Disposable income on the rise for South African tenants

South African tenants are in a better financial position than at the end of 2022 despite high-interest rates and inflation – great news for rental agents and landlords who rely on timely rent payments.

Based on rental transactional data from the popular payment platform, the PayProp Rental Index Annual Market Report found that tenants spent less of their income on debt repayments than they did a year earlier: 44.8% in Q4 2023 compared to 47.8% in Q4 2022. The percentage of income spent on rent also fell in Q4 2023, from 29.2% to 28.4%, notwithstanding stronger rental growth throughout 2023.

Johette Smuts, Head of Data Analysis at PayProp, notes that with rent and debt repayments falling relative to income, salaries have grown faster than rentals and the cost of living, leaving tenants with more disposable income. “The average tenant now has 26.8% of their income left over to cover other expenses, up from 23.1% at the end of 2022,” says Smuts.

Alongside improvements in their spending patterns, rental applicants were also financially healthier in 2023. The average credit score improved by just 1 point year on year, to 643, but 37.7% of tenancy applicants fell into PayProp’s minimum-risk bracket in Q4 2023, up from 35.2% a year earlier. Smuts says this is good news for agents as they have a bigger pool of lower-risk applicants from which to choose moving into 2024.

Arrears are improving

One of the most positive findings in this quarter's Index is that the share of tenants in arrears fell to 17% nationwide in Q4, 2023. This is the lowest level recorded by PayProp since it began tracking arrears in 2020, and a 0.5% fall from the previous low set in Q3 2023. The average arrears percentage remained flat at 74%, also the lowest level recorded to date in the Index.

Whilst the national percentage of tenants in arrears dropped sharply, the Free State and Eastern Cape remained the provinces with the highest percentage of tenants in arrears at 20.7% and 20.3% respectively. In addition, tenants in the Free State owed an average of 85.5% of their rent, the highest in the country and significantly more than the national average of 74% and the Eastern Cape at 67.2%.

Rental growth levels off in the fourth quarter

After eight quarters of rising rental growth, the residential market now appears to have levelled off. Rents grew a sustained 4.6% year on year in October, November and December 2023, for a fourth-quarter growth rate unchanged from Q3. That puts the average rent in South Africa at R8 598, an increase of R368 year on year and R147 above the previous quarter.

“After last quarter’s 0.2% quarter-on-quarter increase in rental growth, South Africa’s rental market appears to have settled on a plateau,” says Smuts. However, she adds that this doesn’t have to be a bad thing for the residential rental sector and says that the current period of stability could be an opportunity for agents to take advantage of steady year-on-year growth. Average rental increases of 4-5% are still the strongest since 2017 and would allow agencies to grow without putting high pressure on tenant affordability.

Nevertheless, Smuts says that there are a couple of factors that could still knock the rental market off the current plateau. “If inflation trends downwards later this year and SARB chooses to cut rates, more tenants could purchase their own homes, reducing current demand for rental properties. On the other hand, if inflation rises further following the small uptick in January, this could put further pressure on tenants’ incomes and reverse the improvements in risk and spending metrics,” concludes Smuts.