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Why people rent instead of buy their homes

 

Being a tenant offers more flexibility than buying, but sometimes dwellers have no choice because of affordability.

South Africa’s property rental market is a mixed bag of offerings. For some who do not have the finances to buy a home of their own, it is a place in which they remain trapped.

For others who can afford to, it is a temporary refuge from economic and political uncertainty which could derail longterm plans. Of course, there are also those for whom the rental market offers the perfect amount of flexibility in a busy and fast-moving world of opportunities. It is this culmination of desires that is keeping the country’s rental market ticking over in otherwise difficult times.

The make-up of the market between those who are being forced to rent as they cannot afford to buy and those who can buy but are renting by choice is about 60% to 40%, estimates Andrew Schaefer, chief executive of property management company Trafalgar. “The flexibility and cost advantages of renting are increasingly important for many South African families.”

Generally, however, the residential market is “tough” at present for both landlords and tenants, Schaefer says. Tenants are battling financial pressures related to the current economy, and landlords are struggling to source tenants with clear credit records who qualify on affordability parameters.

Vacancies have been trending upwards and collections are also under pressure. Although in agreement that the rental market is still under strain, Mark Burt, manager of Greeff Rentals, says: “We are seeing small, positive signs filtering through, and we are looking forward to continued improvement towards the latter part of the year.”

Affordability, however, is not the only push factor into renting over buying as the flexibility that comes with it is also attractive for people who may want or need to relocate at some point. It does, however, appear to be the biggest consideration, says Dogon Group Properties’ Odette Maartens.

The past two months, in particular, have been “very busy” for rentals and there is also a lot of stock available. “The demand for rentals is definitely high, and it’s also linked to the fact that there are fewer buyers out there. People rent instead.”

To illustrate the affordability factor, Maartens says 90% of tenants cannot afford to buy the property they are renting; 10% is made up mostly of corporate employees working on contract in Cape Town. Although growth is still below inflation, says Tobie Fourie, rental manager for Chas Everitt International, the last quarter of 2018 and first quarter of 2019 saw the market improving nationally, and as there is currently strong demand for such properties it is hoped the momentum will continue.

“Despite the slight interest rate decrease this month and the banks’ willingness to lend, many households cannot qualify for a bond for various reasons and must rent.”

Of the tenants on RealNet Platinum’s rental books, there is a 50/50 balance of those who are forced to rent and those who choose to, says Ingrid le Roux.

This franchise covers the western seaboard, Maitland, Parow, Goodwood and Bellville. “Tenants at the lower end of the market are battling to make ends meet.

Many of those at the higher end prefer to rent now and keep their options open, although there has been less caution since the elections in May. A third group could afford to buy, but are renting because it allows them to live in an area they like where they cannot afford to buy.”

Owning your dwelling boosts stability.

Having enough money to fund their retirement is a worry for most South Africans, but for those who do not own property, the stress is even greater. A bricks-and-mortar asset offers retirees a number of options to finance their golden years, whether they choose to live in it, sell it, or let it.

This means those who cannot afford to buy often panic when thinking about retirement. The decision to own a property at any life stage is solely dependent on an individual’s needs and what they can afford. Nondumiso Ncapai, head of Absa home loans, says it is “very common” for people to never own a property.

“South Africa has a population of 57.7 million (as at December 2018), made up of 16.6 million households. If we look at the fact that there are only about 6.6 million formally registered properties in the country, then we can assume there are about 10 million households living in rented housing, on tribal land, or in informal settlements.”

Houses play multiple roles in the economy, Ncapai says: they are people’s homes, land resources, and assets to buy and sell. But one should also take into account that different cultures have very different perspectives about home ownership.

“For some, it makes little financial sense to move into their own property while they could live with family, or could wait until they choose to move in with a partner. For others, home ownership is seen as an important part of being a productive member of society.

“Taking out a mortgage and investing in property is generally seen as a wise economic decision. Instead of paying rent, homeowners can pay off their debts, accumulate wealth and have a home to live in, all at the same time.” There are, however, other ways to save for retirement besides owning a property. These include opening savings or retirement funds on offer from various financial institutions.

However, owning your own property when one retires provides extra stability, says Adrian Goslett, regional director and chief executive of Re/Max of Southern Africa. Rents can increase annually, and this becomes “problematic” when you are living off a pension. “If you have paid off a home loan, the only expenses you need to worry about are your monthly rates and taxes on the property, as well as maintenance. This provides the security of knowing that you will always be able to afford the roof above your head.”

For those who enter the market early and pay off their home loan before they retire, all the money that would have been spent on rent can be put into retirement savings. “Alternatively, if you had purchased the property as an investment and choose to continue letting it, you can earn a monthly passive income that will see you through your retirement.”

Goslett says: “For those who simply cannot afford to purchase property during their working lifetime, I would recommend they pool their resources with close friends or family to qualify for a home loan and purchase a property together.” 

Tough times for Western Cape landlords. 

The Western Cape’s rental market is at a delicate stage following 10 years of double figure rent escalations which Soretha Steenkamp of RealNet in Stellenbosch says were not sustainable.

Furthermore, the vacancy rate was at 0% in most cases during that period due to the shortage of available properties. “This is no longer the case.” Landlords operating in the student accommodation market in Stellenbosch are feeling the pressure. While demand is steady, increases are at an “all-time low”. 

“Vacancy rates are also unlike any other year with students choosing to rather share accommodation instead of trying to afford their own rents,” Steenkamp says. An added factor on the western seaboard is that the area has been “flooded” with developments that are giving tenants many options and making them price conscious, says Ingrid le Roux of RealNet Platinum.

“Landlords are hardly increasing rents, and in some cases are even dropping them to keep good tenants.” Certain properties, however, will have an advantage in such difficult conditions. In-demand properties are those that offer good security, proximity to their workplaces and other amenities, a relaxed living environment, and good value for money, says Chas Everitt International’s Tobie Fourie.

Developments are attractive as they often offer mixed-use benefits such as easy access to retail, restaurants, gyms and business facilities. Unsurprisingly, properties with rents below R5000 are in highest demand, as are those with convenient locations, says Trafalgar’s Andrew Schaefer.

“Tenants are particularly concerned about location-related transport costs (and travel time), security and utility charges which contribute significantly to gross monthly rental costs.” Properties that address these needs are sought-after.

In Cape Town in particular, Greeff Rentals’ Mark Burt says properties that are in, or close to, the city centre and are offered for under R15000 a month are most in demand. There are also areas, like Claremont, where there has always been a healthy demand for rental properties. 

Get saving advice: Credit is too easy.

Adequately saving for retirement will vary based on an individual’s needs. Absa’s Nondumiso Ncapai recommends that people seek professional advice from authorised financial advisers in order to navigate the plethora of savings and retirement products available.

She says, however that achieving retirement savings “peace of mind” requires commitment, discipline and selfcontrol. “The pressure of wanting it now coupled with the easy access to credit generally makes it easy for consumers to start wanting to borrow themselves into prosperity. While borrowing responsibly is appropriate, borrowing for daily consumption is not encouraged.

“Research shows that more than 90% of consumers are not ready to retire. “They have not saved enough to retire and enjoy the same living standard they enjoyed when they were working full time.

“This is why you find people extending their working careers, and suffering from increased stress levels because of financial shortfalls and sudden increases in medical demands. “Tax-free savings is probably one of the best savings vehicles for customers to start with. The powerful thing about this product is that it is completely tax-free and is a National Treasury initiative,” Ncapai says.

Staying put: Oldies don’t sell.

A high-level look at 2018 market activities among 65-year-olds shows the vast majority (98.5%) kept their homes, says Absa’s Nondumiso Ncapai. Only 1.5% sold their properties.

“Of the population that sold their properties (and bought other homes), we saw 36% bought new homes with cash, while 6% bought bonded properties.” People in this age group made up 25% of the market at the time, Ncapai says. “When comparing them to the rest of the market (aged under 65), we see only 22% sold properties and made cash purchases for another property, while 31% sold and then bought a bonded property.”

Only a small percentage of homeowners who sell do so for financial reasons, agents report. Most of those who rent after owning make this choice as they are in a transitional period. They are often still looking for a home to buy, renting in a new area to get a feel for it, or liquidating assets ahead of emigration.

Signs of hope: Coast draws buyers.

Buy-to-let property investment is showing steady growth in coastal regions, but declining inland, the Q2 2019 FNB Estate Agents Survey has found. Nationally, buy-to-let home buying is stabilising, although at lower levels. In the first half of the year, the Cape Town and Durban housing markets showed the strongest buy-to-let estimates, averaging 10.6% and 10.1% of total home buying.

Second-quarter estimates for Joburg and Pretoria came in at 4.8% and 5.2% of total sales respectively. FNB economist Siphamandla Mkhwanazi attributes the general weakness in the buy-to-let property market to a few factors, including slow house-price growth which has limited prospects for capital growth, relatively low rental escalations which have limited yield prospects, and persistently weak economic growth.

However, improvements in purchasing activity in some top-end segments and coastal regions indicate price incentives are beginning to outweigh these ailments.

 

By BONNY FOURIE

Property360

 
 

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