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Disposable Income On The Rise For South African Residential Tenants

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Disposable Income On The Rise For South African Residential Tenants

Despite high interest rates and inflation, South African tenants find themselves in a better financial position compared to the end of 2022. This is great news for rental agents and landlords who rely on timely rent payments. 

According to the PayProp Rental Index Annual Market Report, tenants now allocate less of their income toward debt repayments than they did a year earlier: In Q4 2023 this percentage decreased to 44,8%, down from 47.8% in Q4 2022. Additionally, the portion of income spent on rent also declined during the same period, from 29.2% to 28.4%, despite robust rental growth throughout 2023.

"Johette Smuts, Head of Data Analysis at PayProp, observes that as rent and debt repayments decrease relative to income, salaries have outpaced both rentals and the cost of living. Consequently, South African tenants now enjoy more disposable income. On average, tenants are left with 26.8% of their income after covering other expenses, a notable increase from the 23.1% reported at the end of 2022," says Smuts.

In addition to these positive spending trends, rental applicants in 2023 exhibited improved financial health. Although the average credit score only rose by 1 point year-on-year to 643, 37.7% of tenancy applicants now fall into PayProp's minimum-risk category in Q4 2023, up from 35.2% the previous year. Smuts emphasizes that this development is advantageous for agents, as they have a larger pool of lower-risk applicants to choose from as they transition into 2024.

Good news for rental arrears

Another encouraging finding from this quarter's Index is the decline in rental arrears. The share of tenants in arrears dropped to 17% nationwide in Q4, 2023-the lowest level recorded by PayProp since it began tracking arrears in 2020. This represents a 0.5% decrease from the previous low set in Q3 2023. The average arrears percentage remained steady at 74%, which is also the lowest level recorded to date in the Index.

"While the national percentage of tenants in arrears has dropped sharply, the Free State and Eastern Cape remain the provinces with the highest percentages of tenants in arrears, standing at 20.7% and 20.3%, respectively. Additionally, tenants in the Free State owe an average of 85.5% of their rent, which is the highest in the country and significantly more than the national average of 74% and the Eastern Cape's 67.2%."

Rental growth levels off in the fourth quarter

Regarding rental growth, after eight consecutive quarters of rising rental rates, the residential market now appears to have leveled off. Rents maintained a steady growth rate of 4.6% year-on-year in October, November, and December 2023, remaining unchanged from the third quarter. This places the average rent in South Africa at R8,598, reflecting a yearly increase of R368 and R147 above the previous quarter.

Johette Smuts, Head of Data Analysis at PayProp, comments, "After last quarter's 0.2% quarter-on-quarter increase in rental growth, South Africa's rental market seems to have settled on a plateau." However, she emphasizes that this stability need not be detrimental to the residential rental sector. Instead, it presents an opportunity for agents to capitalize on consistent year-on-year growth. The average rental increases of 4-5% have remained the strongest since 2017, allowing agencies to expand without exerting excessive pressure on tenant affordability.

Nevertheless, Smuts points out that a few factors could potentially disrupt the current rental market plateau. "If inflation trends downward later this year and the South African Reserve Bank (SARB) chooses to cut rates, more tenants might opt to purchase their own homes, reducing the current demand for rental properties. Conversely, if inflation rises further following the small uptick in January, it could place additional strain on tenants' incomes and reverse the improvements in risk and spending metrics," concludes Smuts.

Author Johette Smuts (Payprop)
Published 14 Mar 2024 / Views -
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