The decision to either rent or buy residential property can have far-reaching implications on household cash flows, as well as on wealth, FNB home loans property strategist John Loos said on Monday.

"Everyone has a different financial situation, a different risk appetite, and different priorities," Loos said.

For that reason, certain factors had to be taken into consideration when deciding to rent or to buy.

In recent years, huge capital gains were achieved through a surge in the number of people buying residential property, swinging the pendulum in favour of owning as opposed to renting.

"It wasn't always this way though, and with the extreme interest rates of the 1990s, rental may have seemed far more attractive to many," said Loos.

Now, with the property market slower, interest rates rising and residential property yields low, rental could be becoming a more attractive option for some once again.

Before a decision was made, the obvious benefits of property ownership should be considered, said Loos. These included capital gains accruing to the owner. Although SA residential property was currently entering a period of general price deflation, it was expected that house price inflation would rise on the back of a resumption of interest rate declines in 2009.

Furthermore, on one's primary residence, an additional benefit relative to some other investments was that one was partly exempt from capital gains tax.

The less obvious benefits of ownership relate to human nature, Loos said.

"As opposed to renting, there exists a stronger incentive to invest in one's residential asset and to add value to it through maintenance and alterations."

Greater financial discipline

Ownership might also encourage greater financial discipline than rental.

According to Loos, the benefits of renting was that apart from the cash flow uncertainties surrounding bond repayments, property ownership had the added uncertainty of unforeseen costs, which were numerous — for example routine maintenance or a burst geyser.

"Insurance can solve much of this issue but not everything. By renting, one can pass many of these unexpected costs on to the landlord in accordance with the lease agreement. Obviously this still requires that you choose your landlord well," Loos said.

The other unexpected costs avoided when renting were those associated with possible market fluctuation.

"Capital losses can be made not only in times of deteriorating economic cycles, but if a particular area deteriorates badly... property owners as opposed to tenants are the ones having to live with this risk."

Rental could benefit people who risked re-location quite frequently, he said.

Sapa