Your investment a lemon?

06-09-2004

Here's a reality check for home buyers relishing the huge increases in capital growth they've experienced over the last few years: if measured against inflation over the past 30 years, your investment has actually gone backwards.

Rode house price figures show that an investment in an average-sized house in a middle-income neighbourhood thirty years ago would have given you compound growth of 11 percent over that period – compared with the consumer price inflation of 10,9 percent over the same period.

So if you've followed a "naïve buy-and-hold" strategy over this period, your investment was in reality a rather modest one, says Rode CEO Erwin Rode.

"If the house that you bought for R30 000 is now worth over a R1 million it’s just kept pace with inflation, even though you have probably spent money on it to upgrade some of its facilities. The picture is however not all that grim. A buy-to-let owner would probably have made an annual income return of, say, 7% before tax over this period, implying a total return of 18% (11%+7%);" he says.

"However, over the last four years, the South African house market has shown very strong capital growth. If you had bought four years ago, with a buy-and-hold strategy in mind, the picture will be considerably rosier. Which does show that timing is everything if you want to beat inflation in this game."

Rode will have more to say about this phenomenon at his forthcoming conference.