Trends shaping the rental property market in 2023
Rental growth returns to normal - but for how long?
2022 felt like a long-overdue return to normality from COVID-enforced business restrictions - and we couldn't be happier! We jumped on the opportunity to host our first live events since 2019, and what a delight it was to see our valued clients and associates in person again. We look forward to doing more of these soon.
The rental market's continued recovery is another key ongoing trend that brought a collective sigh of relief last year, as rental growth rates continued to improve along with tenant arrears. However, broader economic circumstances were less favourable, with rising interest rates and high levels of inflation putting the brakes on a return to better times for the industry. Tenants, landlords and businesses alike are all feeling the unrelenting pinch.
Rent and inflation
In 2022, the rental market continued to recover from the 8% low rental growth rates recorded in most of 2020 and 2021 as a result of the global pandemic.
However, ongoing recovery and rising rental growth rates can't be guaranteed as we move into 2023, as higher interest rates, persistently high levels of inflation and a struggling economy all affect tenants' ability to pay higher rents.
Although interest rate increases are commonly used to curb inflation, other factors - like the high price of globally-traded commodities - are keeping prices stubbornly high. More interest rate increases are forecast for this year, as is 3% a possible recession.
That being said, higher interest rates make it less affordable for tenants to buy properties, which increases the demand for (and prices of) rental properties.
Quarterly trends
Nationally, the average rent increased by 3.4% from Q4 2021 to Q4 2022. This was an average increase of R268 to R8 175 over the year.
Rental growth has rebounded impressively over the last 5 quarters since Q3 2021, when we recorded YoY growth of just 0.2%. It has now recovered to pre-pandemic levels - rental growth of 3.2% was last recorded in Q1 2020.
The rental market at a glance
In this section, we take a look at national and provincial performance across our usual selection of rent, arrears, income, spending and risk metrics.
Rent and rental growth
Nationally, rent increased by 3.4% year on year during Q4, the highest YoY growth rate observed during the year. Average rent was R8 175, up R268 from the same quarter the year before.
Arrears
The percentage of tenants in arrears continued to improve nationally since it peaked at 24.9% in Q2 2020, right after lockdown was first announced. In Q4 2022, only 18.1% of tenants were in arrears, lower than the pre-lockdown level of 19.3%.
Although the average size of tenant arrears as a percentage of one month's rent declined during the year, there was a slight increase again towards the end of the year, from 77.4% in Q3 to 78.2% in the last quarter. This was still slightly lower than the pre-lockdown figure of 78.7% recorded in Q1 2020.
Agents should proactively monitor and manage arrears, as the probability of collecting rent (and therefore earning commission) becomes smaller the higher the outstanding amount becomes.
Income and spending
Nationally, net monthly income increased by 4.2% from Q4 2021 to Q4 2022, or by R1 476, to R36 288. While any increase in income will be welcomed by tenants, it has not kept up with inflation which puts more pressure on tenants' already squeezed finances.
During the last quarter of the year, tenants across the country spent an average of 46.6% of their net income on debt repayments (including subscriptions such as cellphones). This was slightly higher than the 45.3% recorded in Q4 2021. Another 29.1% was spent on rent (29.0% in Q4 2021), leaving tenants with only 24.2% of their income to spend on food, school fees, entertainment and the like - despite the rising prices of all of those things. This was down from 25.7% the year before.
In Q4 2022, 18% of tenants had a major delinquency against their name, compared to 16.8% in the same quarter the year before.
The average credit score worsened slightly from 646 in Q4 2021 to 641 in Q4 2022.
These could be signs that tenants are struggling to keep up with the rising cost of living and the increasing cost of servicing debt. As always, we encourage agents to vet tenants properly by assessing the information on credit checks carefully. In addition, questioning tenants when in need of clarity, and using supporting documentation such as bank statements and salary slips before placing tenants.
Western Cape
Rent and rental growth
Year-on-year rental growth in the Western Cape remained modest during the year, ranging from 2.8% in Q1 to 3.4% in Q4, which was in line with the national average. The Western Cape remains the most expensive province in which to rent, with average rent increasing by R323 year on year to R9 737 in Q4 2022.
Arrears
The percentage of tenants in arrears in the Western Cape decreased slightly during the year, from 14.9% in Q2 to 14.6% in Q4. The province had the lowest percentage of tenants in arrears in the country. The average arrears size also decreased during the year, with tenants in arrears owing only 64.8% of one month's rent in Q4, down from 73.4% in Q1. This was also the lowest out of all provinces during the last quarter.
Income and spending
Tenants in the Western Cape enjoyed the highest income levels observed nationally - in Q4 2022, average income in the province was R43 263, after an increase of about R3 500, or 8.9%, from Q4 2021 - the highest growth rate of all provinces and more than double the national average of 4.2%.
Western Cape tenants spent only 38% of their income on debt repayments - the lowest in the country, albeit an increase from 36.1% in the same quarter the year before. After spending 29.4% on rent, tenants were left with 32.6% of their take-home pay to cover their monthly expenses. This was the highest share of income left after debt and rent payments
in the country.
At ABC International Real Estate, only fully vetted applicants will be presented to ensure that our landlords' risks are mitigated as best as possible.