The "rent or buy" debate becomes particularly relevant when times are tough, forcing both tenants and homeowners to weigh accommodation costs more carefully.
FNB property strategist John Loos says the bank’s latest survey of estate agents suggests that a growing proportion of aspirant homeowners are holding back. And, more interesting, there has been a spike in the number of financially pressed home sellers opting not to buy another property but to rent instead. The percentage of sellers keen to rent their next home has jumped to 65.6% in the third quarter, up from 34% in early 2014 (see graph).
Loos says the trend is in line with the economic stress and general pessimism among consumers. "It’s not only a recessionary economy that has prompted more households to put home buying on the back burner, but also concerns about SA’s longer-term political and policy future," he says.
Loos expects a "significant" increase in the number of South Africans looking to rent in the near term. That’s likely to put upward pressure on rentals, which will make renting a more expensive option.
However, industry players say it is still 30%-40% cheaper to rent than to own. Figures from rental processing firm PayProp show net annual yields (rental income as a percentage of market value) now at about 7% nationally. That translates into an average monthly rental of R5,833 for an apartment valued at R1m. If the same apartment was bought with a 15% cash deposit, the monthly bond payment would be R8,203 (financed at the current prime interest rate of 10% over the standard 20-year term).
Monthly ownership costs are further pushed up by municipal rates, levies (in sectional title and gated complexes) and maintenance costs, says Pam Golding Properties rental manager Dexter Leite. Tenants are typically responsible only for water, effluent and electricity bills on top of the monthly rental. "Buying a property is a major, costly and long-term exercise. If you get a key element such as location wrong, it can be a difficult, expensive and time-consuming mistake to remedy — which is not the case with a rental property," says Leite.
He points out that renting also offers far greater flexibility and mobility than owning, especially for younger people who do not necessarily know how long they are going to stay in one city or town.
But the downside of being a tenant is that rentals escalate annually – monthly bond repayments rise only when interest rates do. And paying off a mortgage translates into ownership of an asset that generally appreciates in value over time.
The good news for would-be tenants is that rentals in a number of areas are under pressure. This is particularly true for Cape Town, where the market has cooled considerably over the past 12 months.
Adrian Goslett, regional director and CEO of Re/Max of Southern Africa, says asking rentals so far this year have dropped by 20%-30% year-on-year in Cape Town, which is the city’s first major price correction since 2008. Goslett ascribes this to an oversupply of rental properties — partly because of many new developments being completed, but also due to the drought. That has caused a slump in tourism, which has made many Airbnb owners place their short-term rental units back on the long-term market. The Cape Town rental market has been further flooded with stock by homeowners struggling to sell their properties and forced to rent them out instead.
The Cape drought has caused a slump in tourism, which has made many Airbnb owners place their short-term rental units back on the long-term market
— What it means
Figures from Credit Bureau TPN confirm that more rental units in the Western Cape are standing empty. In the six months to end-June alone, the vacancy rate has nearly doubled, from just below 4% to 7.5%. "The province overheated to such a degree in terms of rental escalations that tenants could no longer afford to rent in the Western Cape," says TPN CEO Michelle Dickens.
Meanwhile, PayProp figures show that the rental growth rate across SA has slowed to an average 3.27% in the second quarter. That’s down from about 8% in early 2017. "Price-sensitive tenants can no longer afford to absorb annual rental escalations of 8%-10%, says Johette Smuts, head of data and analytics at PayProp.
Despite the slowdown in rental demand, Smuts says the Western Cape is still the most expensive province in which to rent, with average monthly rentals at R8,805, comfortably ahead of the national average of R7,359. The Northern Cape is the only other province where the average rental level is above R8,000.
If you are looking for value, the North West is the cheapest province at present, with average monthly rentals of only R4,667.
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