opinion, the present is just about the worst possible time for anyone to be invested in residential property.

You will know it is the right time to buy your dream home by looking for a few of these signs:

  • Interest rates are starting to stabilize at a high rate, after rising steadily for two or three years in a row.
  • Many people are trying to sell their properties, some in a real panic, because they are struggling to make their monthly bond payments.
  • You hear many tales of properties being foreclosed on, also in neighbourhoods where people are considered to be wealthy.
  • People around you are generally feeling quite negative about owning property.

When the blood is in the streets, my friends, that is the ideal time to buy your dream home.

Paying rent is simply throwing away money every month

I often hear people making this argument. I’m sorry, but that is just a silly thing to say.

Upon purchasing the average middle-class-suburbia home, you’re not only paying a massive amount of TAX to the government, you’re also forking over a significant amount in fees for bond registration, deeds and a bunch of other stupid banalities. Never mind the commission that goes to the estate agent.

Property tax, commission and other fees can easily add up to over 15% of the purchase price of a house. This makes residential property one of the most expensive asset classes to invest in, at least as far as up-front costs are concerned.

Then, once your bond is registered and you are the proud owner of your new home, you’ll be paying interest to a bank, every month, until your bond is paid off.

And don’t forget about maintenance! You know… paint starts peeling, roof start leaking, toilet stops flushing, that type of thing.

Lastly, you’ll also be forking out on a monthly basis for rates & taxes. Which, as property owners in Greece found out just recently, can easily go up by sevenfold in two years, if your government is anything like most governments are.

Safe-haven investment my ass.

Except for squatting on someone else’s land, there’s no such thing as living for free.

So are you saying no one should ever own a house?

No, of course not.

I’m saying people should save up for their family homes and buy them cash.

The saving part should be done by building a well diversified investment porfolio and the home buying part should be treated as an expense, rather than the purchase of an asset.

I know… in the world we live in I’m very much on my own in suggesting such a boring and outdated thing.

But I’ve looked at the facts, and even though I’m well aware that the truth doesn’t matter, I also know that nothing matters to anybody until it matters to everybody – and by then it’s too late.

If you disagree or find a flaw in my logic, please leave a comment below. I’d love to be proven wrong, and I’m willing and eager to consider any counter arguments.

Click here to read part 2: Why do people believe the myth?

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  1. Attie du Plessis

    Francois,

    Firstly, thank you for your posts. I am glad you started posting again regularly this year.

    I am in my 30’s and I have been shying away from buying property. I’ve made a few offers on properties, but always much lower than the advertised price because I want to buy a bargain. If I can buy a property in slightly bad shape and fix it up myself, I should be able to make a good profit – but that is true on any asset class, if you can get it at a price lower than market value.

    On the whole I fully agree with you. Thank you for explaining this in a manner a muggle can understand.

    Kind regards.

  2. James Peterson

    Thanks for the detailed post.

    This argument has gone on for years, and the fact is that to truly determine value in purchasing property, you have to look at so many factors it becomes almost too complicated.

    One thing to note, is the value of having an access bond. As the cheapest source of credit you can find, it’s a useful tool for the disciplined.

    Another important note is that your primary residence is not an asset, it’s a liability – It’s not earning you any money, so cannot be seen as an investment unless you sell after some time and buy a cheaper place or rent out a portion of your house. Otherwise it’s just a roof over your head, and having one that’s paid off is one of the most valuable strengths.

    Finally, I just want to point out the value in a 20 year bond. On day 1, the deal looks bad, and that’s the mistake many people make in thinking that bonding and leverage is a poor plan because they are looking at it in today’s money. However over time inflation kills that bond, so by bonding property you are successfully hedging on inflation and using tomorrows cheap money to pay for today’s expensive investment.

    Cheers
    James

  3. Francois Viljoen

    Hi James

    Thank-you for your comment; the whole point of this article is to stimulate thought and I appreciate a good argument.

    1. I agree with you – it is very difficult for the layman to determine whether a single property is good value and there is also some luck involved (e.g. does the area become better or worse as time goes by). That is why, if you wish to invest in residential property, I recommend you buy a few shares in a publicly listed company that owns a lot of residential properties, rather than go out and buy a house.

    2. Sure – an access bond is probably the cheapest way to be an economic zombie. 😉

    3. I agree with you, well kindof – I won’t quite go as far as to describe the house you live in as a liability; I think it is better to view it as an expense.

    4. I’ve often heard the argument that taking out a loan to buy a property is a way to hedge yourself against inflation.

    The elephant in this argument is the fact that the interest rates commercial banks charge their customers have always been higher than the inflation rate.

    If you take out a loan, you pay more in interest than the real value by which the amount outstanding on your principle decreases due to inflation.

    The only winners in this equation are the commercial banks, since not only are they earning an above inflation return on the money they lend to you, they also create the money they lend to you out of thin air.

    Since commercial banks are the main beneficiaries of this scam, I won’t be surprised if they are also the main players responsible for spreading the propaganda about the home ownership myth I attempted to debunk in this article.

    Kind regards,

    Francois

  4. Gerrit Viljoen

    Francois I think your post is possibly the most comprehensive I’ve come across in my 28 years of dealing with these issues and I think you are spot on when you look at the situation from purely an investment point of view.

    I want to hook up with James’ viewpoint that your primary residence is not an investment. When a person gets married the issue of where to stay and bring up the children plays a huge role in the decision making process.

    My experience in dealing with these issues is the fact that a mother with children don’t want the uncertainty of possibly having to move from their current home and schools because the lease expired or the owner decided to sell the house and the new owner might not be a accommodating Landlord. It is vital to try and provide stability for children growing up.

    But as I mentioned even when young couples do buy a residential property they over commit themselves in many cases by buying property they really can’t afford just to keep up with the Joneses who don’t care about them in any case.
    I do agree with all your arguments and line of approach.

  5. Dips

    I bought my first property in Dec 2011. Up to that point I had been saving for a deposit and had about 30% (of the property value) saved up. The last time the interest rate was that low, I wasn’t even born yet. I am now paying substantially less on my home load than I would have been if I had been renting the same property. I have been putting extra money into the bond every month. You can make property work for you if you are disciplined. Once I am done paying this property off I will be purchasing a second property.

    If you don’t get into the property market when interest rates are single digit, what chance do you have when they are at 13% or higher?

    Initially I was a bit perturbed with the sentiment in the article… but at the end of the day… the fear generated by this article will ensure that I have a large pool of rent payers to pick and choose from.

  6. Gerrit Viljoen

    Dips be careful …. I have a large pool of rent payers… this is a trap. Do you know that the tenant today has all the rights. When you look at the costs listed above, the cost of getting delinquent payers out of your property can seriously damage your plans in the long run.

  7. James Peterson

    100% Francois and Gerrit.

    It’s a good point made all round – we can cross reference equities vs property performance over years but how do you quantify security and stability? There are a number if intangible factors that play part in this game, especially when children are in the picture.

    Francois I agree with you all the way regarding listed property. After having played that game before, it makes sense to let the professionals manage the property and you stick to doing what you know and love. I found myself not just managing my tenant, but the body corporate too and thus, the entire complex.

    Regarding a bonded property. The commercial banks are sharks, I’ll never deny that one. However whose to say that rental increases will be inflation matched, especially when demand increases? If you bond your property, you fix the expensive cost today, and pay it with tomorrows cheap money. Interest being your real cost, is that really cheaper then rent? Especially when over time bond interest gets cheaper but rent more expensive because of inflation. So who wins really?

    The question is – rent increases vs inflation vs interest rates over 20 years. Take the outcome of that, factor in all the tangible and intangible items such as rates vs maintenance vs moving costs vs agent and attorney fees vs stability vs security. Then combine that with other asset class performance over the same period (as the renter will need to invest the difference) – and you have the answer.

    I’ve seen many people try, but I’ve never seen a comprehensive case study. I don’t know the answer myself. Without a doubt the industry and schooling is geared towards turning people into economic zombies as you put it. It’s become socially acceptable to walk into a dealership or estate agency, hand them your payslip and ask what house and car you can get for that. It’s a sickness that drives the banking system and feeds the government’s pockets. However I do still think there’s value in using the banks fiat money to your advantage. I believe that well managed low interest debt can and has benefited people in the long run.

  8. Francois Viljoen

    @Gerrit:

    I fully understand that people often purchase properties based on non-financial considerations, probably the most important being to provide a stable home for your family, like you mentioned.

    I would, however, argue that the most important part of providing a stable home for your family is for your children to grow up in a family with a “present” mother and father.

    A recent study found that the odds of a marriage ending in divorce due to finances is approximately 45 percent.

    In my opinion, the vast majority of families who are just starting out are much better off renting a home and living without any debt, than they would be living in a lovely home purchased using a 20-year mortgage.

    @Dips:

    Firstly, I need to point out that because buying property using debt is a leveraged investment, you will always find anecdotal evidence of people who struck it lucky by buying the right property, in the right area, at the right time, much like you will find people who struck it lucky trading CFDs or commodity futures.

    Secondly, I need to note that two years is a very very short time to consider the pros and cons of an investment, so much so that it is essentially meaningless. To really consider the pros and cons of an investment you have to think over periods of 20 to 30 years.

    Lastly, the only way to really know if your property purchase was a wise financial decision is to make an objective comparison.

    If in Dec 2011 you had rented the same style of house you ended up buying, but instead of buying a property, you:
    1. Invested the money you used for your deposit in an ETF fund like the SATRIX TOP40 or SATRIX RAFI40, and
    2. On a monthly basis kept on adding to your investment the difference the total bond payments and maintenance expenses on the property up to date, and the amount you would have paid in rent.

    What would your net worth be in the two scenarios?

  9. Gerrit Viljoen

    Francois, point taken. Did you know that the number one reason for divorce is incompatibility? They say that if the husband’s “income” is big enough, he is “patable”. 🙂

  10. Francois Viljoen

    @James

    Thank-you for your comments.

    I agree with you 100%.

    I also played the property game a few years ago… went through all the hoops, experienced all the pros and cons. I really was surprised to find all the facts that I listed in this article and, more so, that so few people talk about them.

  11. Francois Viljoen

    @Gerrit

    That would be funny if it wasn’t so sad. 🙂

  12. Mzala

    What about buying to let?

    There’s obviously the very likely situation that you may be without tenants for one or more months. You will also need to keep some money aside for repairs/maintenance. Maybe even pay an agent to manage the leasing. Also important to note that the rent you collect may be less than the monthly bond repayment.

    At what point does it make sense to buy to let?

  13. Nimrod

    Agree 100%. Here in the US the mindless mass-infatuation with home ownership is truly mind-boggling to behold.

  14. brian Foster

    You are definitely not alone Francois. There have been several articles written along similar lines in recent years, and I experienced these problems personally in the UK. Its not a local problem!

    There’s another issue too. What happens if your personal circumstances change, and you have to move to another town, or another country! Aside from the upheaval, personal stress and ‘forced sale’ issues, the property becomes another ball and chain to drag around. And all my stuff is in my father’s loft being eaten by mice!

    And what about tax on disposal? Was that mentioned?

    I currently live in a rented house in Muizenberg. Its cheap, flexible, is someone else’s problem and I’m saving to buy a house for cash, with the nagging thought that when I have the money, I might not bother.

    Good post. Like the website. Do more please.

  15. Francois Viljoen

    @Mzala:

    All the points in this article apply to buy-to-rent properties and even more so.

    @Attie, Nimrod & Brian:

    Thanks for stopping by and taking the time to leave some feedback.

  16. Rupam

    Great article and I couldn’t agree more with your views. I live in Singapore and here the situation is even more extreme. One of the world’s most expensive real estate markets, very low interest rates and all you need is the rates to go up a bit for widespread bloodshed. I am planning to refer to this article from our own blog moneywisesmart.com which we recently launched. Thanks again

  17. Scott McGiffid

    I agree with you. I rent a nice apartment because it is $915 a month instead of $1,375, the cost of a very small new house mortgage with excellent credit in my city. Property taxes are sky high. I save the difference each month and invest it in different things. With no children or need for a lot of space, why do I need a house? I like my tiny utility bills, no taxes, and not having to fix anything. Also, when I retire, I’d still have 12 years to go on the mortgage which makes me feel uncomfortable. I also don’t plan to live in the same city. The wife and I want to live out in the country in a RV.

  18. Damien

    Thanks for some much needed perspective Francois. I fell into this trap when I was 23. I’m still struggling to get back to where I was since before this epic fail. We live and learn.

  19. Tyler

    Good article.

    Might worth noting the Piet Eicholtz study of housing prices in the Herengracht neighbourhood of Amsterdam.

    Looks at the prices over 300+ years. Barely beats inflations.

  20. Francois Viljoen

    @Damien:

    Thank-you for leaving feedback, and you’re not alone.

    I also paid dearly for my tuition from the school of life.

    @Rupam, Scott & Tyler:

    Thank-you. It is good to also some perspective from the international markets. I’m not surprised that the situation is much the same elsewhere in the world.

  21. Jim

    Buffet uses leverage in his investments

  22. Francois Viljoen

    @Jim

    Well, I suppose that would make him a hypocrite.

    Or dumb, if he believes in his own theories. 😉

  23. rashaadp

    Hi Francois

    Thanks for that interesting article. Stimulating alternative debate is a good thing. Especially when every property article quotes the likes of Mr’s Rawson, Jawitz, Golding, Seef etc.
    I dont agree with your purist “unemotional non-realworld” theory about owning your own home. The “soft” factors such as family stability etc are not immediately quantifiable but an “investment” every family man must make.

    The fluidity of the equity or commodity markets are exactly the right reason for most Joes to refrain from dipping their toes in those investments. I fear that most Joes dont have the emotional “right stuff” to make wise investment decisions.
    The biggest cause of divorce out there is marriage.
    Shit happens bru.

    Loved your article previously on New vehicle ownership. I think I corresponded with you via email thereto. That was in my view also a purist financial view on that topic leaving out non financial or intangible criteria.

    Keep the debate going
    Thanks once again for stimulating financial education and thoughts

  24. brian Foster

    @ Francois… ouch!

    @ Jim YOU are not Warren Buffett! And neither am I. What is this fixation with WB? Its like driving your car at full speed and breaking as late as possible, just because Lewis Hamilton says that’s the way to a quick lap time.

    WB also said something about when the tide goes out, you’ll see who isn’t wearing shorts.

  25. Brent

    I enjoyed your article but it was missing one thing.

    What is the meaning of the word MORTGAGE

    Mort = Death ie. post Mortem or after death

    Gage = Pledge ie. to get engaged or Pledge to marry

    What do you get when you put these together?

    Death Pledge !

    How many people do you thing would sign the real estate contract if the heading read…. DEATH PLEDGE ?

    Now you know why rich kids take Latin & the rest of us take Spanish & French.

  26. Francois Viljoen

    @Brent

    Nice one! I love it!

    @Rashaad

    Funny you should mention the “what your car is really costing you” article…

    I bought a racing red little hot hatch ST brand new out of the box just 6 months ago – jikes!! Worst financial decision ever!! But it puts a big smile on my face and I love it; so even I am influenced by my emotions… occasionally!!! 🙂

    (In case you’re wondering, yes, I did save up first and buy it cash!!)

    Concerning your comment about many people “not having the right stuff”, as you put it, I reluctantly do agree with you.

    Another reader put it this way: “Your article makes sense for the disciplined. That said however, having a paid for home at retirement for the financially undisciplined is not easy without buying and bonding young.”

    In other words, for some people paying off a bond is kind-of like a forced way to acquire a little bit of savings.

  27. Warren Blake

    Awesome article.

    Just wondering about the numbers though and viewing this differently.

    If you have an income of lets say R30k net, and you are spending about 5k a month on rent and lets further say that you are only saving about 3k a month (after your expenses).

    I’m curious to find out which is better after 10 years….

    1. The 3k invested per month (equity etc), to eventually buy a property cash
    OR
    2. Purchasing a debt product from the bank (ie a home) at 8k (5k +3k) a month.

    My thinking here is that you have to live somewhere. The small amount you have available to save might only be able to purchase some form of decent property 15 – 20 years from today. It’s a lifestyle expense at the end of the day.

    Any thoughts?

  28. Francois Viljoen

    @Warren:

    It is impossible to say if you’ll be better or worse off.

    You can be lucky (interest rates remain low, the area where you purchased becomes more popular, etc.) and have a much higher net-worth after 10 years than you would have had if you rented and invested the difference.

    Or you can be unlucky (interest rates rise quickly, squatters move in close to the area where you bought, property taxes are increased, etc.) and be much worse off.

    You can also find yourself without work for a few months, miss a few bond payments and end up in a whole other world of trouble.

    The point is, the argument about which way is financially better is irrelevant.

    In the end of the day, if you choose to take out a loan to buy a property, you’re stepping into a highly undiversified, highly leveraged investment, with major and long-lasting consequences to you and your family if your bet goes wrong.

    In my opinion, in the world we live in currently, buying a home using debt is just a stupid and irresponsible thing to do for most young people, especially if you have a family who depends on you.

    Why do so many people think it is responsible to buy a house this way, but they also think it is extremely risky and irresponsible to trade CFDs?

    The risks and the consequences are very similar. You can even argue that CFDs are better, since they are way more liquid, the costs are way lower and you can achieve greater diversification, e.g. by purchasing CFDs on whole indexes, that include many companies.

    Well, let me tell you why.

    It’s because of The American Dream.

    That, and the fact that the truth doesn’t matter.

  29. Syd

    Francois,

    Thanks for some excellent food for thought. I am passing this on to my own children, who have now started earning. I have been paying off my bond slavishly for the past 12 year, and by August this year I will be at last finished giving me an extra cash flow injection of R8000/month

    I was considering selling the house and renting using the R8000 per month for rent and investing the income (balanced portfolio plus index tracking unit trusts) generated by the selling of my primary property to contribute towards building the retirement nest egg (about five years away from retirement). I also have a paid for house for retirement. This sound like a perfectly good financial plan, but being a sceptical soul I am not sure whether I have considered all relevant facts.

    Your opinion will be much appreciated.

  30. Dips

    Syd just be careful… you have a property thats paid off already. Whilst there may be value in not signing long term bonds for prospective property buyers, I believe your scenario is a bit different.

    Keep in mind all the costs that you will incur to sell the property. Now that you have made the investment already, it might not be the best idea to sell now. Especially considering that property is cyclical. We are def. at the bottom near the bottom of the curve in terms of property value at the moment.

    I would keep the property once paid off… and then use the money you were paying for its bond to invest in other areas. You are 5 years away from retirement, an RA could be worth considering especially with the tax incentives that will apply from next year. Keep the costs down though. Don’t pay more than 1.5%. Without contradicting myself you also need advice on wether an RA so close to retirement is the best way to go also. (i Don’t know)

  31. Francois Viljoen

    @Syd

    This article is written mostly for young people/people who still have a low net worth who are thinking about taking on a lot of debt to buy a property.

    Except to say you should do your own research, make your own decisions and take responsibility for the consequences – I don’t give financial advice.

    As part of your research perhaps you should consult a financial adviser. Choose one who who makes his money by charging a fee for his advice instead of one who makes his money on commission from selling financial products.

    @Dips

    If you really believe property is at the end of a bear cycle and about to enter a bull run then you see the world through very different lenses than I do.

    I see company valuations, margin debt, investor leverage and PE ratios at the same levels they were before the 2008 collapse.

    I see very strained economies and abysmal job markets both in Europe and the USA.

    I see a major credit bubble busting in China – the world’s “growth engine” and the biggest importer of South African goods.

    I see the Baltic Dry Index falling day-by-day.

    I see many developing nations experiencing unrest, breakdown and extremely high levels of inflation (Argentina, Venezuela, Ukraine, etc.).

    I see interest rates turning and entering an upwards cycle.

    I even see the return of sub-prime lending in the USA.

    But you may even be right. We’re with Alice in Wonderland – fundamentals don’t matter, up is down and left is right, and with a big enough printing press and even bigger headlines, just about anything is possible nowadays.

  32. Syd

    The reason I asked for your opinion, is because of your “alternative” way of looking at economics! Thanks for that, as I believe more of this is needed for us, the not-so-well-informed citizens of this world.

    I also do not believe in financial advisers, as I believe you gather as many as possible opinions (reading and asking) and formulate your decision accordingly.

    It will however be great to learn your opinion on investing (by the low net worth individual) in the world you have sketched above – maybe start another thread?

  33. Francois Viljoen

    @Syd

    I can only offer to tell you what financial decisions I made personally.

    I’ve written about it extensively.

    1. You can start here
    2. Then go here
    3. And, of course, I choose to live without debt.

  34. Dustin Davids

    Hi Francois,

    Thanks for the post and the stimulation deliberations from the other participants. I just paid off my first home two years ago, after doing a Financial Management module at Varsity and actually realised how the banks are laughing all the way to coffers and the purchasers are forced to say thank you for lending us the money. Luckily I have a wife who is an excellent partner in sticking to agreements. We paid the house off in 3 years while eating peanut butter and bread. Being from the streets of Mitchells Plain, we both were not born with or handed a silver spoon by our economic struggling parents.

    Notwithstanding, we want to build an asset base for our family. We both in our 30’s with the aim of ultimately moving to Pinelands in Cape Town- “the dream”- hopefully in the next 5 years. Unfortunately, we have “just” fallen out of the bus of being able to purchase there. However, we just put in an offer for another house and Standard Bank gave us a 2nd 100% bond for the loan amount- seeing that we killed off all our long and short term debts. And I mean we killed everything. We keeping our first property, gonna lease it out, build a granny flat (saving up and building cash- as we hate 2nd bonds on a homeloan) in the yard to generate additional income and the “new house” also has a granny flat that we can lease to generate income.

    However, Im reading your article and a lot of other articles on this topic and Im asking, should I purchase now? I just spoke 5 minutes ago to my bond originators who congratulated me on the home loan offer from the Bank and requested permission to proceed with the registration of the new purchase. Alarmingly, she told me that the interest “will indefinitely” go up in 2014 in the 3rd and 4th quarter. Im in a dilemma….my wife wants the house as we work hard and have stressful jobs and it will actually be nice to move to a house that have the luxury the we long for. Balcony, 1hectar plot, so many rooms. It looks like the damn American White house man!!! What to do? Must I cancel it or continue with the deal? What will be economical sense in this regard????

    We estimated that we can pay the bond off in 4 1/2 years……and that means another 4 1/2 of peanut butter and bread everyday…..I did nogal get fat since I paid off the 1st property…..maybe I need to trim down??? just a joke, but the concern remains the same.

  35. Dips

    Hi Dustin

    I look forward to Francois’s comment on your query. I would like to add my 2c in the meanwhile.

    Firstly congratulations. Give yourself a pat on the back for paying off the first bond in such a quick time and for living within your means. If there were more people like you out there, we wouldn’t in the kak we are in right now world wide.

    My feeling is that property can be made to work if you have a substantial deposit in hand. The biggest issue with property is when people take out bonds for the long term and then this leads to lack of diversity in their investment portfolio.

    So… by taking out a 100% bond right now, this could be the situation you are placing yourself in. Interest rates will def. be going up, that I think we know is coming.

    Whilst I understand the you work hard and the ‘new house’ would be just reward, is there any chance that you can stay put in order save up a deposit for the next 2-3 years if at all possible and then make a decision? If you do this, that effectively means less interest payment… see how this impacts your 4-5 year projection to pay off the second bond? Your projection for paying off the second bond… does this include any future increase in the interest rate? How much have you catered for if so? 1%? could be 3% in a couple years… nobody knows. But if you saving for a deposit you can make that choice later on.

    Also I keep harping on about this, but I’m also in my 30’s the tax incentive on RA’s for me is too good an offer to refuse. Make sure you diversify your portfolio.

  36. Dustin Davids

    Thanks a lot Dips. I look forward to more inputs in this regard.

  37. Francois Viljoen

    @Dustin

    I have to agree with Dips and say well done!

    It takes discipline to live below your means and get rid of all your debt.

    As for your question… you already know what I’m going to say.

    If I was you, I will not go into debt to buy another property.

    You have so many choices being debt free. Why on Earth would you go and get yourself knee-high into debt again now after 5 years of suffering to get out of it?

  38. Methodise

    Yes! This! I have gone blue in the face watching people fail to grasp the eggs-in-one-basket analogy. Seriously. Opportunity cost? Completely lost on most homeowners.

    Buy to let landlords? Amateurs who unwittingly subsidise their tenants cost of living.

    The idea that ‘a home shouldn’t be considered an investment? That is seriously elite logic!

  39. que_botic

    Hi Francios

    Thank you for the article. I am in my late 20s and I have decided to avoid using debt to purchase a home. I rent an apartment and the cost saving helps me fund my retirement annuity with all the tax benefits and further discretionary savings. I am really happy with the choice. One thing I find bizarre, is that I have friends who essentially use peer pressure to insist that I should buy a house like them. In my peer group there is significant buy-in to the home buying using debt idea. I just point out to them that the equity in their investment is less than the value of the listed property component of my assets. Oh and I now earn a chunk of the benefits tax free in my tax free savings account, thanks Treasury.

    For myself, there are three other points which have influenced my thoughts on the matter.

    One, house prices have a link to money supply to the buyers. Buyers seem to buy a property for the maximum amount they can afford. http://repository.upenn.edu/cgi/viewcontent.cgi?article=1000&context=penniur_papers . We have seen shifts over the decades which have increased money supply to buyers of fixed property: reduced buyer contribution requirement (deposit), longer terms, even payment in kind loans or 100 year loans. This is such an issue that the South African goverment introduced law to curb the behaviour. It is my belief that my parent’s generation experienced an unusual growth in home values, and since they were underinvested and undiversified they believed that this asset outperformed all other opportunities. This experience has distorted the decision making of my peers on the matter. Also with our enlightened laws, I can’t imagine any unlinking of house prices and inflation/wage growth, even if you have increased demand and densification in a particular area. If there is a link between money supply to buyers and house prices, then this has been captured in past decades over performance in the asset class. I ask myself the question, do I see money supply growth to the buyer continuing to expand in the future?

    I think another thing which influences people on the matter is the leveraged return because they don’t calculate the total costs vs benefits over the term of the investment. Say a friend buys a house for R1 000 000, then in the next year prices track inflation at 6%, the friend will tell me that they made R60 000 in a year. They are not accurately factoring in the cost of the leverage in their assessment.

    Last is that I think people in general underestimate the difficulty in extracting the value from the home you live in. Say you live in a 2 room house and you have paid off the debt and own it outright. Let us call this an asset worth 2 housing units. If you want to retire, you can sell this asset of 2 housing units. But you will still need to live somewhere, and the cost of that somewhere you will live, will be based on the same inflation / affordability / earnings related information as the 2 housing units you just sold. Even if house prices increased at 40% pa for the last 10 years, the cost of the housing you purchase or rent at that point will be based on the same information. Considering the tax on changing houses, it makes the prospect daunting. The only way you could get any asset value out of the equasion, is by moving to a cheaper home, say 1 housing unit instead of 2, or a less desirable neighbourhood. I also would not want to start renting into retirement when your income growth will be less linked to wage growth / inflation on which the cost of the rental will be based.

  40. Francois Viljoen

    @que_botic:

    Thank-you for sharing your experience.

    I have bad news and good news for you.

    The good news is that you are probably right. The bad news it doesn’t really matter how right you are, most people will never believe you.

  41. Franco

    Gem of a post. Whoever reads this, numbers don’t lie. Do the math. Compare buying with renting. You’ll see the NPV are approximately the same, depending on your assumptions. What is very clear is that owning property IS A LIABILITY. Thinking otherwise goes against all logic

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