Residential rental market could surge

The recent 50 basis points increase in interest rates, could place pressure on some buyers and homeowners in the residential property space, and result in a surge of demand for rental properties, says Francois Venter, Director of Jawitz Properties.  “This may also lead to higher rents.”

“Some homeowners may look to renting out their properties to make ends meet and move into smaller properties,” Venter says.  “While costs continue to rise, renting may also be the only option for many prospective buyers.”

In addition, the recent interest increase shows that the interest rate cycle has bottomed out and the only way forward is up, says Venter.  This can make banks tighten their lending criteria, making it even harder for buyers to get bonds.

“Of course investors who already have properties on the market to rent are in a good position to earn higher yields.”

He says that some buyers may have to look to different areas than their preferred suburbs or will look for cheaper homes in the areas of their choice, and some homeowners may even look to downsizing. “Times are tough,” says Venter. “A lot of people have home loans, car payments and other debt and downsizing can give them some relief on their monthly expenses.”

Venter says this could result in a release of stock as homeowners who are on the margin of being able to afford their bonds decide to sell.
The table below demonstrates the new monthly repayments homeowners will face because of the 0.5% increase, looking at the average home loan values for small to large properties.  


Small homes (80m²-140m²)

Medium-sized homes (141m²-220 m²)

Large homes (221m²-400m²)

Average value (December 2013)

R778 000

R1 085 000

R1 720 000

Monthly repayment (Prime 8.5%)*

R6 751.66

R9 415.88

R14 926.56

Monthly repayment (Prime 9%)*

R6 999.87

R9 762.03

R15 475.29

Difference (at prime 9%)




Source: Erwin & Associates

Venter says that households usually feel the pressure of an interest rate hike four to six months down the line. “Ultimately when interest rates go up, property prices tend to slow because demand can drop.  However, because of the economic pressures most South Africans are facing, we feel the demand for rentals, and thus rental yields, is likely to go up.”
It is, however, still a historically low interest rate environment, even with the increase. This means that buyers will still be looking to purchase, even if it is slightly more expensive than before. “But some buyers, particularly in the lower end of the market may be cautious and sit on the fence for a while,” Venter concludes.

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