Finance minister Enoch Godongwana delivered his maiden budget speech this week with few surprises, notes TPN Credit Bureau. But what impact will it have on the rental market, amid an interest rate hike cycle?
A R181 billion tax windfall, primarily as a result of a commodities boom, has helped to improve the state’s fiscal situation. The increased price of commodities, however, is a short-term trend and prices are expected to taper off.
Declining commodity prices will have a negative impact on tax collections, said Waldo Marcus at TPN Credit Bureau.
“Higher tax collections from the mining industry, for example, have been due to higher commodity prices rather than increased production which was down 1.1% for December 2021 compared to December 2020. This does not auger well for our tax revenue collections when the commodity boom inevitably starts to ease.”
Godongwana did concede that the state cannot plan for permanent expenditure based on short-term increases in commodity prices.
Increased tax collections are also the result of more resilient corporate income and better than expected collections of personal income tax and VAT, the minister said and has ensured that South Africa’s budget deficit has reduced to 5.7% of GDP rather than the originally anticipated 7.8%.
National Treasury projects that the budget deficit will have reduced to 4.2% in 2024.
The good news for taxpayers is that no increase in personal tax or VAT was announced. Neither will there be an increase in the fuel levy. Personal income tax brackets will be adjusted lower by 4.5% to counter the impact of inflation. Now is not the time to increase taxes and put the country’s economic recovery at risk, said Godongwana.
This is good news for consumers still struggling to recover from the devastating impact of lockdowns imposed in the last two years. Consumers’ financial recovery is particularly evident in property rental behaviour trends.
TPN’s data reveals that the number of residential tenants in good standing with their landlords has still not recovered to the pre-pandemic level.
“Although the number of residential tenants in good standing improved from 77.6% in the fourth quarter of 2020 to 81.4% in the fourth quarter of 2021, this is still short of the 81.88% recorded in the fourth quarter of 2019, before the onset of the pandemic in South Africa,” said Marcus.
Godongwana said that the corporate tax rate will drop from 28% to 27% next year, which is good news for businesses that are still struggling to recover. TPN’s data shows that the number of commercial tenants in good standing with their landlords has seen an improvement.
This figure has grown from 61.62% for the fourth quarter of 2020 to 68.49% for the same period in 2021.
“The fourth quarter of 2021 saw the best rental collections in the commercial sector since the onset of the lockdown. However, while businesses are slowly recovering, some will require assistance,” said Marcus.
Gauteng commercial tenants recorded the weakest rental collections in the sector with only 66.73% in good standing for the last quarter of 2021, while the Western Cape recorded the best performing commercial tenants with 77.31% in good standing with their landlords, he said. “What these figures reveal is that some provinces require more stimulus than others,” said Marcus.
South Africa’s Reserve Bank (SARB) continued with its rate hike cycle in January, which will have an impact on the housing sector.
The repo rate, which directly impacts interest rates, affects many aspects of an economy, such as the exchange rate and money supply. As such, it can be used to manipulate spending to reach certain economic goals, said Johette Smuts, head of data analytics at PayProp.
For example, when spending and hence economic activity is low, the Reserve Bank may lower the interest rate to lower the cost of borrowing money, effectively incentivising consumers, and investors to borrow and spend more, thereby stimulating economic growth.
This, in turn, can drive up prices and inflation, which can be detrimental to an economy in the longer term. To curb this, central banks may raise interest rates. The USA, for instance, is currently experiencing its highest inflation levels in decades, and the expectation is that interest rates there will be hiked soon.
After a small recent hike following a long period of low rates, South African rates are also widely expected to be increased in small increments this year and beyond, said Smuts.
Relationship between the repo rate and rental growth rates
Does the same inverse relationship exist between the repo rate and rental price growth, whereby higher rates will put downward pressure on rental inflation?
Due to the pandemic, rental growth was subdued throughout 2021. The market hasn’t seen year-on-year increases of more than 1% since Q3 2020, which is a far cry from the increases of 4% year on year in 2019.
In response to the cooling effect of the pandemic on consumer spending, the Reserve Bank’s Monetary Policy Committee dramatically lowered the repo rate. In February of 2020, it stood at 6.25%. By the end of July, 5 months and 4 rate adjustments later, the rate was at 3.5%, the lowest it has been in decades. The prime lending rate consequently changed from 9.75% to 7% during that time.
Meanwhile, over the same period, rental growth halved and declined further to just 0.2% year-on-year at the end of 2020. It went on to stay below 1% for the whole of 2021.
Smuts has plotted the rental growth rate against the repo rate over the last three years and calculated the correlation between them.
“The yearly correlation for 2019, 2020 and 2021 were all positive but of varying strength, ranging from 0.23 in 2019 to 0.84 in 2021. However, the calculation over the full three-year period yields a figure of 0.94 – indicating a very strong correlation indeed,” she said.
What does this mean for the rental market?
Smuts said that it would be easy to imagine that changes in the repo rate directly cause changes in the rental growth rate. “This is not true; they simply correlate or occur together. The reasons for this are a bit more complex.”
She said it is more likely that the concurrent change in both indicators comes from having the same underlying economic factors, although interest rate decisions are also influenced by global economic trends. Either way, the strong correlation indicates that we could see a rebound in the rental growth rate in 2022 and beyond.
The forecasted increases in the repo rate could lower inflationary pressures in the short term, although this is not guaranteed. Many tenants will most likely remain under financial pressure, especially since their incomes didn’t keep up with inflation, thereby reducing their purchasing power.
That being said, Smuts says the average arrears position has recovered remarkably well and is in line with pre-pandemic levels. “Looking at the year ahead, we don’t foresee any further significant improvements in this area, as arrears figures are back to normal, removing some pressure on rental price growth.”
Article courtesy of BUSINESSTECH