This one should be short and sweet, it’s really just a brain dump of a conversation I had with a friend who had the all too common argument of ‘But It’s so expensive, I can’t afford R9500 payments’. It’s the same excuse I used for years, but it’s only semi true.

Housing is a commodity. All commodities are subject to supply and demand economics. There are millions of people who would love to buy a house and only a few houses.

Supply and demand says that when there is high demand and limited supply, prices go up… not everyone understands why though.

Think of an auction: The audience is made up of an accurate cross section of South African society. 90% of them earn less than R5000 a month. 5% earn around R10 000 a month. 3% earn around R20 000 a month, 1% earn around R35 000 a month and the other 1% earn more than R45 000 a month.

(I made those stats up because the StatsSA release is so racially oriented I was unable to find a non-race income breakdown. If anyone knows of better percentages I’d love to see them)

Ok, so we’re at this auction and there are 98% of the people earn less than R20 000 a month… and there’s only 3 houses for sale. That last 2% will outbid anyone in the other 98%, but they’ll stop when it starts hurting…. the housing price is therefore completely linked to the salaries of the highest income earners in the country. Now, people like my friend and I are lucky to be in or near that top 3% but we certainly aren’t that top 1%. Which means that whenever we want to buy there will be some fatcat pushing the price up… but with some belt tightening, we’ll be able to afford it.

Ask an older friend who bought property about their bond repayments… I know guys who are paying R950 every month towards their bond. The natural instinct is to say ‘Oh man, I wish I’d bought when the prices were still so low”, but the truth is, the prices were never low. My parents had to pay R120 bond payments when they first bough their house 29 years ago. They struggled. My mom says there was a time when the stopped buying cheese because it was a luxury!

It all boils down to this. Unless you are earning a salary in the top 1% of the population, it is going to hurt a little bit when you buy property. But soon enough salaries will go up and your bond payment will stay R9500 a month. I just know that one day, in the hopefully not too distant future, someone will say ‘Oh man I wish I had bought property when the payments were still under R10 000′.

(I realise that this summary completely ignores cheaper housing in cheaper areas, but I did that to keep it simple)

ps. Analysts predict that the housing price will skyrocket in 2010… but there’s a chance (Skye, block your ears) that we might be in for another percent increase in prime during August. Eek!

Be sure to read the overly long winded “When to buy” post first if you care about this stuff.

I think it’s very important that people enter into property buying with their heads and not with their hearts. Property is much like gambling in that there is often some game theory going on… you like a place but don’t love it, should you buy it and risk not being happy, or not buy it and risk it being sold and not finding anything else?. This stuff is stressful and you’ll probably find yourself lying awake at night with your mind running through all the variables… Having said all that, there is one thing you need to do right from the very beginning and then never budge on it: Set a price and stick to it.

Getting to that price is easier said than done… Here’s the steps you should probably follow:

1. First you need to know what the bank will give you. A place like Ooba is a good start. Be prepared for a little bit of paperwork.
2. Next you need to know whether you can afford the repayments. A spreadsheet and budget will help you here. It’s imperative that you be realistic and conservative. Find out what you’re paying on bank charges, go through your credit card statements, include EVERYTHING… Perhaps start keeping your pick ‘n pay receipts so you know how much you really spend on groceries. You’ll want to be in a position where you can make your payments (at 2% or 3% higher interest rates) and live comfortably.
3. If you’re like us you’ll notice that the banks are quite happy to offer you much more than you can probably afford. We qualified for about 250k more than we ended up buying for. Based on your budget figure out what payments you can make comfortably and work out what your total bond amount would be based on those monthly payments. I like this bond calculator. Ask you bond originator what interest rate you should do your calculations on. They’ll probably give you an accurate conservative figure. If we had bought on the limit we qualified for our quality of life would have decreased significantly until one of us got a raise… not something you want to bank on… and we would have been up shit creek if the interest rate went up by 2%… something that you unfortunately need to bank on. (It probably won’t happen, but you need to bank on it)
4. Once you’ve got your final number you can start looking for a property. That’s step 3 which is coming soon.

over and out.

j.

Just thought I’d write a little update since everyone is asking.

We got the house! It’s about 107 years old and in perfect condition except for the bathroom which could do with some love. There is a tenant in the house already so we’re going to maximize on our existing leases and only move in during the month of December… The wait is killing us but it’s also giving us lots of time to look for bathroom fittings, tiles and other similarly domestic things. The one thing I’d always wanted was a house with a fireplace (preferably a little Dover stove) and now I have one! We’ve also been planning our herb garden which I think is going to be a tiny piece of awesome. My biggest concern is the audio visual wiring. I plan to run RJ6 coax and BNC wall boxes, with BNC to Belling Lee fly leads and an RF Modulator so we can watch stuff off the Xbox in the bedroom ;) Nerd much? The rest of the house will be covered by 802.11n/g/b wifi. How much does a 15″ touch screen cost? I’m thinking of turning my Alix into a “kitchen pc”. :)

I can’t wait to get in there with a drill and a flipping screwdriver.

Life is AWESOME.