Run on Numbers: Property rentals trade at a substantial discount to the cost of homeownership

The reason as to why inflation in the rental market lags that of general inflation is proof that inflation is not demand-led in SA as the demand for housing is huge. Picture:

The reason as to why inflation in the rental market lags that of general inflation is proof that inflation is not demand-led in SA as the demand for housing is huge. Picture:

Published Aug 21, 2023


The Consumer Price index doesn’t mean the same thing to everyone, especially when it comes to living arrangements. According to StatisticsSA, there are 412 basic goods and services in the basket, and they are classified into 12 broader groups, such as food and non-alcoholic beverages, clothing and footwear, health, transport, and education.

According to StatsSA the poor are struggling the most. The headline rate was 6.8% in April 2023. The poorest households experienced the highest inflation rate: in the 12 months to April, the cost of living for households in decile 1 (the poorest households) increased by 11.3%. The rate was 7.8% for households in decile 5 and 6.2% for the wealthiest households (decile 10). These statistics were posted on June 6.

The reason as to why inflation in the rental market lags that of general inflation is proof that inflation is not demand-led in South Africa as the demand for housing is huge.

Over time one can expect rental levels to close the gap. Currently, the consumer is taking strain as higher interest rates and high food and energy prices are diminishing income. Wage demands are only high in the government sector, which is politically driven in that the ANC government wants to please their alliance partners.

It was announced last week, for example, that Telkom workers will not receive any wage increases. The brakes are on in the private sector.

  1. According to Lighthouse research, national year-on-year house price inflation is at 3.16%, having remained steady since previous months. Annual residential property inflation remained steady in KwaZulu-Natal and the Western Cape, increased in Limpopo and Mpumalanga, and decreased in the Eastern Cape, Free State, Gauteng, North West, and the Northern Cape. Annual property inflation in the low-value segment was once again much higher than that in other segments – inflation for properties in low-value segments was 9.1%, compared to 3.6% for properties in mid-value segments.
  2. The informative Payprop rental index for the first quarter of 2023 was recently released. The rental market finally returned to pre-pandemic levels of growth in the final quarter of last year, and that positive trend has continued in the first quarter of 2023. Rental growth of 3.9%, 4.6% and 4% was recorded in January, February and March respectively. In cash terms, this was an increase of R336 to R8 294.
  3. StatsSA has developed a residential property price index (RPPI) in partnership with the South African Reserve Bank (SARB) and with the support of the International Monetary Fund (IMF). However, in the case of residential properties, price is determined by many different characteristics such as the location, the size of the property, the land it occupies and the type of building, with the result that no two properties are exactly identical. In addition, only a small proportion of the housing stock will be transacted in any given period. Both new and existing dwellings are covered. Only market prices from actual transactions are considered. They include the price of the land on which residential buildings are located Stats SA publishes the index at two levels of detail. First, RPPIs for each province are aggregated to the “national” RPPI. Second, the RPPIs for each of the eight metropolitan municipalities are aggregated to the “all metropolitan areas” RPPI.
  4. The weights for the largest provinces are as follows: Gauteng makes up 44% of the index, the Western Cape 29%, Kwa-Zulu-Natal 11.62%, and the Eastern Cape 5.23%. The Deeds Office data is continuously updated and therefore Stats SA allows for revisions of the indices. The data provided is most informative as can be seen from the following results, the growth rates in the RPPI for each metropolitan area from January 2010 to October 2022. The City of Cape Town showed the highest growth from 2010, with prices increasing by 139.9%, followed by Ekurhuleni (92.7%) and the City of Tshwane (90.9%). The City of Johannesburg recorded the lowest growth rate (69.9%).
  5. Your home’s rebuilding cost is different from its market value. The rebuilding cost is based on the prices of materials and labour required to replace your home. Market value depends on variables such as the economy, your home’s condition and age, and nearby property values. As of late in South Africa it is not uncommon to find houses with replacement/insurance values of R5.5 million to have market values of R2 million or even less. Insurance companies have a vested interest to inflate these values or defend such values as the premiums charged on insurance are dependent on such values. This is a two-edged sword for the consumer/homeowner. On the one hand, he would not want to require a claim for damage to his home and be told he is under-insured. It is hardly fair to pay on an insurance value that does not reflect market value at all. However, in the end, the current situation in South Africa is not sustainable in the longer term.

House prices need to – and will – increase substantially over the next decade or two to keep the market equilibrium between existing homes, newly built homes, and the rental market.

Now the consumers renting are paying a substantial discount relative to the cost of homeownership. The substantially higher inflation increases in utility bills are being questioned and will be challenged by various organisations based on unfair and unconstitutional grounds.

Kruger is an independent analyst