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Tuesday Mar 06, 2012

Residential rental market set to remain weak - FNB

The residential buy-to-let and rental markets remain weak and may remain so for some time because of the crowding-out effect of the myriad other consumer costs, according to FNB.

However, John Loos, a household and property sector analyst at FNB, said a weak residential market might have been key in preventing interest rates rising last year because of the large weighting of rentals in the consumer price index (CPI).

"Should the rental market have strengthened more significantly in 2011 at a time when other components of the CPI were rising sharply, overall consumer price inflation may have risen far higher above the 6 percent upper target limit and that may just have been the catalyst for the Reserve Bank to start hiking interest rates."

Loos added that interest rate hikes appeared to have been significantly delayed and residential buying demand had continued to grow gradually.

He expected the rental market to pick up from the start of expected interest rate hikes around 2014. Increases in rates would be a catalyst for a stronger rental market as many aspirant first-time buyers would delay buying a home and rent for longer.

Loos said weak buy-to-let buying did lay the foundation for the ultimate recovery of the rental market by constraining supply, which would gradually set the basis for a future shortage leading to stronger rental inflation.

However, Loos said it appeared that significant strengthening in the rental market might be some way off, with credit dependent first-time home buyers flocking into the home buying market in greater numbers as opposed to renting.

Loos said the percentage of residential buyers who were purchasing properties to let was believed to have remained fairly weak based on the results of FNB's fourth-quarter estate agent survey.

He said agents surveyed estimated about 8 percent of sales were to buy-to-let buyers, virtually unchanged from the previous three quarters and still a far cry from the almost 25 percent recorded in 2004.

Loos attributed the weakness in the buy-to-let market to the current significant household sector pressure.

The sources of this pressure had been a mediocre economic performance despite some recent improvement, along with sharp increases in the cost of high-frequency consumer purchases.

"Although price inflation for petrol and food are starting to turn for the better, their inflation rates remain very high and these highly essential items do exert a significant degree of financial pressure.

"But more significant in limiting the appeal of owning a second home is arguably the ongoing increases in municipal rates while utilities tariffs, most notably in the area of electricity, are skyrocketing."

Loos said while utilities tariffs were generally passed on to the tenant in a rental property, the general levels of financial pressure in recent years must often have meant the negative impact on tenants of these tariffs and other CPI inflation items limited the "pricing power" of landlords in hiking rentals.

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