Rental Market Faces Challenges as Growth Slows in Q1 2024

Challenges Ahead for the Rental Market as Growth Slows in Q1 2024

The rental market’s recovery from the pandemic faced a significant setback in the first quarter of 2024. National rental growth dipped to 3.8%, down from 4.6% in the previous quarter, according to the latest PayProp Rental Index. This decline marks the most substantial drop in rental growth since the pandemic.

Impact of High Interest Rates

The primary driver behind this slowdown is the persistently high interest rates, with the prime rate holding at 11.75% since May 2023. This has made rental affordability a critical issue in the market, affecting both tenants and potential buyers.

Consequences of Rising Interest Rates

High interest rates have not only slowed rental growth but have also deterred potential home buyers, many of whom are postponing purchases in hopes of future rate cuts. Currently, the prime lending rate stands at a 15-year high, impacting the rental market and reducing the volume of new home sales.

In Q1 2024, the average rent in South Africa was R8,654, up by R301 from the previous year. However, this 3.8% growth is the lowest seen since Q4 2022.

Inflation Outpacing Rental Growth

Inflation remains a significant challenge, with the Consumer Price Index persistently hovering at the upper end of the 3-6% target range. Despite high interest rates, inflation has consistently outpaced rental growth, diminishing returns for property owners and rental agents.

Additionally, rental arrears increased to 18.3% in Q1 2024, up from 17% in the previous quarter. This rise could be due to tenant overspending during the December holidays.

Performance Across Provinces

Despite the national struggle, some provinces are performing better than others. The Free State saw rents grow by 9.1% year-on-year, the second-fastest growth rate of any province, surpassing the 8.8% growth in Q4 2023. This is remarkable considering the Free State’s previously below-average growth until the end of 2023.

Conversely, KwaZulu-Natal experienced a decline in rental growth, with rents decreasing by 0.4%, marking the first negative growth for any province since the Free State in Q1 2023.

Regional Highlights

• Western Cape: While the Western Cape recorded below-average rental growth for most of 2023, it saw a 4.3% year-on-year increase in Q1 2024, exceeding the national average.
• Gauteng: Rental growth in Gauteng was slightly below the national average at 3.5%, with an average rent of R8,943 in Q1 2024. Continued growth could soon see Gauteng surpass an average rent of R9,000.

Increasing Rental Arrears

The increase in rental arrears has nearly erased the progress made over the past year. The Free State, previously the province with the highest arrears, has seen improvement, with 22% of tenants in arrears, down from 26.7% a year earlier. However, North West now has the highest arrears, with 25.7% of tenants behind on rent.

Other provinces with notable increases in arrears include Mpumalanga, rising from 18.1% to 19.3%, and KwaZulu-Natal, from 20.4% to 21.4%.

Future Outlook

Looking forward, the South African Reserve Bank (Sarb) faces a challenging decision: whether to cut interest rates to stimulate economic growth, risking increased inflationary pressures. As rental agents and property owners navigate these turbulent times, the resilience shown during the pandemic will be vital in overcoming current market difficulties.

Understanding these trends and regional variations can help property buyers and investors make more informed decisions in the evolving real estate market. Stay informed and be strategic to navigate the challenges ahead.