Lower interest rates will also be good for the rental market
Category Property
Lower interest rates will also be good for the rental market
Landlords should be looking forward to the start of interest rates decreases as much as homeowners are.
According to Denese Zaslansky, chair of the Firzt Realty group, this may seem counter-intuitive, since declining interest rates have often prompted tenants to switch from renting to buying and made it more difficult for landlords to raise rentals or fill vacancies. But what we foresee is that even when the Reserve Bank does start cutting rates, there will be no sudden slump in rental demand or simultaneous spike in first-time homebuying for at least the next year to 18 months.
"What we expect instead is a slow-but-steady increase in the financial health of tenants, a concomitant decrease in rental defaults, and rental growth rates that could quite possibly start to sustainably exceed inflation."
There are two main reasons for this, she says, the first being that the Reserve Bank will most likely proceed with caution and cut rates by only 0,25 or 0,50 percentage points at a time, given the ongoing difficulties of bringing inflation under control globally as well as in SA. "Indeed, the Bank of International Settlements has warned central banks to be cautious about cutting rates too soon or too much, noting that sudden commodity price increases due to geopolitical tensions could easily re-ignite inflation worldwide.
"This danger also applies to SA, especially with regard to fuel prices and despite the stronger performance of the Rand since the formation of the Government of National Unity. It is also notable that while the Canadian and EU central banks have both introduced small rate cuts in recent weeks, those in the UK, the US and other developed countries have continued to hold off - with the US Federal Reserve only recently indicating that it would make more than one rate cut this year."
Secondly, says Zaslansky, it is going to take most tenants a long time to recover enough from the effects of high inflation and the high interest rates of the past two years to become potential homebuyers. "We all remember the huge surge of first-time homebuying in 2020 and 2021 after the prime interest rate was lowered to 7% - but it's important to note that the inflation rate at that time was just over 3% and had been on the decline for two years, which meant that many tenants were in a really good position financially to take advantage of the lower interest rates - and the lower 'pandemic' property prices.
"But by the end of 2021, the inflation rate had literally doubled, and by mid-2022 it had almost tripled. This is what forced the Reserve Bank to start raising interest rates and meant that consumers were not only faced with higher prices for all goods and services but also with much higher monthly debt repayments. The overall effect was that tenants suddenly had much less financial capacity to become homeowners.
"This is reflected in the fact that the percentage of first-time homebuyers has fallen from between 60% and 70% of the total in 2020/ 21 to between 30% and 40% currently - and we do not believe this situation is going to change substantially until the prime interest rate gets closer to 10%, which we estimate will only be towards the end of next year."
Indeed, she notes, the demand for rental properties is still increasing and vacancies are still declining. "Figures from StatsSA show that around 24% of SA's 18,5m households now live in rented homes, compared to 22,5% in 2022. And the latest TPN Vacancy Survey shows that the average vacancy rate in the first quarter of this year was 4,42%, down from 8,82% at the start of 2022 (when interest rates started to rise), and from 13,31% at the start of 2021 (when first-time homebuying was at its peak).
"Meanwhile, the latest PayProp Rental Index reveals that the pressure on rental growth is easing up, with tenants possibly doing a little better financially as inflation living slowly declines and salary increases enable them to pay off more of their debt. According to the index, the national average rental growth rate in Q2 was 4,9%, up from 3.8% in the previous quarter, and the highest since Q4 2017."
However, tenants earning below R40 000 a month, who make up around 60% of the market, are still spending more than 50% of their take-home-pay on debt repayments and are not likely to be able to afford to become buyers in the near future. Those in the higher income brackets spend between 29% and 40% on debt repayments and could possibly qualify to buy more quickly - provided they do not have impaired credit records, Zaslansky says.
"Meanwhile, the PayProp stats show that the percentage of tenants in arrears fell from 18,3% in Q1 to 18,1% in Q2, and that the average arrears percentage fell from 77,5% to 76,8% over the same time period - and our expectation for landlords is that this pattern will continue in the coming months, creating more room for market-related rental increases as the financial health of tenants recovers.
"In short, interest rates cuts will mean better days for landlords, although they will of course need the help of professional managing agents to maximise their returns by ensuring that they rent only to tenants with excellent credit and payment records, and that their rental properties are efficiently managed, maintained and improved to meet the demands of modern lifestyles."
In a previous article Abrahams & Gross's Litigation and Dispute Resolution attorney, Henno Bothma discussed the important of a lease agreement and shared, for a landlord, renting out their property can be an excellent source of income, but it also comes with a degree of risk. To mitigate this risk, it is crucial to have a proper lease agreement in place to protect yourself and your property.
Bothma shares a few tips:
What is a lease agreement?
A lease agreement is a legally binding contract between a landlord and a tenant that outlines the terms and conditions of the rental arrangement. A well-drafted lease agreement should cover all aspects of the tenancy, including rent, security deposit, maintenance responsibilities, and tenant obligations. It should also provide a framework for resolving disputes and terminating the tenancy.
Why does a landlord need a watertight lease agreement?
Having a proper lease agreement is essential for landlords for several reasons. Firstly, it helps to establish a clear understanding between the landlord and the tenant about their respective rights and obligations. This can help to prevent misunderstandings or disputes that may arise during the tenancy.
Secondly, a lease agreement can protect the landlord's property by setting out guidelines for maintenance and repairs. This can help to ensure that the property is maintained in good condition and that any damages caused by the tenant are addressed promptly.
Thirdly, a lease agreement can provide a framework for resolving disputes that may arise during the tenancy. This can help to minimise the risk of costly and time-consuming legal proceedings.
Fourthly, a lease agreement can help to protect the landlord's financial interests by specifying the terms of rent payments, late fees, and security deposits. This can help to ensure that the landlord receives the rent on time and is adequately compensated for any damages or unpaid rent.
A sound lease agreement is essential
In summary, a well-drafted lease agreement is essential for landlords to protect themselves and their property. It provides a clear understanding of the terms and conditions of the arrangement, establishes guidelines for maintenance and repairs, provides a framework for resolving disputes, and protects the landlord's financial interests.
Speak to a legal expert
As a landlord, it is important to seek the advice of a legal professional to ensure that your lease agreement complies with all relevant laws and regulations, and is tailored to your specific circumstances.
Our attorneys have considerable legal experience with all matters related to tenants, landlords, lease agreements and dispute resolution. Please contact our Conveyancing and Property Law or Litigation and Dispute Resolution team to assist with your issue.
Author: Property 24
