WOW! - The news this week

WOW! – The news this week has been off the charts.

The World Bank has increased the global growth rate prediction from 3.8 to 3.9%. Doesn’t look like much but extrapolated across the world, that’s huge.

CR has appointed a super-Team to trawl the leading investors for $1tn in Investment in South Africa. Some of the finest networks, the greatest minds and the cleanest hands in the country are going to be out doing battle for investment Dollars. Put behind you that the last time when we came close to such an initiative was when our erstwhile president recalled Pravin Gordhan from an investors’ meeting where $5tn was meeting to discuss SA as an investment destination.

Gwedi Mantashe and CR are making good work of the revised Mining Charter and the legal framework that gives it legs. Positive discussions are taking place to find the economically fair ground that serves social equity and investment. Find that and we come alive with opportunity and word has it, mining projects that were on hold pending the past minister’s removal by commonsense, could be released for development.

The IMF has upped the SA growth rate to 1.5% minimum and up to 1.9% for this year. You read it first in my previous blog but, hey, who cares who gets the scoop on excellent news!

Flippit, this is good for everybody. WOW!

In a country rich with heritage, blessed with resources and inhabited by beautiful people, we have so much going for us. We have speculated before on what could happen and it seems that before our eyes we are beginning to experience the unthinkable just 5 months ago. Leadership has made an enormous impact in a short space of time. Now we need rain down here!

The latest Property Barometer from FNB has some interesting news on secondary home buying. Just fyi, the reasons for secondary homes are predominantly, buy-to-let, buying for another member of the family and leisure homes. Although the smallest percentage of the overall market, buying for other family members has increased way more than the other two. I would like to focus on that for a moment.

According to FNB:

In the 1st quarter survey, it was only the 3rd and smallest motive, i.e. buying a primary residence for someone else, that rose quarter-on-quarter, from a lowly 0.37% to 2.01%. This is the strongest estimate in this small category since a 9-year high of 2.32% reached in the 3rd quarter of 2015. This “jump” comes suddenly, and the estimates for this category of buying can be volatile, so we are cautious not to read too much into it.

However, we are well-aware of South Africa’s very weak household savings rate, implying many people ill-prepared for retirement, resulting in a need for support from younger family members in their older years. The phenomenon of “hiving” (3 or more generations of a family in the same home), or in some cases buying another property for a family member, on a larger scale could be the result at some stage.

Is the rise in this survey estimate beginning to reflect the above challenges?

There are two forces at play in this sector. The one is longevity with inflation and the other, not mentioned by FNB in this survey, the purchasing for children.

Just addressing the children first, worldwide with property prices rising exorbitantly, parents are buying homes for their children. Once we received our first car from our mom and dad, but today in increasing numbers, mom and dad are buying their children their first home. Nothing fancy but a huge boon for youngsters setting out on life. The purchase takes a few forms such as outright purchase as a gift, lending money to the children and monetizing the loan as part of the income, pension or otherwise, of the parents or, simply a large deposit on the property to bring the bond into affordability. I would imagine that the use of trusts in these cases is quite normal so as to protect the asset. Those of you who follow the UK property market will know that property has moved away from the common man never mind the youngsters. In this case, many hybrids of what I have just discussed are used to fund a home for the children.

In a sense, the move to private university accommodation [student accomodation] which has proliferated in the last 15 years is nothing more than this trend. Rather than house, if it is possible in any case, your child in a varsity res, you buy a small flat and use it for the years that they study. It’s not unusual to let the other room for income for the child or retain it for a younger sibling on their way to the same institution. Student accommodation has proven to be a great investment over the years with rising yields and even capital growth. It is really sustainable as university budgets are hammered and cannot any longer build residences – by the way, the protest for accommodation in recent student protests may not simply be entitlement as some seem to think, but the very issue that accommodation is simply out of reach of the less affluent students.

Let’s finish with homes for parents. It is not longevity that causes problems with income over the years but rather, inflation. Keeping pace with inflation is hard enough as it is, but living a long time with it is a scissor grip from which many cannot escape. We find ourselves surrounded by octagenarians who are quite open about the fact that their children help them to live. Whether that be by way of housing or a subsidy or both, life on the other side of 70 is tough for most people financially. So, my reader, what do you do to avoid what is obviously on its way? Some suggestions:

  1. Those who can buy a retirement village home that precedes their needing it one day. Let to retirees who prefer to rent rather than buy when they retire, such a home does not make a great return but does pay for itself. Also, when needed, it is available fairly readily because you need to remember that retirement villages are scarce resources and you don’t just get in on the day you decide you need to.
  2. Be aware of the retirement conundrum before you have to retire. I say this because what is an obvious projection when you’re healthy can become an immediate nightmare when you or your spouse is not. It may sound radical but given that units in retirement villages are either scarce or increasing in value faster than your residential property, you need to consider down-scaling your home so as to afford a retirement unit and a freestanding home before prices move away from you and you can’t buy the unit you really want. If you do this, rent the retirement home as indicated above.
  3. Many retirement villages are Life Rights. Relatively inexpensive to acquire, a downside may be that you’re not able to rent the unit to a third party. This puts pay to the idea above and you must ensure rent-ability is confirmed in writing before you buy.
  4. If you’re reading this and you have concerns about your ability to retire in principle knowing that your genes live long, then consider selling and making the move sooner rather than later. The reason is the old issue of opportunity cost. As an example, a R5m home can cost you R8000 per month to service and maintain but sold, it can provide you R500000 per annum in a preference share. Sure you have to do your sums and will probably spend half that buying a retirement unit, but the point stands that the sooner you release funds for a smaller home and retirement income, the better you will cope with ever-increasing costs of living.

In the part of the world that I live, I see the above daily. It doesn’t just take extraneous political factors to set one’s mind reeling, you just have to see what it costs year on year to eat out to understand that many luxuries today may not be attainable tomorrow. The sooner you get over yourself and understand the new reality, the better. The exception could be significant capital growth in your current property but, when the chips are down, a Rand in the hand could be better than a double storey.

Property and life are inextricably linked at an individual level. And, so it is for Homeloan Junction. We understand the implications of what’s been discussed above and can give an answer or refer many of your questions as regards that connection between your home and your lifestyle. We would welcome such interaction and will be there with finance as required. In the final analysis, we care about our customers.

Yours in Property

Jack Trevena
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