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Profit hidden in the home
You think the price of your house is what makes you rich. But Stats SA is about to teach you that it's the rent you don't have to pay on your home that also counts for a lot.
A new consumer price index (CPI) measure will be applied to January, and will appear in February. Housing will be the biggest component at 21%. Home-loan interest costs are no longer part of CPI and are replaced by "owner's equivalent rent" (OER). Most homeowners are unaware of this investment value that is hidden in their homes.
Property is known as an income investment, because that is more important over time than capital growth. But homeowners ignore this, because they don't actually receive cash to put in the bank. Instead, they gain by not having to pay rent. OER is the rent that owners don't get because they occupy their homes.
Stats SA will use data from a quarterly survey of about 9 000 rented properties to measure OER. Rents make up 3% of the 21% housing component in CPI, and OER is the biggest portion at 11,35%. The reason for changing to this method, according to Stats SA's Patrick Kelly, is that it is internationally the most accepted measure. It is accurate and can be broken into regional data. "SA's data on house prices is inadequate," says Kelly. "OER also reflects the home's dominant role as a consumption item, though it does have an investment element."
An unexpected consequence of OER is that it may help homeowners understand how important this hidden income is. An investment's total return is made up of capital growth and income. According to recent research by JPMorgan, income return from shares in stock exchanges averaged 3,3%/year over 20 years - less than 20% of total return over the full period. But income can be 85% of a property's total return. Click here to read the full article.
Ian Fife, www.financialmail.co.za, 5 December 2008
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