The real state of the residential rental market

It is widely known, at least by Moneyweb readers, that house prices have fallen 21% in real terms since their 2007 peak. But how is the rental market performing? Anecdotally at least, sharp rises in administered prices (particularly electricity and municipal rates) suggest that this is very much a tenant’s market.

The PayProp Rental Index annual review for 2018 shows “a continuation of the downward trend in national rental growth, trailing inflation for most of the year”. The average monthly rental growth rate practically halved from 2017, ending last year on 3.9% (6.4% year-on-year a year prior). Average consumer price inflation (CPI) was 4.7% in 2018 and 5.3% in 2017. PayProp is the largest processor of residential letting transactions in the country.

The report shows that “net income levels have stagnated, increasing by only 1.56% between Q4 2017 and Q4 2018. With rent and inflation increasing at higher rates, consumers are struggling to keep up.”

It argues that this only “partly explains” the year-on-year increase in tenants’ debt-to-income ratios: “In Q4 2017, tenants paid R13,756 on their monthly debt repayments versus R15 031 in Q4 2018. The increase in debt-to-income ratios, in turn, affects affordability ratios. And as incomes have grown more slowly than rents, the slight increase in the rent-to-income ratio was to be expected.”

The picture across the country’s three major provinces looks very different. In Gauteng, the average monthly rent breached R8,000 for the first time in the last quarter of 2018, which is 4.84% higher than the year prior (and the third-highest growth rate in the country). PayProp says “while this rate was lower than the year before, it was the province’s first increase in quarterly growth in two years, which might signal the beginning of a recovering rental market in the province”.

The market in KwaZulu-Natal recovered from subdued growth in 2017, with a 7.25% increase in Q4. Year-on-year rental growth was above 7% for three of the four quarters (6.47% in Q3).

PayProp says “in its current situation, it’s hard to believe that the Western Cape experienced four consecutive quarters of 10% year-on-year growth in 2017. By comparison, 2018 yielded the lowest growth figures for the province since the launch of the Rental Index in 2012. At its lowest point of the year, growth in the Cape slowed to just 3.96% in Q4 2018. (The year-on-year figure for December was only 0.4%!)”

But the report notes that the average monthly rent in the province “surpassed the R9 000 mark during the year, still making it the most expensive province to live in with an average price differential of nearly R1 000 compared to the second most expensive province”.

The affordability ratios above show just how much of their net income the average tenant spends on rent and debt obligations. This means the average Gauteng tenant, for example, has 24.1% of their net income left.

PayProp says that “a widely accepted rule of thumb holds that a tenant shouldn’t spend more than 30% of their net income on rent” (nationally, the average was 28.9% in Q4). However, it argues “the true measure of appropriate rent-to-income levels is slightly more nuanced. In addition, we see a correlation between a tenant’s risk level (determined by their credit score) and the percentage of income they spend on rent.

“Generally speaking, financially savvy tenants, who have higher credit scores (and therefore lower risk ratings), spend less of their income on rent than high-risk and very high-risk tenants. The figure for lower-risk tenants is less than 30%, with the lowest-risk ones spending just 23% of their income on rent – 20% less than the average tenant! On the other end of the spectrum, the riskiest tenants spend about 33% of their income on rent.”

What is also evident from the table above is that, in Gauteng, more than four out of every 10 tenants could be categorised as ‘risky’. The figure is less than three out of every 10 in the Western Cape, possibly due to the fact that those riskier tenants are crowded (priced) out of the formal rental market.

The situation for landlords is unlikely to improve materially in the near-term.

The lone positive signal was that Q4 was the first quarter in two years to show an uptick in year-on-year growth. The reality is that “most provinces saw lower rental growth and a deterioration in the average tenant’s financial situation from 2017 to 2018. Below-inflation income growth makes it harder to keep up with debt and other costs.”

While PayProp expects growth to recover “somewhat” during this year, it says inflation is “likely to continue to outstrip rental growth if current trends continue”.

Hilton Tarrant works at YFM. He can still be contacted at hilton@moneyweb.co.za.

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