Overburdened consumers’ rental appetite is weak

THE RESIDENTIAL rental market was oversupplied, as demand for rental property remained weak in the third quarter of this year.

TPN Credit Bureau chief executive Michelle Dickens said last week that the low demand was perhaps not surprising, considering that the hard lockdown in the second quarter of last year wiped out 14 percent of obs.

“Even after some subsequent initial job recovery, the unemployment situation remains concerning, at 34.4 percent, meaning 1.4 million pre-pandemic jobs have been lost. The unemployment rate deteriorated again in the third quarter of 2021, with an additional 375 000 more jobs lost in the formal sector,” Dickens said.

According to TPN, exacerbating the challenge of high unemployment were the increased housing costs, water, gas and other fuels which account for 15.9 percent of household expenditure, with transport accounting for another 15.6 percent. The factors were a powerful incentive driving tenant behaviour towards cost savings such as downscaling, co-habitating or moving in with friends and family.

The TPN Market Strength Index is based on the perceptions and experience of estate agents and landlords of the residential rental market. Respondents are asked to rate whether the demand by tenants looking to rent is strong (100), average (50) or weak (0).

They are asked a similar question regarding their perception of whether supply of rental properties is strong (100), average (50) or weak (0).

The data is aggregated to provide a demand rating and a supply rating. The difference indicates the Market Strength Index, where a result of 50 would suggest a market in equilibrium.

Demand for rental property in the third quarter of this year was only slightly higher than average, at 56. Rental property supply, however, remained at pre-pandemic highs, with a rating of 67.

Weak tenant demand coupled with supply highs translated into a Market Strength Index of 44 which translated to an oversupplied residential rental market. An oversupplied rental market with weak tenant demand had been observed in high vacancy rates.

Encouragingly, vacancy rates might have peaked, given that they had dipped to 10.66 percent in the third quarter, trending downward from 13.15 percent in the previous one.

According to the Quarterly Employment Statistics, the average monthly earnings paid to employees in the formal sector increased by 9.7 percent year-on-year in May.

Higher salaries, however, did not always translate into more disposable income, particularly as the Consumer Price Index was on the increase, at 4.9 percent and creeping higher. Consumers also needed to factor in the higher cost of interest with the first of the South African Reserve Bank’s 25 basis point increases taking effect last week. An upward cycle of increases was predicted for next year and 2023.

Residential rental prices appeared to have also reached the bottom of negative escalation and were slowly starting to rise into positive territory, at 0.4 percent in the third quarter.

The only segment of the market that escaped negative escalation was the low value rentals category, below R3 000 per month. However, the category’s escalation of 1.26 percent was on a downward slope.

Low value rentals were the most impacted category by persistent high vacancies. Rentals below R3 000 per month had 12 percent vacancies while those between R3 000 and R4 500 were 13.32 percent vacant.

Only the Western Cape continued to suffer double-digit vacancy rates at 11.07 percent while Gauteng, KwaZulu-Natal and the Eastern Cape were at 9.84 percent, 9.85 percent and 7.13 percent, respectively.

Most provinces did not see a significant recovery in residential building activity. It nearly halved year-on-year, from 45 342 completed flats and houses in 2019 to 24 178 last year and only 22 270 completed properties in the first nine months of this year.

Gauteng saw new residential buildings completed being reduced from 25 238 in 2019 to just 10 373 last year and 8 793 recorded to date this year. The Western Cape outperformed last year’s numbers this year.

However, fewer new buy-to-let properties may be a welcome relief for struggling landlords burdened with high vacancies, particularly as they were competing against larger players with price-reduced rental portfolios.

Activity in alterations has also been subdued. This, however, was not a new trend. Post the global financial crisis there has been a slow decline in the number of square metres added to residential housing.

What was becoming apparent was the interest rate hiking cycle was likely to add pressure to tenants in good standing in the next six to nine months.