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Is property still a good investment? | Buying property jointly | Building vs. buying | Buy-to-Let | The new National Consumer Act

Is property still a good investment?

It pays to downscale your expectation and buy a property rather than upscale and pay off someone else’s. Obtain a beachhead in the market and don’t allow yourself to be out of it by renting. Buying property is a big commitment and you should thoroughly research your financing options to ensure that there are no surprises along the way. The need for property will always be in demand and will always offer significant investment potential. Investing in property will give you the opportunity to create a legacy for your grandchildren.

Buying property jointly

Note: When buying a legal entity that owns a property, be sure that there is no outstanding debt or obligations, consult an attorney.

House prices are on the increase and more partners buy property jointly to afford the property they want, with the advantage of sharing repayments and responsibility. Shares of the property do not have to be equal, although the property will be registered in both names. Regardless of arrangements between you, both will be jointly liable for the repayments to the bank. Before you decide to take up this option, consult an attorney to draw up a legal contract to protect both sides.

Building vs. buying

Figures were released by ABSA in May 2006 stating that the gap between new and existing houses has shrunk to its lowest level in more than 15 Years. It now costs on average only 1.5 % more to build a new house than buying an older, existing one. This is due to the large number of developers and building contractors now active in the property market, which leads to greater competition on tender prices.

According to ABSA they place the current average prices of a new house at R 767 100 and for an existing house at R 755 700. The total price of a new house will depend on the cost of the land. Stands values are rising faster than house prices; suitable located and zoned residential land becomes increasingly scarcer. The building cost on an average middle class house is approximately R 3 300 m2 and a luxury house anything between R12 000 and R 24 000 m2 (top of the range finishes).

(These costs are subject to change, but gives you an idea of costs applicable)

Buy-to-Let

The strong demand for residential property, driven by a rapidly growing middle class, caused the development of higher-density residential units to increase strongly over the past five to six years. Together with the lower interest rates in 2005, caused many new investors to invest in the booming market. As a result, the buy-to-let market grew rapidly, and put downward pressure on rentals. Taking into account the lower interest rates, which made it easier for people to buy, which resulted in rentals not increasing significantly during the course of the year.

The new National Consumer Act

The Department of Trade and Industry recently introduced the National Credit Act, which replaces all current credit legislation. The Act came into effect on the 1st June 2006 and certain sections will come in effective at a later date.

Sections which will become effective on 1 June 2007, includes the sections on disclosure, limits on interest rates and fees, reckless lending and all related compliance requirements as well as the sections on debt counselling & debt restructuring become effective on 1 June 2007.

Transactions which fall under the Act are all loans and other credit, from banks, including mortgages, overdrafts, credit cards, vehicle finance and any other personal finance; furniture finance, clothing accounts and any other type of credit from retailers; micro-loans and pawn transactions; and any other type of credit or loan provided to a consumer.

The purposes of the Act is to promote and advance the social and economic welfare of South Africans, an accessible credit market and industry, and to protect consumers.

The Act establishes a National Credit Regulator, to carry out education, research, policy, development, registration of industry participants, investigate serious complaints, and ensure enforcement of the Act.

It will really change the way anyone who lends money behaves and treats consumers also puts a greater degree on responsibility on lenders.

When applying for credit, honesty and/or full disclosure at the application stage is crucial and counts as a total defence against any allegation of a credit provider providing reckless credit.

Be aware of over indebtedness. Credit providers have to take into consideration a consumer’s total credit exposure as at the date of assessment to prevent over indebtedness and/or the provision of reckless credit.

Before entering a credit agreement with a credit provider, make sure of all implications, regulations and terms of such agreement, including fees, costs, interest rate and total instalment. All information have to be disclosed by the credit provider, prior entering an agreement. This will benefit the consumer regarding their future obligations and resultant implications should they default on such obligations.

Legislation has also eliminated the use of fine print in all credit (loan) agreements. Language in credit agreements must be simple and understandable; quotes must be given on all credit agreements, and will be binding for 5 days. If a credit application is declined, reasons must be provided to the costumer. Reckless lending is prohibited and interest and fees are regulated on all agreements, including micro-loans. The Credit Bureau is regulated and consumers have the right to a free credit bureau record once a year.

Pay your instalments before or on due date. Don’t delay your instalments. Financial discipline is essential. Lack of financial discipline can lead to be blacklisted which can leave you in financial darkness for three years or longer.

Distinguish between good debt (home) and bad debt (store accounts). Be ruthless about cutting non-essential expenses and pay off short-term debts, which attracts the highest rates of interest. Think twice before entering a short-term loan.

If you get in financial trouble don’t run away, visit your credit provider and make arrangements. Remember when in financial trouble first priority is to protect your home. Stick to your budget – be a good consumer - Bare in mind the new act is consumer friendly; it’s up to you to treat accordingly.