South Africa
June 8, 2023
PayProp Insights

Will interest rate hikes damage the rental industry?

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The South African Reserve Bank (SARB) has raised interest rates to their highest level in 14 years, sparking fears in the residential rental sector over rental affordability and landlord mortgage costs. Read on to see how landlords, tenants and agents are affected.

Last month’s rise of 50 basis points took the repo rate (the rate at which SARB lends to banks) to 8.25%. In turn, the prime lending rate – the interest rate at which banks lend to consumers – rose to 11.75%.

The interest rate hike will squeeze profit margins in the residential rented sector despite this year’s recovery in rental growth, and not just because of increases in landlords’ bond repayments.

Tenants’ ability to afford rent will also be reduced due to higher debt repayments, limiting landlords’ ability to pass on their increased costs. According to the latest PayProp Rental Index, tenants spend on average 44.5% of their income on debt repayments, and those debts will now become more expensive to service.

For rental agents, the concern is that landlords could cut costs by negotiating lower commission payments. According to the latest PayProp State of the Rental Industry Survey, released this month, 55.1% of agents have already reduced their commission to retain landlord clients over the past few years.

Silver lining

On the flip-side of this bad penny, rising interest rates will also boost the supply of tenants. Home sales have fallen as interest rates have risen, meaning more prospective buyers have decided to keep renting instead. On top of that, growing numbers of homeowners could sell up and move into rented properties to avoid unaffordable bond repayments, according to industry experts. The increased demand could give landlords more flexibility to raise rents.

The question now is whether that will make up for landlords’ rising bond repayments. According to John Loos, Property Sector Strategist at FNB Commercial Property Finance, earlier interest rate rises did help the rental market, but rates are now high enough to damage it.

The interest rate rise could also help the residential rental sector and the wider economy, if it achieves SARB’s goal of bringing inflation under control. So far this year, inflation has outpaced rental growth, also reducing tenants’ ability to afford rent. If it falls to more normal levels, that would ease the pressure on tenants and landlords and reduce the chance of further rate rises by SARB.

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