But perhaps that’s not the issue. What about the holding costs of residential property that have gone through the roof since 2000? Will you be able to afford to keep your cave in retirement? In short, are your caves sustainable? Watch the video.
You can download the calculator I refer to in the video by clicking on Cost-of-cave-calculator1 (you will need Microsoft Excel on your computer for it to work)
Transcript of video:
PROF MATTHEW LESTER: Hi there. I’m Matthew Lester at the Rhodes Business School. Here’s a little presentation, which I’m very keen on: it’s entitled ‘Can I afford my cave in retirement’. It’s a look at the South African residential property market.
South Africans have loved it for years. Is it still the place to be? Well, if we take the Absa House Price Index and we run it all the way back to the 1970’s, we see that we had a property boom in the ‘70’s, which was followed by 20 years of doldrums. Then we all got very excited about property between 2000 and 2007, but we haven’t seen much action since. Many people still believe that the property market is coming back and they make all sorts of comparisons.
If you are able to extract the data, you can chart the House Price Index against inflation, so it looks like this. There’s inflation, there’s the House Price Index in 2007, but the JSE is slightly above it. People say ‘what are you complaining about’. If one puts the Dow on it, we can see that foreign investments have not kept pace with the housing market at all, but one has to take into account: all of these statistics have flaws in them.
For starters, we had a totally ridiculous exchange rate in the early 2000’s, which subsequently improved. Then we had the effects of the Financial Crisis and these have to be taken out of the equation, so let’s look at it post-2008. We start from mid-2009, after the Financial Crisis and put all the indices on the same basis. What we get is that the Absa house price index is below the inflation rate, over the last five years and the JSE is miles ahead. If one looks at offshore investments since 2009, they are even way ahead of the JSE, so it all depends on what picture you want to generate. It’s all just a question of fiddling around with the indices, but that’s not my primary problem and it’s not the reason for this presentation.
I’m worried about the increased cost of keeping residential property in South Africa. What we have noticed since 2000 is that we have had massive increases in holding costs. Prior to 2000, buying property was a question of affording the expensive interest rates at the time, but now we have to look and say ‘since the Municipal property Rates Act came in, in 2004, rates have gone through the roof. The cost of electricity has gone up 550 percent, since 2000. Insurance and upkeep costs often exceed inflation. Is this sustainable?
To answer that question, I put it to you on this basis: will you be able to keep all your property in retirement. What we did with my friend, Mark Crowley, is we developed a little Excel spreadsheet and we filled it in as follows. My age is currently around 50. I want to retire when I’m 65. I want to keep my house, so I’ll carry on paying rates of R3000 per month. I’ll have my monthly trip to the hardware store, then pay my insurance on bricks and mortar, then I’m going to have a staggering electricity bill, and then I’ll also want a servant. If I want all of those things in retirement, I’d better put aside R3.45m.
You might say that sounds absolutely impossible, but what we have to say is ‘I’m going to pay for that out of my pension’. Therefore, I have to accumulate the capital to generate the annuity, to then pay tax on the annuity, to then pay household utilities, and this is what people are not factoring in. The more expense you have in, the more capital you’re going to require, and the more taxes you’re going to pay. If you think that one’s frightening, we’ve even made a position on the spreadsheet to put in various caves that people have accumulated over the last 20 years: your house at the coast and your house on a game farm etcetera.
What we are finding from this analysis is that you may have wealth in your residential property, but there’s an off-balance sheet liability for the costs of keeping it. Part of financial planning today is to simply go into an exercise like this and say ‘is your property not going to eat up your pension in retirement, and is it not time for a little downsizing’.
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