Caution in market good for rentals

Caution in market good for rentals
2008/05/29

The effects that South Africa's rising cost of living and high interest rates is having on the property market's residential sales is no secret.
Sentiment has shifted from confidence to caution, however, the effects have been positive in the residential rental market.
"Potential home buyers are renting, placing their home-buying decisions on hold due to the diminished affordability of property. They want to observe what is happening with interest rates before they consider purchasing property. Therefore, the demand for rental properties has escalated dramatically," says Marsha Haupt, sales director at Betterbond.
Marsha notes that the first edition of the FNB Residential Property Barometer for the rental market in the first quarter of 2008 shows a positive picture of the rental market when compared with the main FNB Residential Property Barometer for the home buying market.
The FNB barometer also shows that on a scale of one to ten, the activity in the home buyers market is at a mediocre level of around 4,96, whereas the rental market's activity is above average at 8,4.
According to FNB Home Loans property strategist, John Loos, monthly rental repayments are considerably lower than 100% bond repayments, which make the rental option increasingly popular during these times of rising interest rates.
Investors are now "dipping their toes" back into the buy to let market. This is resulting in the recovery of the rental market.
People who have over-borrowed to purchase homes are experiencing cash flow problems. This has led to luxury or high bonded properties being placed on the market with urgency to sell. "For this reason we are seeing a stabilisation in the property market as properties are placed on sale at more realistic price levels.
"The gap between rental and bond repayment rates in metro areas is approximately 65% of bond repayments," says Haupt.
"Therefore on a bond of R500k, the repayment would be R6,585 whereas rental would be R4,300". In non-metro/coastal areas the gap is about 60%, with reference to the same example, the rent would be R3,900.
Developers are attracting investors with a buy-to-let promise. They assure investors of rental returns, however, it will not materialise if the investor is taking an 80% to 100% bond. This approach will make the developer rich but will most definitely place the inexperienced investor in financial hardship as the rental will not cover the bond repayment.
"In spite of the high interest rates, the slowing price growth is an opportunity for investors with money to buy. Properties are reaching more reasonable price levels and at some point interest rates will inevitably start to fall and prices will once again start to climb, providing good returns for investors," Haupt concludes.

Caution in market good for rentals