Home buying: will the good times last?

Property investment and rental

Higher impending interest rates likely to boost rental market.

JOHANNESBURG – The legacy of low interest rates over the last decade is very evident in the property market, with the home buying option trumping renting. But this could change in the near future with interest rates steadily climbing.

This has been backed up by the latest FNB data which indicates that home ownership is still in vogue for buyers, trumping the rental option – with house price inflation outstripping rental inflation.

The latest figures show that actual rental inflation has marginally moved upwards from a low of 4.26% year-on-year in mid-2012 to only 5.16% by June 2014. While in the same period inflation for home owners edged up from 3.91% to 4.98%.

“The reason why home buying is apparently trumping rental lies in the cost of credit. The low cost of credit in recent years keeps the home buying option a popular one relative to renting,” FNB household and property sector strategist John Loos told Moneyweb.

But with an interest rate rising environment in full swing, already seen in the 75 basis points risen so far this year, the momentum of home buying might slow.

Common theory is that in a high interest rate environment, the cost of borrowing escalates, making repayments to a home loans more expensive. It is this upward trend in home loan repayments, which might see consumers gravitate to the renting option.

“The result (in interest rates rising) is expected to be a further gradual acceleration in rental inflation, and a further gradual slowing in house price inflation,” Loos adds.

Home ownership vs renting

Rode & Associates CEO Erwin Rode says rentals this year are expected to increase in the region of 1% to 4%, while house prices are expected to record 7% to 8% growth.

“House prices are growing faster than rentals. Though the run in house prices is not sustainable, as all we need is interest rates rising (for the slowdown). There is also a lag of nine months before we see the impact,” Rode explains.

Not only are the figures in favour of home buying, but property experts agree that on the ground consumers still have an attractive appetite for home buying.

Jonathan Davies of Pam Golding Properties says the property market overall has been characterised by toughness recently where “the law of supply and demand prevails.”

“When there are a surplus of properties on the market, prices are put under pressure due to competition and reduce to meet the lower demand,” Davies says.

Also generally when interest rates increase, Davies says buyers who normally would have been able to purchase property, often opt to rent until such time as interest rates decrease.

Both markets have enjoyed stock shortages, but this has buoyed the home ownership market more.  “Rentals are not in vogue now as the market has seen a strong demand of property ownership due to limited stock. After all we are coming from a low base of interest rates,” explains chairman of Sotheby’s International Realty in South Africa Lew Geffen.

The demand Geffen says has been strong across all property segments for instance in the R1 million to the R150 million property value tier.

Areas of strong demand?

The home ownership market Geffen says is quite active in Cape Town, where leafy suburbs such as Bantry Bay and Fresnaye on the Atlantic Seaboard – the coastline between the V&A Waterfront and Hout Bay – could retail for R100 000 per square metre. While Johannesburg’s suburbs such as Sandton and Sandhurst could boast R30 000 per square metre.

The picture in the two regions is vastly different for the rental market. “Long-term rentals in Cape Town are relatively cheaper; there is no real demand for [short-term] rentals,” while the demand for short- and long-term rentals in Johannesburg is strong.

It’s not all the doom and gloom for the rental market, as it still holds its own in rental prices. South Africa’s largest processor of residential letting transactions, PayProp, in its latest (2013) rental index notes an annual 10.4% increase in rental prices in September – the biggest jump since October 2010.

With average rentals increasing throughout the year from R5 473 in Q1 (2013) to R5 867 in Q4, PayProp says it is expecting growth in the national average rental to exceed the R6 000 mark.

“The next five years will be strong for buying, as there is a lot of developments popping up across the board,” says Geffen.

However Davies cautions: “The frenzied buying we experienced in the last boom will not appear, due to the more conservative stance the banks have adopted relating to their appetite to lend.”

Source: http://www.moneyweb.co.za/moneyweb-property/home-buying-will-the-good-times-last

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