Could rental increases soon overtake inflation?

It’s official: inflation is down! In May, headline consumer inflation fell to 6.3% from 6.8% in April, and is now the lowest it’s been in over a year. The governor of the South African Reserve Bank now expects inflation to drop back into its 3-6% target range by the third quarter.

That’s good news for financially squeezed consumers – but also for landlords, who’ll be looking to escape the run of negative real-terms rental returns since 2019. Between January 2021 and March 2023, rental growth averaged 4% below inflation.

And now, with inflation falling and rents rising, the clouds may finally be parting for the residential rental sector. Data from the latest PayProp Rental Index showed that national rental growth reached 4.2% in the first quarter of 2023, marking six quarters of accelerating growth. Furthermore, preliminary data from PayProp, drawn from real rental transactions across the country, shows rental growth of 4.6% in both April and May. That puts the country on course for another rental growth increase in Q2 – getting ever closer to the crucial marker of the inflation rate.

Why are rents rising?

Rising interest rates have made it harder for prospective homebuyers to afford properties, and many are continuing to rent instead. That has boosted demand in the residential rental sector, allowing landlords to increase rents.

High interest rates have also added to landlords’ costs, putting pressure on them to pass on bigger increases – and with inflation still above the target range, that’s unlikely to stop anytime soon. The SARB is expected to keep the prime rate high for now, and may even increase it again at its next interest rate decision on 20 July.

Stretched affordability pressures on tenants could soon limit how high rents can go. Renters still battle higher costs for essentials and more expensive debt repayments. For now though, PayProp Rental Index data from Q1 doesn’t show a significant increase in arrears, even if disposable incomes have come down.

Rental agents and property investors will have to wait and see which set of economic pressures wins out – and the best way to keep an eye out is to subscribe to the PayProp Rental Index! The Rental Index is the most comprehensive analysis of South Africa’s residential rental market, based on actual rental transactions made through the PayProp platform for hundreds of thousands of properties.