Growth & Jobs | Homeownership still effective in building personal wealth – Samuels
Experts in the real estate sector agree that homeownership is probably one of the most powerful drivers of wealth creation in the Jamaican economy.
Carlton Earl Samuels, chief development financing officer at The Jamaica National Group (JN), said owning a home is a safe investment, pointing out that homeownership offers long-term financial security for most persons and can transform the economic prospects of a family, both day to day, and generation to generation.
Samuels explained that unlike buying a motor car, which depreciates from the day it is driven out from the dealer’s garage, real estate generally appreciates in value from the date of its acquisition.
“Therefore, while a motor car and other consumables tend to lose value, real estate generally increases in value, as long as there is no degradation in the area in which the property is located and it is generally maintained,” he advised.
“For example, a property which was purchased in 2012 for J$15 million is now worth $28 million. That means, in seven years, your investment has almost doubled,” he stated. “If nothing else, it’s a fairly reliable long-term investment.”
Howard Johnson Jr, chief executive officer of Howard Johnson Realty and immediate past president of the Realtors Association of Jamaica (RAJ), agrees, noting that for years, home prices in Jamaica have appreciated annually, at average rates from about eight to 20 per cent.
“This is based on a combination of factors, from how early you buy into a development to how well the area has appreciated because of infrastructure development,” he explained. “Therefore, I’ve seen persons buy into a typical community, there’s no significant change in terms of development, but based on what they could get for rental, they are now earning eight to 10 per cent interest on their money per annum,” he said.
Johnson added that he had also seen the high-roller investor who took a chance in a community and is now looking at 20 to 22 per cent return on his investment.
“This is based on a number of factors, including the rental that he is now earning from the property, combined with the discount that he got from the developer ..., he explained.
Real estate prices move with inflation
Samuels noted that the increase in real estate prices tend to move along with or above inflation, therefore, investors receive real returns on their investment.
“The only other context I see this in is the stock market, and the stock market still has a level of risk, because it can go in any direction,” he advised.
The JN executive noted that while a homeowner’s mortgage payments are likely to remain the same over the life of the loan, market prices for the house tend to increase, creating valuable home equity, which also increases the owner’s net worth.
He said that in addition to the fact that a house is an appreciating asset, the unique power of the investment is that it appreciates based on the entire value of the property.
“Equity accumulates not only on what the homeowner was able to pay out of pocket, but also on what they borrowed,” he explained. “This is referred to as ‘leveraging’ .”
That means that rather than earning four per-cent appreciation on the 10-per-cent down payment, a purchaser will build equity on the full $15-million value of the house, as if you had invested all that sum of money yourself. “This means you leveraged your $1.5-million into a $15-million investment,” Samuels explained.