While the Home Buying Market is buoyant, still being driven by sharply lower interest rates this year, the September CPI (Consumer Price Index) inflation numbers continue to point to a battling Residential Rental Market, hampered by a tenant population financially pressured by a deep recession, and “outcompeted” by the homeowner market due to a dramatic reduction in interest rates earlier this year.
This week’s CPI data release for September 2020 confirmed the ongoing relative weakness in the Residential Rental Property Market.
The rental survey is done every 3 months, and the September survey showed a further slowing in year-on-year actual rental inflation from 1.8% in the June survey to 1.4%.
This continues a broad slowing rental inflation trend since a high of 5.68% back in September 2017.
All 3 rental subsegments have seen a significant multi-year slowing in rental growth. In the September 2020 survey, the segment with the weakest rental inflation was the Townhouses segment, recording 1.1% year-on-year. The Houses segment was slightly stronger, recording 1.4%, while the most affordable Flats segment was the strongest, recording 1.7%.
The key source of pressure on the rental market in recent years, prior to COVID-19 lockdowns, has been the long term stagnation in growth in the South African economy.
This source of pressure constrains the finances of existing rental tenants, thereby curtailing their ability to pay rent timeously and absorb rental escalations. This was reflected in the multi-year trend in TPN’s percentage of tenants that are in good standing with their landlords, which declined gradually from a decade high of 85.95% as at the 3rd quarter of 2014 to reach 81.52% by the 1st quarter of 2020, a multi-year gradual decline that started well prior to the economic shock from the 2020 COVID-19 lockdown.
Then came the more severe economic dip of the 2nd quarter, caused by the lockdown period, and the percentage of tenants in good standing dropped more sharply to 73.5%.
We believe that these economy-related pressures have contributed to a greater oversupply of rental space relative to demand, with new household formation slowing and a portion of existing households “shutting down”, as reflected in a rising residential rental property vacancy rate.
From a low of 5.35% in the final quarter of 2017, the TPN National Average Vacancy Rate has drifted broadly higher over the past few years to reach 11.39% by the 3rd quarter of 2020.
This increase in rental property oversupply has translated into slowing rental inflation through this period.
More recently, sharp interest rate cuts may have also had a dampening impact on the rental market
The second key influence on the rental market is recent sharp interest rate cuts, although the overall impact of this is less clear than the GDP recession impact.
There has been a large reduction in interest rates during 2020, with Prime Rate declining from 10% at the start of the year (10.25% at a stage of 2019) to 7%.
The overall impact of this interest rate cutting cycle on the rental market is unclear. On the one hand, it has cushioned the blow of lockdowns on the economy, and the magnitude of the recession may have been worse had it not been for rate cuts. That may have been even harsher on rental tenants than the recession with the actual rate cuts. However, the sharp rate-cutting gives highly credit-dependent home buying a greater competitive advantage over the rental option, encouraging a portion of tenants to leave the Rental Market in favour of buying homes.
Households are required to choose between the homeownership and home rental option, the former option being a far more interest rate sensitive decision due to the fact that many households use a mortgage loan to finance this. Therefore, all other things equal, a sudden reduction in interest rates increases the attractiveness of the home buying option relative to the rental option.