Rental market a hive of activity

Potential buyers ‘sit on sidelines’ as higher interest rates make property too pricey for many

THE South African residential rental market is experiencing intensified activity as prospective first-time buyers and struggling homeowners opt to rent instead of buy. The residential property market has taken a battering since the beginning of the year thanks to higher interest rates, which have made property too expensive for many.

The National Credit Act, which came into being in June last year, has also made it increasingly difficult to qualify for mortgage bonds.

Andrew Schaefer, MD of residential property manager Trafalgar, says the group’s letting consultants have “never been busier across all our branches”. He says: “They are now run off their feet trying to secure rental accommodation for prospective tenants.”

Schaefer says the activity has intensified over the past four months. The rental market is generally cyclical and is busiest at the beginning of the year. “We’ve seen very high levels of activity and inquiries since January this year.

“It’s been much busier than last year. There has been a significant upturn. Vacancies in many of our portfolios are at historic lows of below 1% in some cases,” says Schaefer.

He says the market is also seeing much more aggressive rental increases because demand for accommodation is so strong.

Schaefer believes SA will see an improvement in the buy-to-let market because vacancies are so low and rental increases are relatively good compared with prior years. The fundamentals would suggest that this would continue at least for the medium term, he says.

“There is uncertainty among buyers about the outlook for interest rates and affordability, given the fact that fuel prices are rocketing. They are opting to rent rather than buy.

“It allows them time to manage their short-term finances better and gives them flexibility deciding when to buy at a better time,” says Schaefer.

Potential first-time buyers who have decided to rent instead of buy are an important driver of the rental market.

There is also a growing number of mortgage defaults, and many homeowners may opt to sell rather than rent.

Saul Geffen, CE of ooba, formerly MortgageSA, says the weakening property market has increased demand for rental property as “potential buyers sit on the sidelines”.

He says rental yields are rapidly improving, which underlines the “investment case” for buy-to-let.

But property economist Erwin Rode, of Rode & Associates, says that while it is “quite an attractive argument that when you can’t afford to own a house, you choose to rent”, this is not always the case .

Rode says the same economic factors that inhibit owners also inhibit renters. One example would be inflation.

“The only difference between a buyer and a letter is in the case of the buyer, you are affected by fast-rising interest rates on the mortgage bond.

“A further factor to consider is that when times are tough, many people double up — for instance, children move back in with their parents. As a consequence historically, there hasn’t been a negative correlation between house prices and rentals.”

Rode says the latest information indicates that rentals are growing at between 7% and 9%, depending on the city.

“If you compare that with inflation that is pushing 11%, it should be clear that there is no boom out there for the rental market,” Rode says.

Lewis Civin, MD of Redcon Property Development, says that property investors remain “poised for rental growth” as Reserve Bank Governor Tito Mboweni raised interest rates by half a percentage point last week. “Investors in the low to medium price range can expect to see continued growth in rental income as home buyers even at this level are drying up.

“Investors in one of our recently completed developments in Boksburg saw a 20% increase in rental income on a one-bed unit over eight months,” Civin says.

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