After inflation, the picture looks particularly dire.
Rental price growth hit a fresh all-time low for the second consecutive quarter in Q3, according to the PayProp Rental Index.
Growth between July and September measured just 1.5% year on year, compared to 1.6% in Q2 – the lowest since the index was launched in 2012. It is likely this is the lowest in over a decade, with the aftermath of the global financial crisis in 2009 likely the previous low point.
Rent prices had been tracking sideways for the last two years before the shock of this year’s Covid-19 lockdown, which precipitated a sharp downward trend. For most of last year, however, rental growth was below inflation. PayProp notes that “the moving average trendline, which shows the underlying growth trend more clearly in the midst of short-term variations, has been pointing downward for the whole of the past year”.
The demand and supply sides of the picture are both weak.
“Lacklustre growth continued even after most South Africans returned to work [‘most’ referring to those who were still employed]. Because so many households suffered a partial or total loss of income this year, many are worse off financially compared to the beginning of the year, when economic pressures were already in effect. In the circumstances, affordability continues to be a major factor in persistent low rental growth.”
Read: Residential rental arrears above 25%, vacancies top 11%
Separately, the report points to a side effect of interest rates at historically low levels.
Interest rates are luring some into exiting the rental market
“Generally speaking, it is easier for consumers with good credit records to qualify for a bond. This means many tenants with good credit scores [‘good tenants’] are exiting the rental market. As a result, agents are left struggling to find good tenants to replace them in rental properties.” This puts additional pressure on the demand-side of the equation.
PayProp also highlights the fact that “the market has essentially been flooded with supply” because of the “many short-term lets reallocated to the long-term rental market [to avoid standing empty while travel restrictions were in place]”. This has added “to existing downward pressure on rental growth”.
In September, says PayProp, “the market plumbed fresh lows when rental growth measured just 1% over the same month the year before”. With inflation at 3% for the same month, one can see just how subdued the market actually is. When factoring in inflation, average rents have declined every month this year.
In real terms, rents are down by an average of 1.2% in the first nine months of this year.
Contrast this with the sharp increases in especially unrecoverable administered prices (such as property rates, sewerage and refuse removal), and one can easily see why landlords are under significant pressure.
Weighted average national rental growth rate Inflation Real weighted average national rental growth rate
January 2020 3.3% 4.5% -1.2%
February 2020 3.2% 4.6% -1.4%
March 2020 2.9% 4.1% -1.2%
April 2020 2.3% 3.0% -0.7%
May 2020 1.1% 2.1% -1.0%
June 2020 1.6% 2.2% -0.6%
July 2020 2.0% 3.2% -1.2%
August 2020 1.4% 3.1% -1.7%
September 2020 1.0% 3.0% -2.0%
Gauteng has held up fairly well by comparison, with the index showing that while “growth rates have been decreasing over the past two quarters”, these measured 3.2% in Q3 and 3.6% in Q2.
The Western Cape has now had its second consecutive quarter of negative growth. It saw a decrease of 0.4% in Q3 from the year before, with a figure of -0.04% in Q2.
PayProp says “KwaZulu-Natal rental growth rates picked up in Q3, but at -0.9% [versus -1.6% in Q2], growth was still negative”.
Impact on estate agencies
PayProp points to a potentially “dire effect” of the current rental market on estate agencies. These businesses are caught between low rental growth and elevated arrears, which will impact their cashflow.
Says PayProp: “Because commission is usually calculated as a percentage of rent, and rent is increasing slower than inflation, the commission income earned on a rental book can’t keep up with inflation”. Arrears affect cashflow directly, but also impact commissions as these are not earned until rent is collected.
PayProp says while arrears have peaked, rental growth is likely to remain subdued: “We don’t foresee a recovery anytime soon – in fact, it is possible that we will see even lower rates in Q4 this year.”
The original article can be found at: https://www.moneyweb.co.za/investing/property/residential-rental-price-crash-continues/