Last week’s group discussion lead by Ewald Kellerman, Head of First National Bank Home Loans around the buy to let market highlighted three major issues.
It brought greater understanding of the financing behind private property ownership, as it pertains to both landlords and tenants. Both which are subject to affordability as well as returns, amid volatile economic conditions, exacerbated by excessive consumer debt.
The FNB Home Loans Quarterly report utilises information from the FNB Estate Agents Survey to record the proportion of buyers buying to let nationally, over a ten year period. The report showed a total percentage of 25% buyers in this category in 2003, to have declined from 2004 down to just over 10% in 2007, having reached 8% by the end of 2012. This low rate of investment in residential property for buy-to-let purposes is driven by a variety of factors says Kellerman: “Assuming that more housing is needed for rental purposes, this lack of growth in supply could start creating a more lucrative opportunity for investors to enter the market in the near future.”
The proportion of buyers broken down into provinces currently shows an overlap in the combination of primary and holiday properties. Gauteng shows the lowest proportion of 6%, followed by the Western Cape at 8% with the highest proportion at 11% in Kwa-Zulu Natal.
High levels of returns derived from the buy-to-let market looked very different in 2007, when capital growth in property prices not only contributed a large portion of the total returns, it also exceeded lending rates. However, when looking at the longer term performance of the FNB House Price Index, in real terms the index is -19.2% down on last decade’s real price peak reached in November 2007, while in nominal (less inflation) terms, it is a mere 14.5% higher.
This dismal growth rate, says Kellerman decreases the attraction of residential investment. He says the lack of capital growth necessitates greater reliance on the rental income stream generated by landlords from their tenants. “While it may not attract the same level of investment, rental yields are a much more reliable form of income.” The reason he says is that modern landlords are more sophisticated in their approach, as they focus on buying an ‘income stream’ as opposed to merely betting on property price appreciation.
However, changeable and therefore unpredictable factors such as high consumer indebtedness of tenants can result in volatile income streams. Pressure on personal income relates to increased utility and tax rates and maintenance costs, impacting heavily on the financial well being of tenants. As a result, annual inflationary rental increases agreed to in long leases may not remain affordable to all tenants as originally agreed.
Tenant behaviour is seen in statistics of Rental Tenants in Good Standing, as illustrated in the Tenant Profile Network’s (TPN) 1st Quarter 2013. The report estimates that 84% are currently in good standing, (have not missed a payment), the same level as for 1st Quarter 2008, that dropped down to 71% in 2009, and is one percentage point up from the same period last year.
When assessing affordability when financing home loans for buy-to-let property, Kellerman said variables within rental incomes are considered by the bank.
Not taking into consideration average rental returns of holiday buy-to-lets that are affected by peaks and downturns, but rather a portion of the rental income only, is but one example of how home loan applicants as consumers of debt are protected.