I was sitting having coffee with one of my colleagues from my audit days a couple of weeks ago and we started talking about property and its recent prices. Both the drop in rental and in physical property prices were discussed and we also discussed whether it would be better buying or renting a property from an investment perspective. My gut feeling was that it would probably be best to rent a property as the onus of repairs and maintenance and rates and taxes are on the lessee.
So I did a quick and dirty calculation using the FNB Namibia Housing index, Mortgage Lending Rate and inflation as a guide. Unfortunately the FNB Namibia housing index only dates back until 2007, however this gives us about 11 years of data to work with.
I used the historical information in order to get to a more informed answer in today’s terms. Therefore, assuming we would buy a house in today’s terms to the Value of N$ 3 Million and applying the FNB Housing Index, this house would have cost us about N$ 970,000 11 years ago. I also assumed one could negotiate quite strongly with the bank and one would have obtained a loan at one of the banks at a Mortgage Lending rate less 2%. I used a rough rates & taxes amount of N$ 2,500 and adjusted it for inflation to roughly 6% per annum. A monthly rental of N$ 20,000 for the house also adjusted to an annual increase rate of 8% per annum. Lastly, I assumed one would have invested the Transfer duty that one would have paid when buying a house into the FTSE JSE Shareholder Weighted All Share Index or in the FTSE JSE South African Listed Property Index. As well as any leftover cash depending on the scenario.
For information sake, the Namibian Property market returned about 10.8% per annum, whereas the FTSE JSE Shareholder Weighted All Share Index returned about 10.6% per annum, also the FTSE JSE South African Listed Property Index returned roughly 11.9% per annum over the last 11 years up until March 2018. Once applying my calculations, after 11 years of investment in either case, the result would have been as follows: Your house should you have purchased it would be worth N$ 3 Million in today’s value, which is a growth of N$ 2.03 Million in nominal terms. The outstanding bond amount on this loan would have been approximately N$ 650,000. Thus, you would have paid off roughly N$ 320,000 of your Capital amount owing at the start of the period. Your total payments for the period would have been roughly N$ 1.28 Million, resulting in N$ 960,000 of interest payments made towards the bank.
Should one have been renting and investing any excess money into the market, specifically into the abovementioned Indices, taking no asset management fees into account, you would have had to pay an additional amount on average of about N$ 95,000 above the amount, should you have purchased the property. In fact over the 11 years you would have paid N$ 1.84 Million in rent.
Over time the bond payment becomes less than the rental payment of a property, purely on the back of inflation and on the increase in housing prices. Would one have invested the difference from bond payment vs rental amount into the above mentioned indices again excluding any asset management fees, on average the investment would have stood at roughly N$ 525,000 after 11 years.
Therefore in conclusion, it would be better buying a property than renting one in the Namibia, basing the information on historical facts and data. This is mainly due to gearing, as you are using the banks money to finance a property. However, there are other facts to consider, such as varying interest rates, growth in housing prices, maintenance of the property (which based on my above calculations I have not taken into consideration). The N$ 525,000 could however be applied to maintenance. The norm is that home owners over capitalize on their houses i.e. they do many changes, renovations, additions etc. which cost a lot of money and are not always feasible (adding value). So the quick and dirty calculation of buying a house vs renting over the longer term using historical figures shows us that buying is better than renting.
Stefan Horsthemke – Portfolio Manager, Old Mutual Investment Group Namibia