By Louw Liebenberg, CEO of PayProp

Three factors need to be considered when re-evaluating the rental market.

Of late, an interesting conundrum has presented itself in the rental market. On the one hand, there is extremely positive rental data on growing average rentals and sustained growth in the level of annual increases. On the other, there is an overwhelming amount of statistics showing how tough life is for consumers, with major increases in the cost of transport, energy, healthcare and food. How do we reconcile these views? The answer may be found in simple economics, but first, consider the three pieces in this puzzle, namely positive rental data, negative inflation data and the state of the buy-to-let market. Considering these three together may point to the pending shift in the rental market that estate agents have been waiting for.

 

Looking at the first piece of the puzzle, the current weighted average rental in South Africa is now R5 757.

 

This is 10.4% up from the R5 212 recorded in September 2012. What is more, the 10.4% year- on-year, increase is the highest level of average rental increase seen since October 2010, a time when the South African rental market was normalising after the almost 14% rental increases seen in June 2010 as a result of optimism relating to our hosting of the FIFA World Cup. As late as February 2013, South African rental increases were still in the 5% per annum range, but we have seen an uptick from April this year to the current record high percentages.
Does all of this mean that tenants suddenly have more money available in their pockets to not only afford record year-on-year rental increases, but also to be able to pay on time more regularly than previously?

 

On the other hand, inflation data tends to tells us a different story.

 

CPI rose 6.4% year-on-year in August according to Statistics South Africa. The main basket items responsible for the increase were food, which rose by 7.1% year-on-year and transport, at 8.7%. At the same time, the BankservAfrica Disposable Salary Index shows us that the average South African’s disposable salary has only increased by 5%, and isolates the 10.2% increase in medical insurance as another important factor that has dampened the disposable income available to consumers.Clearly, the above data does not support a view that consumers have more money available to spend on rentals.

 

Then there is the final piece of the puzzle, which is the decline in buy-to-let investors over the past 10 years.

 

According to John Loos of FNB, more than 25% of all buyers in 2004 were buy-to-let investors. As the market ‘crash’ progressed, this number has now dwindled to around 8% of all sales transactions. What this means in practical terms is that there has been a strong and steady decline in the number of properties bought for investment over the past decade. All of this in a housing market where an increasing percentage of citizens are choosing to rent (Standard Bank’s latest estimates are that more than 25% of all households are now renting).

 

And this is where the penny should be dropping.

 

We are currently operating in a market where the last decade has seen limited rental stock formation, but an influx of demand in the form of more households choosing to rent. This, in all likelihood, is creating a rental stock shortage, which, despite consumers not having more money available, is causing rentals to escalate dramatically because the mismatch between supply and demand is pushing prices up. So tenants are caught between a rock and a hard place. They really do not have the disposable income available to afford higher rentals, but because they are fighting over limited stock, they have to be prepared to pay more to secure a place to live.

What does this mean for the market?

 

There are two important consequences to carefully consider. The first is to understand the increasing strain that tenants are under and to utilise credit and affordability checking as a cornerstone of tenant selection. Tenants may be tempted to extend themselves financially further than they are really capable of maintaining in the long term. Most importantly, this may be the signal buy-to-let investors have been waiting for as they have seen limited capital growth in the value of properties the past year and have not seen the type of rental yields to entice them back into the market. Basic economics tell us that scarcity increases value – and going by the early signals we are seeing in the market, this may just be the ‘perfect storm’ for which buy-to-let investors have held out.