Most ordinary people will contribute to pension funds and retirement annuity schemes for many years so that they can eventually afford to retire.
Many of them will realize when they get to retirement that they will have to sell their houses in order to move to a coastal property, as two households will just be to expensive to keep up and it is furthermore financially unwise to keep both. One can for sure start the search for the ideal location when one get near to retirement. But there is also another way to go about. And perhaps one that makes a lot of sense.
Let me use the example of Avonddans II, Country Estate at Great Brak River. One can still buy a plot at Avonddans for ZAR R640 000. This is not a boiling hot market at its peak kind of price. This comes at a time when the market is rather subdued and where the value of these plots have grown to reflect a very decent buy.
Say one puts down a deposit of R60 000 and takes up a bond with a financial institution for the rest of the purchase price. The back payment over a 10 year period will be about R8 500 per month. Ten years later, at retirement, the plot will be paid in full and one can start to build a house befitting people who want to enjoy their lives when all the responsibilities become less. You will not be hold captive to a possible slump in the property market and then become pressurized to sell your pre retirement house at below the target price as you have created maneuvering space to handle different options.
Should your best friends decide that they too would build a house at Avonddans II in Great Brak River they most likely will have to fork out the astonishing amount of ZAR R 1 800 000 to buy a similar plot, if there are plots still available. The premise here is that the value of this type of property will be expected to increase by 11% on average per annum. It just might be that the Soccer World Cup in 2010 attract foreign interest that might lead to exceptional price bargaining for prime coastal properties. Then one’s estimations could look rather silly.
There are two main issues here to consider: will one do better to pay a property off over 10 years, or would it be better to make a purchase near retirement? Secondly, what is the emotional price to pay for any one of these decisions?
The escalation in the price of property depends on many things. One can expect property prices in general to increase by a few points above inflation if one does not buy at times when property hunters become feverish and thus drive prices above the inherent value. A plot at Avonddans II at the peak of the property cycle could well be priced so that a buyer will find out a few years later that his or her escalation in value is sub standard to other people’s returns. There are hopelessly too few people that either understand the principle of the time factor of money or too many that know, but just forget to use that in their financial decisions.
A plot of 834 square metres can still be bought in Avonddans II here in 2007 at round about R 640 000. This is in no way expensive. A mistake one can easily make is to compare apples with pears. It is possible to buy a plot for less than that in the same area! But with a smaller plot and at a lower price than the Avonddans II plot, a different type of buyer will be interested. Most likely a less expensive structure will be built. The investment value can for that reason not be the same. The bigger plots will attract more up market buyers, they will most likely build better quality houses and because they have space around their houses on the strength of bigger plots, the privacy will ensure better bargaining power price-wise in future.
It is therefore difficult and even impossible to indicate what the average price increase of property will be over the next few years. Property in a sought after area (like prime coastal property ) bought at the right price and at the right time will increase ahead of inflation and will be a good investment.
Let us play devil’s advocate and ask whether one cannot do even better with the ZAR R 8500 per month and invest that in the stock market until the point arrives to cash up and buy a good plot at a good price? And this can be answered by the devil advocate’s counter-part by saying that it is for sure possible to have better returns on the stock market if you get it all right - and get it right constantly. The risk is that when you decide to cash in because you want to retire and need the money to buy a plot at Avonddans II, that if there is a market slump, you could be advised to stay in longer until the market picks up again.
When you have retirement as a short term goal, you do not need any postponements. Furthermore, the investor with the ZAR R 8500 per month in the stock market will have to face another negative factor at cash up time. The Receiver would really like to take a portion of that money for the many needs of government. The person that has bought the plot at Avonddans II, 10 years previously, will not have to contribute to the tax authorities as he or she does not need to cash up and is not liable for any tax on the growth of his property investment. The concept of buying a plot for retirement purposes is not a frivolous idea. It has to do with thorough planning towards financial goals and thus should be considered as such.
And then we get to the emotional side of the argument. It will always be a traumatic decision to sell one’s property, say goodbye to old friends and to move on to your coastal destination. A sudden decision, on the brink of retirement, will leave one with a huge uncertainty that is not really needed in matured years. Do you go to the West Coast, East Coast or off to Avonddans on the Garden Route? Will your friends come visiting? The person that has bought 10 years earlier at Avonddans will have an advantage that makes it so much easier to sell and move out. For 10 years, month after month, a ZAR R 8500 has been paid towards a very specific goal namely to pay off that chosen plot at Avonddans II. It will be something that one can visualize and focus on. It will also most likely lead to it that friends buy there too. A motivated buyer will discuss his or her plans for the future with other people and it can become a closeknit colony of friends on way to Avonddans II. Most of those friends would have made alternative plans if you were still contributing your ZAR R8500 towards a stock market investment up to the time of retirement.
As with everything else in life, we have to make choices. Your choices will be very personal, and it makes sense to work through all the various factors that need to be considered. Ideas not thought through could leave one with half-baked results or even detrimental ones. Take time to consider options, and then act on them as an option chosen and widely proclaimed will come to nothing if not implemented.
Wim van der Walt
28 October 2007
