Big shift coming for South African property

Rentals on South African property are set to rise markedly in the coming years as a number of factors combine to present landlords with an opportunity to raise prices. 

In its latest Monetary Policy Review, the Reserve Bank conducted a deep dive into housing inflation in South Africa. 

Over the past few years, housing inflation has been relatively low in South Africa, but the bank is concerned that this is unsustainable as landlords are keeping prices low to drive up occupancy rates. 

Housing inflation in South Africa has trended well below its long-term average in recent years, averaging 2.7% in 2022 and 2023 and 3.1% year to date. 

Subdued housing inflation has helped to contain services and, thus, core inflation, easing pressures on headline inflation, the bank said. 

Meanwhile, homeownership costs have risen strongly in recent years, reflecting the large increases in municipal rates and taxes, other costs, and interest rates. 

The rental market has also tightened sharply in the wake of the pandemic due to fewer South Africans being willing to purchase property, choosing to rent for the flexibility. 

These cost escalations and demand recovery do not appear to be reflected in housing inflation but suggest upside risks to this important component of consumer prices. 

Market indicators of rental escalations, including the PayProp and TPN rental series, show rental inflation rising significantly after the pandemic. 

The divergence between the official and market measures of rental inflation presents an upside risk of ‘catch-up’ over the medium term, considering their historically strong correlation. 

Over the past three years, the Reserve Bank had expected rental inflation to return to its long-term average, but it has repeatedly been surprised by the downside.

One way of explaining this inconsistency between housing inflation and squeezed supply is that landlords keep prices low to increase occupancy rates, which may be a bigger priority compared to cost recovery. 

The Reserve Bank questioned how sustainable such an approach is in the latest Monetary Policy Review. 

“How long will landlords continue to ‘subsidise’ tenants and take a lower return on their capital when vacancy rates are historically low and the rental market tight?” it asked.  

Equally, with stronger economic growth over the medium term, demand for rentals should rise and vacancy rates tighten further, turning the market in the landlords’. 

In addition, the supply of rental housing units is unlikely to increase much over the near to medium term as activity in the residential building sector remains depressed.

This constellation of factors may present an opportunity for landlords to escalate rentals markedly to balance supply and demand and recoup lost earnings. 

Thus, despite the downside surprises to housing inflation over the past three years, risks remain weighted to the upside. 

The materialisation of these risks could push core inflation higher and dent the recent easing of headline inflation, given the large weight of housing in the consumer price index (CPI) basket.

It may also sway the perpetual debate among people about whether it is better to rent or buy a property in South Africa. 

Renting offers great flexibility, enabling you to drastically change your lifestyle and home location with just a month’s notice. Furthermore, you do not have to carry regular maintenance costs.

Buying your own home also has attractive benefits, giving you stability and security along with any upside on the investment in the property. 

As a homeowner, you also have the freedom to make any changes to the property and potentially create your dream home. 

The main factor in this debate tends to be the level of interest rates. Higher interest rates increase the cost of home loan repayments, making renting relatively more attractive. 

Over the past 18 months, interest rates in South Africa have remained elevated as the Reserve Bank has been committed to bringing inflation decisively under control. 

However, this picture is changing as the bank entered an interest rate cutting cycle in Septemeber, reducing the repo rate by 25 basis points. 

The consensus among economists is that the bank will cut rates by a cumulative 100 basis points by the middle of 2025. 

This will make buying a property significantly more attractive as home loan repayments will decline with lower interest rates. 

When coupled with the likelihood of higher rent in South Africa, buying a property may once again become a relatively more attractive financial option.