Tough economic times seem to be causing some homeowners to sell their houses and opt to rent instead, as consumers fight to keep the home fires going.
“On the one hand, tough economic times are making times tougher for tenants as they have to cope with increasing fuel, electricity and services costs, which has put pressure on landlords to limit rent increases to below inflation in order to retain paying tenants that are struggling with affordability.” On the other hand, landlords, for whom rental income is not necessarily a luxury, are biting the bullet as their income is not growing with their expenses, says Liebenberg.
And with about 15% of the population partly depending on rental income, the immediate future income looks strained as the smoothed year-on-year increase in rental income, according to the latest PayProp Rental Index, is the lowest in more than two years at 4.9% – below the projected inflation rate of around 6%.
These findings are included in the June PayProp Rental Index, a research tool recently launched by PayProp, South Africa’s largest processor of rental transactions. The index tracks a series of indices from real-time transaction data to provide a comprehensive view of the state of the residential rental market in South Africa.
Currently most developing economies seem to be propped up by low interest rates that are unlikely to rise anytime soon – perhaps not even until 2014, says Mr Mike Schüssler, chief economist at economists.co.za.
In South Africa, the Treasury expects inflation to rise to 6.2% and GDP growth to slow to 2.7%. Schüssler’s expected figure for inflation is around 6% and GDP growth 2.4%. He says they expect interest rates to stay low for the whole year.
“We are fighting a hard battle against a possible recession. We are likely to win, but at a higher debt cost,” he explains.
Over 2.9 million households rent, of which 1.6 million rent formal structures. Of this number, about 700 000 households rent properties in the formal (suburban) market, up from 675 000 in 2010.
PayProp currently processes the rental transactions for over 50 000 of these properties and has an extra 8 000 plus on its database, some of which are not rented out.
More than 62% of all South African households currently own their lodgings – but this percentage has dropped in the last few years and is significantly lower than earlier in the decade when it was around 70%. This indicates that more and more former homeowners are now entering the rental market, says Mr Louw Liebenberg, PayProp CEO.
To complicate matters further, nearly 10% of all South African households rely on rent for their bread and butter. About 5% use rent as supplementary income, adding up to around 15% of South Africans getting some form of income from rents.
“On the one hand, tough economic times are making times tougher for tenants as they have to cope with increasing fuel, electricity and services costs, which has put pressure on landlords to limit rent increases to below inflation in order to retain paying tenants that are struggling with affordability.”
On the other hand, landlords, for whom rental income is not necessarily a luxury, are biting the bullet as their income is not growing with their expenses, says Liebenberg.
Considering that around 77% of these landlords receive less than R3 000 per month for their properties, it is clear that it is not only the top end of the property market that is affected.
Generally, he says one could argue that the lower end of some of the formal rental market starts at about R1 000 per month. However, as it is unlikely that RDP house rentals can be advertised by estate agents, it is being estimated that, other than the 400 000 houses that rent for more than R3 001 per month, there are only about another 275 000 houses for rent in the formal market.
A figure of 26% of all households have a second home, but a large number of these are in rural areas and are generally not rentable.
The average rent in South Africa was R5 178 per month, which is slightly more than the February figure of R5 172 per month. Using nominal rental income of R5 178 per month, the gross returns on a medium house (using Absa medium price of R968 600) would be 6.42%.
Using Absa’s average small house price (currently R666 900), the gross return is 9.32%. This means the average gross rental return between medium and small houses is 7.6%.
This average drops to under 6.3% when estimated municipal charges and other minor factors are taken into account.
“This is at least a little higher than leaving money in the bank, and rents do improve slowly over time, and one could also get a capital gain,” says Schüssler.