High cost of living sees more tenants not paying their rent

The number of tenants who are in arrears with their rent is increasing. Picture: Ketut Subiyanto/Pexels

The number of tenants who are in arrears with their rent is increasing. Picture: Ketut Subiyanto/Pexels

Published Sep 14, 2023


More tenants are falling behind on their rent as the rising cost of living continues to put pressure on household finances.

The increase in tenants who are in arrears with their rent is not being driven by rental increases but rising inflation and costs of servicing debt.

The Q2 PayProp Rental Index reveals that the percentage of South African tenants in arrears rose from 18% in Q1 2023 to 18.4% in Q2 – the highest percentage recorded since the end of 2021, but still below the peak recorded during the COVID-19 pandemic.

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Johette Smuts, PayProp’s head of data analytics, says, however, that there has not been a significant increase in rent as a share of income over the past five years, and that, in fact, incomes have risen considerably faster than rents in most income brackets over the past year.

“However, it is evident that rising inflation and the cost of servicing debt have made rental payments harder to manage for tenants.”

Unlike Q1 2023, when the increase in tenants behind with their rents was driven by just a couple of provinces, the share of tenants in arrears rose in all but two provinces in Q2 – albeit by less than one percent in most cases. The Eastern Cape, Gauteng, KwaZulu-Natal, Limpopo, Mpumalanga and the Western Cape all experienced small increases, while the North West had a bigger escalation from 22.8 percent to 25 percent.

In the Free State, she says the percentage of tenants in arrears fell from 26.7 percent to 25.2 percent – still the highest in the country, but only by a marginal 0.2 percent. In the Northern Cape the percentage of tenants in arrears dropped from 20.1 percent to 19.3 percent.

While the average national percentage of tenants in arrears is up in Q2 from Q1, the amount they owe as a percentage of rent is down, with the national figure dropping from 78.3 percent to 77.1 percent. This statistic also dropped in all but two provinces, with a particularly big decrease from 99 percent to 91.8 percent in the North West. Smuts says that this might be because more tenants are newly in arrears in that province and haven't had time to build up large debts.

Two provinces posted outlier rises in arrears percentages this quarter; in the Free State this figure rose from 97.6 percent to 105.2 percent, putting it above one month’s rent and making it the highest in South Africa. In the Western Cape, it remained flat at 65 percent, still the lowest in the country.

While Smuts does not believe there is yet cause for concern, agents must be on the lookout for further rises in arrears over the coming year.

“We might not yet have seen the long-term effects of high interest rates on tenants’ finances filtering through completely, so we might see arrears getting worse before they start getting better.

“On the other hand, inflation has fallen significantly, easing the pressure on tenants’ finances.”

Despite the economic pressure on consumers though, TPN Credit Bureau says South Africa’s residential rental market has remained strong with vacancies nationally seeing only a small increase from 6.19 percent in the first quarter to 7.27 percent in the second quarter of 2023.

Vacancies are a key indicator for property investment as consumer demand drives vacancies in the residential rental market and is influenced by whether consumers choose to purchase a property or rent it. The number of units available for rent and high capital costs also influence the vacancy rate.

TPN’s Vacancy Survey Report for Q2 2023 reveals that the number of vacant residential rental properties is very similar to the vacancy rate in the second quarter of 2022 at 7.16 percent. However, it is lower than the pre-pandemic vacancy rates of 8 percent in 2018 and 8.11 percent in 2017.

Waldo Marcus, industry principal at TPN Credit Bureau says that, in recent quarters, vacancies have primarily been quelled by higher interest rates. During the pandemic, house prices saw healthier capital growth as a result of low-interest rates. However, the Reserve Bank’s aggressive interest rate hike cycle has slowed this capital growth. The mounting economic challenges facing consumers have helped the rental market to regain the losses it incurred during the pandemic by accelerating rental growth and improving collections and occupancy rates.

Throughout the country, there has been a slowdown in the supply of residential stock. Larger municipalities have reported that the value of completed new buildings dropped by R1.45bn in the first half of 2023 compared to the same period in 2022.

He explains that reduced stock entering the market will impact consumers in two direct ways: firstly, it will ensure less supply to choose from which will drive escalations higher, and secondly, an increase in housing cost will make it even more difficult for new buyers to enter the market given that it is already plagued by high interest rates.

“For residential property investors, this indicates a market environment characterised by higher demand and less competing supply in the short and medium term. Limited inventory coming online in the near future means more competition to find and place good quality tenants to ensure a decent return on investment.”

TPN’s data reveals that lower rental value bands are experiencing higher vacancy rates. Properties at the lowest end of the TPN rental value band had a vacancy rate of 13.9 percent in the second quarter of 2023 while, in the R3,000 to R4,500 rental band, the vacancy rate rose to 11 percent.

The best-performing rental units are those priced between R7,000 and R12,000 per month with a vacancy rate of 5.5 percent, followed by units priced between R12,000 to R25,000 per month with a vacancy rate of 6.49 percent.

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