In last week's newsletter we discovered that regardless of the property cycle, now is always the right time to buy, because there are good buys to be found in any phase of the cycle, and because a market slump does not guarantee that any particular property will be a "bargain".
However, there is another, and perhaps even more compelling reason why now is always the right time to buy. It is simply that property will never, never again be as cheap as it is today. And we are not talking about the specific market conditions in 2010, we are talking about the "now" in any time in history, regardless of the prevailing market conditions or the property cycle.
Property will simply never again be as cheap as it is today because of the time value of money, which is a result of the ravages of inflation compounded over time.
The time value of money refers to the very real phenomenon that the value, or purchasing power, of money halves around every 7 years, depending on the inflation rate. This means that you will be able to buy less with R1 in a year's time than what you can buy today. And in 7 years' time, you will only be able to buy with this R1 what you can buy with 50c today. This is why in 1972 you could buy a cheese burger and chips for 28c, and end your meal with a cup of coffee for 12c. What can you buy with 40c today?
The time value of money can be seen clearly in the property market. Take a look at the graph below.
Source: Absa
In 2000, just 10 years ago, you would have been able to buy an average home between 80-400m2 for R400 000. Today that same house will cost R900 000. If you bought this property in 2000, your bond repayments are probably still around R4 000 a month and you are half way through the repayment term. If you buy this property today, your bond repayment is closer to R10 000 a month, and you are facing 20 years of R10 000-a-month bond repayments.
And, in another 7 or 10 year's time, that same property could cost you R1.8 million, with bond repayments closer to R20 000. This property at R900 000, and any other property available today, will simply never again be as cheap, or as cheap to acquire, as it is today.
So, in essence, the ideal time to buy was actually 20 or 10 years ago, when you could buy this property for R40 000. But since we cannot go back into the past, the next best time is now. Every year you wait to buy that investment property, the time value of money is working against you and the property you can buy for a certain amount of money becomes smaller and smaller.
In fact, for the most part, the time value of money works against us. That is because it is easier to see the effect of the time value of money looking back, than looking forward. A pension or retirement annuity is a prime example, which explains why 95% of people who do have a retirement fund won't be able to retire. The R1 million pension fund you have been saving up for may sound like a lot of money now, but in 7 years time, it will only buy what you can buy with R500 000 today, and in 14 years time, will have the same purchasing power as R250 000 has today. So your pension fund, for which you worked all your life, will barely buy you the luxury car you dreamed of. It is certainly not enough to sustain you for 20 years of retirement.
There is another related reason why now is the time to buy: the wonder of compounding. The wonder of compounding makes your money work for you, but the secret is time. The longer you allow the wonder of compounding to work for you, the more spectacular the results. Waiting even just one year has a significant dampening effect. Einstein called compounding the 8th wonder of the world. Anyone who has bought an investment property generating rental income and held it for 10 years, will know exactly what Einstein meant.
For those who want instant gratification (and that would be most investors) here is a real life example, one of thousands more. In 1985 a novice investor bought four apartment blocks in the City Bowl in Cape Town, consisting of 20 units in total, for just under R500 000! What has the wonder of compounding done in 25 years, long after the R500 000 finance has been repaid? The properties are now generating more than R100 000 per month in rental income, as rentals have risen steadily over the years, outpacing the ravages of inflation in a way very few other investments can. Imagine what the wonder of compounding will do in another 25 years of holding this property?
The longer you hold an income-generating property, the greater your return on investment. But our time is limited, which means there is no better time to buy property than now. Don't dilute the value of the finance you qualify for by waiting another year to buy a property, and don't wait another month to let the wonder of compounding do its magic.
