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The Economy’s impact on the Property Market

In a recent meeting with our Rental and Sales Agents, the Etchells & Young Director shared the following facts and figures taken from TPN, FNB and Private Property. The reason he felt it necessary to relay this information is that as property professionals we feel it’s vital that our Agents and other industry professionals keep up-to-speed and fully informed on the current South African economy and it’s effect on the property market.

 

The property market remains well-balanced despite sluggish economic growth, a weakening rand, rising interest rates and growing pressure on disposable incomes. Real estate, in the face of broad economic weakening, remains resilient. We have listed some significant factors affecting property rentals and sales, as well as other challenges and changes experienced in the industry.

 

The Economy’s impact on Property Sales

  • Sellers may find it more difficult to sell their property because of the current economic climate.
  • However, money will be made in property in times of economic growth and times of economic decline.
  • Overall the property market appears to be on solid ground and remains a sound investment.
  • In times of economic uncertainty, people tend to fall back to proven investments like property and gold.
  • Disposable income has dropped behind house prices, indicating a deterioration in housing affordability.
  • Agents have noted a significant drop in the average number of visitors to show houses – down from 11.6% to 9.4% in Q2 of 2016 (Q2 of 2013 was 16.69).
  • There has been an increase in the estimated average time a property remains on the market, up from 11 weeks and 1 day to 13 weeks and 4 days.
  • The percentage of first-time buyers decreased to 21% in comparison with 28% in 2014.
  • The buy-to-let category only made up approximately 7.6% of total property sales in Q2 of 2016.
  • As much as 14% of sellers choose to rent rather than buy after selling their property, revealing that households are under increased financial pressure.
  • Sellers who drop their prices have increased from 88% to 92% (vs 78% in Q2 of 2014).
  • A further weakening of the rand is predicted as a result of BREXIT, resulting in a rise in inflation, interest rates and home ownership costs. However, these are no greater than the economic challenges SA is already experiencing.
  • No previous “doom and gloom” or “property disaster” predictions from the last few years have come to reality.
  • If correctly priced, aggressively marketed and partnered with the right agent, sales property will sell!

The Economy’s impact on Property Rentals

  • A weak economy constrains tenants financially, thereby limiting their ability to absorb rental increases.
  • Average Gross Residential Yield has decreased slightly to 8.34%. This is a good indication as to the attractiveness of residential property as an investment class. The average Gross Residential Yield has been decreasing since early 2014. According to Rode & Associates, subtracting 1.5% from the Gross Yield will give a fairly accurate Net Yield.
  • Therefore the estimated Net Yield = 6.84% (which is below the cost of finance).
    • An estimated 15,000 jobs were lost in South Africa in the last year.
    • The Unemployment Rate increased to 26.7%.
    • South Africa’s GDP contracted by -1.2%.
    • The rental market experienced a drop of 2.8% in the percentage of Tenants in Good-Standing.

 

  • An increase in Interest Rates usually boosts property rentals; however the weak economy has counter-acted this trend.
  • The TPN National Vacancy Rate is 6.05% for Q2 of 2016. Rentals of R7000 – R12000 = 6.11%. Rentals of R12000 – R25000 = 14.82%.
  • Tenant risk has increased. This is reflected in TPN’s Tenants in Good-Standing (the total percentage of tenants that paid on time, paid within the grace period and paid late). The National Average is 82.2%, down from 86% in 2013/2014.  (The average for Gauteng is slightly higher at 83.89%)
  • Etchells & Young’s current (March, April, May, June) average Arrears Rate is 2%, which means that 98% of rent is paid by month-end.
  • Rental values between R7,000 and R12,000 have the highest percentage of tenants in good-standing, currently 87.5%
  • The national percentage of tenants in good-standing by rental price is R3000 – R7000 = 85.1%; R12,000 – R25,000 = 83.6%; +R25,000 = 75.7%
  • The Rental Inflation year-on-year reflected in Q1 of 2016 according to StatsSA and TPN is 5.18% (StatsSA) and 3.3% (TPN).
  • Signals point toward rental demand strengthening in Q3 and Q4 of 2016.
  • According to the FNB Estate Agents Survey, agents estimate that 53% of sellers are choosing to “rent down” rather than “buying down”, indicating that afforability is declining.
  • Demand for rental accommodation continues to outstrip supply.