After some hints of an approaching increase in Buy-to-Let Home Buying, when expressed as a percentage of total home buying, back in the 1st half of 2014, the 2nd half of last year saw things flatten out once more. So, by the 4th quarter FNB Estate Agent Survey, this form of home buying still remained in single-digit territory at 9% of total home buying, unchanged from the prior quarter. But while this may translate into constraints on growth in the supply of properties available for tenants to rent, there appear good reasons as to why demand for properties to rent by aspirant tenants may also be constrained, so it isn’t obvious that residential rental inflation will accelerate further in 2015.
BUY-TO-LET BUYING PERCENTAGE REMAINS UNCHANGED
The 4th quarter 2014 FNB Estate Agent Survey pointed to no further increase in the significance of buy-to-let buying in the market compared with the previous quarter.
By this we mean that, as a percentage of total buying, buy-to-let purchases are estimated by survey respondents to have remained unchanged on the 3rd quarter at 9%, and are slightly down on the 10% of the 2nd quarter of 2014.
This percentage remains mediocre in comparison to the estimated 25% back in the “crazy days” of early-2004 at the height of the property boom, continuing to suggest that the current residential market attitude remains relatively “sane and rational”. Besides widespread household financial constraints still a limiting factor when it comes to affording non-essential purchases such as 2nd properties, the rental market’s strengthening to date has been moderate at best, with a strong preference for buying primary homes, rather than renting, in these times of low interest rates.
With the buy-to-let percentage hovering at high single-digit levels, this should imply a gradual rise absolute volume of buy-to-let purchases as total residential transaction volumes rise. However, this overall volume growth rate appears moderate.
BUT AGENTS EXPECT STRONGER BUY-TO-LET BUYING IN THE NEAR TERM
Looking forward, however, the agents surveyed appear to be expecting mildly stronger levels of buy-to-let home buying in the near term.
In our survey, we ask them to state whether they expect buy-to-let demand to increase (which gets a rating of +1), stay the same (rated as zero) or decline (rates as -1).
The FNB Buy-to-let Market Confidence Indicator is the average of these different ratings, and the 4th quarter survey came out more positive than the previous one at 0.088, slightly higher than the revised 0.066 of the 3rd quarter (scale of 1 to -1). This is the 2nd successive quarter of increase in this index.
ARE AGENT EXPECTATIONS PLAUSIBLE? WE THINK “YES”
How plausible is this agents expectation that we could see some rise in the buy-to-let percentage in 2015? Well, one factor in 2015 which could support some improvement in this form of home buying is a significantly improved interest rate outlook. The start of mild interest rate hiking back early in 2014 was an event that may have led to the slight dip in agents’ buy-to-let expectation back earlier last year in the first place. Now, early in 2015, a sharp drop in global oil prices, a lesser drop in food prices, and a reasonably well-behaved Rand of late, have all contributed to a steadily declining CPI inflation rate, which leads us to the expectation that the SARB (Reserve Bank) will keep interest rates unchanged for the entire year.
Unchanged interest rates, a direction shift from last year’s hiking, could indeed be expected to be supportive of a rise in buy-to-let buying in what is currently a very positive “vibe” in the residential market. In addition, we see increasing signs of significantly stronger levels of new residential building completions coming our way in 2015, and it is often the “flats and townhouses” category of new developments that prove a sizeable target for buy-to-let investors.
WHAT DOES ALL OF THIS IMPLY FOR RENTAL MARKET PERFORMANCE? BETTER SUPPLY GROWTH, WEAKER DEMAND GROWTH
An expectation of possible strengthening in buy-to-let buying implies some increase in the supply of properties in the residential rental market.
Simultaneously, we expect some “downward pressure” on growth in demand for rental properties by aspirant tenants under our unchanged interest rate scenario. There are 2 drivers of this possible rental property demand growth suppression.
A 2015 with unchanged interest rates and solid house price growth would likely sustain strong level of 1st time home buying, to the detriment of new rental property demand growth.
Secondly, low interest rates and a declining Household Debt-to-Disposable Income Ratio continue to drive the percentage of sellers “selling in order to downscale due to financial pressure” downward, and this percentage reached a new multi-year low of 11% by the end of 2014. This source of home selling is an important driver of rental property demand, as a portion of these financially pressured sellers moves into the rental market. Not only do agents estimate a smaller percentage of financial pressure-related selling of late, but they also estimate that a high percentage of 63% of this seller group will buy a cheaper property while only 37% will rent. This is significantly different from the 51% estimate of those that would choose to rent back in 2011.
A year of sideways interest rate movement could be expected to keep the financial pressure-related selling percentage low, possibly declining even further given the financial relief coming from an expected sharp drop in CPI inflation, and the “buying down” percentage high relative to “renting down”.
SOFTER RENTAL INFLATION TO COME? NEGATIVE FOR LANDLORDS, POSITIVE FOR BORROWERS
The net expected result is some mild softening in residential rental inflation as the rental market loses some of its growth steam. This may be starting to happen already, if the latest CPI numbers of StatsSA are to be believed. In the December CPI – Rental numbers, we saw Actual Rental year-on-year inflation declining very slightly from a previous 5.2% to 5.05%, after a prior rise from 4.3% back in 2012 while Owner Equivalent rental inflation slowed from 4.9% to 4.7%.
One CPI inflation survey is obviously insufficient to draw conclusions from. However, our view of the world appears to suggest that 2015’s economic “fundamentals” are stacked in favour of the Residential Home Buying/Ownership Market, and a little more against the Rental Market.
We expect the inflation rate for the CPI for Actual Rentals to slow to nearer to 4.5% by the end of 2015.
This has 2 sides to it. Obviously, the prospect of limits to rental inflation is not exactly what existing landlords would want to hear. However, from an overall consumer price inflation, and thus a SARB interest rate decision, point of view, the fact that Actual and Owner Equivalent Rentals are a “big ticket item” in the overall CPI means that slower rental inflation would be good news. While one can’t expect rental inflation to drop like oil prices recently, a shift from “gradually rising” to “gradually declining” would be a further contributing factor to slower CPI inflation and a decreased likelihood of interest rate hikes in the near future.