Renting versus buying a house in South Africa – the winner is clear

An analysis by BusinessTech showed that buying a home is a much better investment than renting and investing the savings in the equity market.

The debate between renting and buying a home in South Africa has long been contentious, with arguments on both sides.

Advocates for homeownership highlight the long-term financial benefits, value appreciation, security, and a sense of ownership.

Those favouring renting argue for flexibility, fewer financial burdens, and the ability to invest excess cash in more productive assets.

BusinessTech conducted a detailed financial comparison between renting and buying to see which option provides the best long-term return.

For this comparison, we used a two-bedroom apartment in Broadacres, a popular residential area in Johannesburg, Gauteng.

The comparison is based on actual market data to determine which option would be better over 20 years for a person intending to live in the property rather than investing in it for rental income.

The average price of purchasing the selected two-bedroom apartment in Broadacres in Johannesburg is R953,000.

Assuming the buyer could secure a 100% home loan at the prime lending rate of 11.00% over a 20-year term, their monthly bond repayment would be R9,837.

Additional costs, such as bond registration and transfer fees, amounted to R42,145. Rates and taxes, calculated based on City of Joburg rates, came to R478 per month.

Estimated maintenance costs, calculated at 1% of the property’s market value and adjusted for inflation at 4.5%, started at R780 monthly. Over 20 years, these costs increased in line with property appreciation.

On the rental side, the equivalent property had an observed market rental price of R9,150 per month. Based on market data, the rental yield was 11.52%.

Over the 20 years, rental rates were assumed to increase with property appreciation, ensuring a fair comparison between renting and buying.

To factor in the opportunity cost of homeownership, the bond registration costs of R42,145 were assumed to be invested by the renter as a lump sum into the S&P 500 index.

Any difference in monthly expenses between the buyer and renter was also invested into the S&P 500 to simulate the wealth-building potential of renting.

Buying versus renting investment comparison

Initially, the buyer paid R1,959 more per month than the renter, meaning the renter had an extra R1,959 to invest in the S&P 500 each month.

However, as rental costs rose over time, the financial gap narrowed. By the end of year one, rental costs equalled homeownership costs.

After three years, rent had risen to match the buyer’s total monthly expenses, including bond payments, rates, taxes, and maintenance.

From this point onwards, any additional rent paid above the buyer’s total costs was assumed to be added to the buyer’s wealth and invested in the S&P 500 to maintain a fair comparison.

At the same time, property appreciation worked in the buyer’s favour, as home values historically increased at an average annual rate of 8.13%, according to FNB’s House Price Index since 2001.

At the end of the 20-year period, the homeowner, benefiting from property appreciation and stable costs, had amassed R8.02 million.

Meanwhile, despite investing the initial surplus funds in the S&P 500, the renter had a total wealth of only R1.12 million.

This vast difference highlights the compounding effect of property appreciation and stable homeownership costs over time.

The analysis confirms that from a long-term financial perspective, buying a house is a much better investment than renting.

Renting a house in South Africa instead of buying one offers short-term benefits like flexibility and lower upfront costs.

However, the long-term benefits of buying a house, such as property appreciation, fixed bond repayments, and wealth accumulation, are attractive to investors.

The numbers listed in the table below, based on a real-world example, show that ownership is the more financially rewarding path for those in a position to buy.