Rental escalations: why tenants can’t beat the system
I have a friend who moves to a new apartment every 12 months to avoid paying this escalation. When he first mentioned it, I blew it off as crazy talk: surely the cost and inconvenience of moving would outweigh any benefit of keeping your rental at the same level for as long as possible? And is this exercise even really possible: paying the same rental year in, year out in the same neighbourhood and enjoying similar or better amenities?
I own a small sectional title apartment but am currently renting in a different city due to work obligations. I’ve owned the apartment for five years and during that time interest rates have dropped and risen again (when I bought prime was 9% and today it’s 9.75%). The monthly bond amount today is not even 10% more than I was paying back in 2011.
If I was renting that property and applied a 10% annual rental escalation, I would be paying 62% more today than my original rent: R5,635 (compared to R3,500).
My friend’s point was that he would be paying that extra 10% for the next 12 months and hence the reason for opting to move before the escalation kicked in.
He is currently paying around R5,000, and with a 10% escalation (R500), by what month or year would he have paid the equivalent of his current rental in escalations? In his case, and anyone whose rental increase is 10%, the answer is 10 months. So by the end of his second year, he will have essentially paid his rental twice over with some change to spare.
But is moving every year in search of the same or slightly higher rental not a lot like chasing the proverbial pot at the end of the rainbow? FNB reports that average house price growth in 2015 peaked at 6%, down from 2014’s 7.1%; it expects to see even slower growth this year.
TPN, however, reports that national average rental escalations in Q3 2015 were as low as 5.1%, with the Northern Cape boasting 27.91% and Limpopo having to drop by -11.12%. Gauteng saw modest growth of 4.37%, the Western Cape 7.85% and KwaZulu-Natal 4.85%. TPN’s figures seem to suggest that average national rental escalations, which have dropped more than 4% since Q4 2013, will continue to slow this year as the economy struggles to grow.
External factors such as double-digit increases in electricity prices, refuse collection and sewage treatment, not to mention the rising cost of water recycling and distribution, will see landlords squeezed even tighter. An average 5% rental escalation will, unfortunately, not be sufficient to cover the homeowner’s costs.
So, even for tenants who live light and see their rental properties as places to merely sleep and wash will not nail down a rental that matches their current property – especially if they want to continue living in the same neighbourhood or estate. The fact is that supply and demand dynamics means some landlords will be able to set rental prices and escalations higher than the market average. Most landlords, however, won’t be successful in placing tenants if they set their prices higher than 5%, due to a host of external factors and a shortage of quality tenants.
I have to concede that in my friend’s case, he will at the very least be forced to pay 5% more in 12 months’ time and will still have to pay for moving costs, at least two months of rent upfront, and in some cases key and electricity deposits.
The only way he will still pay the same this year as he did last year, will be if he compromises on location, amenities, fittings and fixtures and the state of the property.