More steam in rentals than in sales

Although the scene is set for a flat residential property market next year, rentals may well be more lucrative as rates climb higher than a bank’s savings rate. First National Bank property analyst John Loos projects slow nominal growth for house prices at between 1% and 2% for the new year, from an estimated 3% for 2011.

“With consumer price inflation expected to move in the 4% to 6% range during next year, this would translate into further house price decline in real terms,” he said. Third-quarter economic growth of 1.4% spelt further bad news for ­residential property prices.

“This could place downward ­pressure on employment growth as well as disposable-income growth, ultimately restricting residential purchasing power,” Loos said. Rental income, on the other hand, grew 6.6% year on year to the end of November, according to the PayProp Rental Index, and it was slightly higher than the 6.1% general inflation for the same period. Rental price inflation reached a low of 4.1% in June, but the speed of rental increases has been rising since then.

The index, launched this month, found that the national average rent, as it stood at the end of November, was R5 116 a month — up from R4 797 a month in the previous year. Mike Schüssler, economist and developer of the index, said this was a fair return, given the gloomy economic conditions, and certainly better than a bank saving rate of 5.5%. Rising rental rates showed an improvement on return on investment. “We need rentals to improve before property prices will improve.”

Although there would not be fireworks for house price growth during 2012, Loos anticipated positive “healing” processes, such as a further decline in the debt-to-disposable-income ratio, to continue.

Loos said the textbook big-property cycle spanned an average of 15 to 20 years and, “given that 1998 was arguably the last big-cycle bottom point, we are now only 13 years into the current cycle. This would suggest a few more years of eliminating the various excesses and imbalances before the market can flourish.”