Real estate prices rise and fall over time, and property rentals are no different. But real estate prices and property rentals don't usually react in the same way, even though they react to changes in the same factors.
Property rentals are affected by a large number of factors, all of which cannot be discussed here. Instead, this article looks at the major factors that can affect the property rental market.
Supply and Demand
In the property rental market, as in any free market industry, supply and demand is the key factor determining market performance. An over-supply of rental properties will cause property rental prices to decline, while a shortage of rental properties will usually cause rentals to rise.
In normal situations, supply and demand will stay in a relatively stable balance. But when either one of the two factors change radically, while the other factor fails to keep pace, we have a problem.
If prices rise too quickly, due to a huge demand or a small supply, tenants will simply not be able to afford to rent anymore. This may cause tenants to consider lowering their sights and moving to a more affordable type of rental property, or to rather purchase their own properties.
Landlords may also find themselves in hot water if demand falls sharply, or if the market suddenly gets flooded with available rental properties. This would mean that rental prices would decline, possibly leaving tenants with mortgage repayments that cannot be met.
Affordability
Another important factor affecting property rentals is the average person's ability to afford to purchase his/her own property. Most people have heard somewhere that buying their own home is a good idea, so most tenants hope to do so at some time. But if one cannot afford to purchase a property in the current real estate market, a person will have to rent a property instead.
When real estate becomes less affordable to the average person, the demand for rental property increases. But when real estate becomes more affordable to the average person, demand for rental property will decline and property rental prices will therefore follow suit.
Interest Rates
The home loan interest rate influences property rentals.
I can hear some people asking: "But how can home loan interest rates influence rental prices? Tenants don't have mortgages to pay!"
True. Tenants dont have mortgage repayments to worry about, but high interest rates make real estate less affordable, which results in a higher demand for rental properties.
We also have to keep in mind that landlords do have mortgage payments to make. High interest rates mean that a landlord has to pay more each month. And those higher costs do get transferred to the tenants, through higher rental prices.
In extreme cases, interest rate hikes can cause landlords to decide to sell their rental properties. This can cause the rental property supply to decrease and rental prices to rise. Or if a large scale rental property sell-off cause real estate prices to drop, the rental property demand could also drop, because property becomes more affordable again. And this can cause more landlords to sell, resulting in a collapse of the real estate market!
THe current property rental market
In many places in South Africa, real estate prices have risen out of reach of average South Africans. Property values rose way above the rate of employment pay increases, which has left the majority of people, who are not property owners yet, unable to afford the deposit and monthly mortgage repayments on a home. Many young people are not in a position to purchase a home of their own.
This means that the South African property rental market has a healthy demand for rental properties. One would therefore expect rental prices to be quite high, but rental prices did not keep track with the booming property prices! Why?!
The relatively low rental prices can be explained by the large number of South Africans who have decided to invest in rental real estate for the first time. These inexperienced investors rely on the continued increase in real estate prices for realising their investment profits.
Because of the high demand for investment properties, the South African building industry has been churning out record numbers of high-density developments. And for a little while the demand for property rentals kept up with the sudden boom in supply, but then the tables turned and the cost of renting a property in many areas of South Africa dropped far below the cost of buying the same property.
The real estate market has slowly started to show signs that we are quickly reaching the top of the market, but it seems as if the building industry is not yet ready to stop producing their high density homes.
The South African Reserve Bank has been slowly pushing interest rates higher and higher during the year, even though no-one predicted any interest rate hikes at the start of the year.
Predictions for the future
Many experts predict that further interest rate hikes are possible. This means that a large number of first-time landlords (who got on the band-wagon a little late) might soon find themselves in a position where they have to sell their rental properties, which could (but hopefully will not) escalate into a market collapse.
The building industry might also react to the decline real estate price hikes and reduce their output of new properties, which might allow both the real estate market and the property rental market to stabalise.
Property rental factors summary
The property rental market in South Africa experiences a healthy demand, because the recent property boom in South Africa took real estate ownership out of the reach of many South Africans. This is good news for the rental market.
But the future of property rentals are by no means a "sure thing", as I hope this article on property rental factors illustrated. The few factors discussed here is by no means the begining and end for all the possible changes in the property rental market.
