While the property market declined somewhat during 2023, largely due to the interest rate hikes, the rental market showed a marked improvement. After the challenges of the prior three years where landlords achieved almost no rental growth and, in many cases, needed to cut their rental rates to fill their properties, landlords were finally achieving positive growth last year.
Naturally, when the interest rate rises, affordability challenges tend to drive more people to the rental market where they can rent, generally for less than what they can buy, at least until the interest rate comes down again.
This was clearly evident in the market over the last year, with a notable increase in demand for rental accommodation in many areas. Seeff's mortgage lending partners, ooba, for example, reports that mortgage applications declined year-on-year, which means that many would-be buyers turned to the rental market.
Factors Likely to Impact the Rental Market in 2024
Economic indicators such as employment rates, inflation, and GDP growth can significantly impact the residential rental market.
In view of the current economic challenges, the lacklustre economic outlook is likely to continue to drive notable demand in the rental market. Weaker economic factors could even impact
If growth remains muted and tenant finances come under pressure, then rental rates are likely to come under pressure, especially in certain price categories. Inflation and the rising cost of living will also impact the rental market as these have a direct impact on the health of consumer household finances.
The ongoing geo-political challenges, such as the wars in Ukraine and the Middle East, could potentially impact the cost of goods. On the domestic front, the ongoing Eskom crisis and load-shedding risk, combined with rising utility costs, pose further risks to household budgets. All eyes are also on the Finance Minister's Budget 2024 to see whether tax hikes may further impact consumers.
The interest rate is, of course, a primary driver of the property market right now. The current outlook seems to be that it will at best remain stable this year and that the market can look forward to interest rate cuts of around 75bps to 100bps from around mid-year. Such rate cuts would boost the economy and property market and free up some household budgets, which will be good news for landlords.
Migration patterns and demographic shifts are also a big driver of the demand for rental accommodation. The early part of the year also often coincides with an increase in the demand for rentals as new job entrants, students, and the like look to move into their own residential places.
Rise in property investment/buy-to-let market
According to ooba, there has been a notable uptick in the purchase of investment properties, including those for the rental market. These comprised almost 15% of all mortgage applications in December, which is the highest since late 2008.
The highest volume of investment/buy-to-let purchases were in the Western Cape, but other provinces also showed a notable trend, including Mpumalanga, Limpopo, and the Free State, said ooba.
Rental increases and tenant payment health
There was a notable improvement in tenant payment health last year as the market recovered fully from the challenges of the two-year Covid pandemic period. That said, tenant finances will likely remain under some pressure due to the higher cost of debt as a result of the higher interest rate and general cost of living hikes until there is an improved economic climate, including a lowering of the interest rate.
How will that affect rental rates? According to PayProp, rental growth amounted to 4.6% as at the third quarter of 2023, which closely tracked the inflation rate and was much improved compared to the prior three years.
Economically speaking, the rental market entered 2024 in much the same position as it was last year. Little has changed in terms of the interest rate and economic growth, which means that while landlords are able to increase their rents slightly this year, they will need to keep their increases in line with their local market conditions.
That said, based on the 2024 trends, it seems that landlords may be able to achieve reasonable returns on their rental property investments this year, but it will depend on how the interest rate and economic growth landscape unfold.
As to whether they may see some real growth, it will depend on the inflation rate. The Reserve Bank expects inflation to come down to around 5% in 2024, notably better than the 7% average in 2021, but still somewhat higher compared to the 3.21% average in 2019 (based on data from macrotrends.net).
As always, Seeff's rental agents recommend that landlords work with a credible rental agent to assess their current market conditions and ensure they set their rental rates in line with the respective local market.
Working with credible and skilled rental agents such as Seeff also means that landlords are able to attract quality tenants who are properly vetted and managed to ensure they pay their rent on time and look after the property.