Tenants, don’t let rental increases get you evicted
“Honey, should we stay in this house for at least one more year or do you want to move when our lease expires?”
“Let’s stay, please. I hate moving! We moved last year.”
“Okay, but the lease is increasing by another 10% if we stay on.”
“It’s fine. You’re getting a salary increase, aren’t you?”
Six months later…
“Danny, did you pay the rent?”
“No, I thought you did?”
“How am I supposed to pay the rent? All my money goes to the house, medical aid and Amanda’s school fees!”
“Well, all my money goes to food, the cars and our joint savings! I told you we should have moved. We can’t afford to live here. I knew that six months ago!”
“Well, if you worked harder you would have gotten that raise. It’s your fault we can’t afford to live here!”
Each day the headlines paint a picture of a country in crisis: our economy is not growing, a quarter of our working population remains unemployed and salaries are not keeping pace with inflation; on the flip side, property rates and utilities increase by double the rate of inflation, and the consumer sentiment in the country lacks confidence.
With many of these factors beyond the average consumer’s control, tenants firstly need to ensure they agree with the proposed contractual annual (or bi-annual) rental increase, and if they do, keep an eye on their own financial position at lease renewal time.
Tenants are aspirational: If their current leased property no longer meets their needs, they seek more expensive properties.
This is evidenced by PayProp’s Q3 Rental Index which states that “we know that almost a third of tenants rent for between R5,000 and R7,500 [per month]. We also know that the proportion of tenants in the higher brackets (R7,500 and higher) go up over time, while those in the lower rental brackets diminish”.
The index asks whether this shift is being driven by demand from tenants or rising rental prices.
“The common assumption is that tenants who rent more expensive properties have higher incomes and higher levels of financial sophistication, and for the most part, the facts bear this out,” the report reads. “When we consider average income per rent bracket, indeed we see that tenants who rent more expensive properties have higher incomes. Average credit measures tell a similar story – tenants who rent for more and have higher incomes also have better credit scores and lower debt-to-income ratios. A smaller percentage of these tenants are therefore high-risk clients.
“But this doesn’t mean tenants with higher incomes spend any less – quite the contrary. Such tenants tend to have more CPA accounts (day-to-day accounts like retail accounts and cellphone contracts) and higher debt repayments, but their debt as a percentage of income is lower. There is, however, one very interesting statistic in all of this: the percentage of income spent on rent tends to increase as income increases. Somehow, high earners spend disproportionately more on rent than lower-income earners.”
Keeping up with appearances and being aspirational are two factors at play here: The more a tenant earns, the higher the desire to display that fact.
“But higher levels of rent (and more CPA accounts) could mean these tenants are spending more money than necessary,” the report reads. “Can they afford it? Is their behaviour sustainable? From our analysis of the available data, it appears that tenants at the lower end of the more expensive rental bands (properties renting for R7,500 to R10,000) struggle to keep their heads above water. While there was no decrease in credit scores in the past year in any of the upper three rental brackets, there has been a noteworthy increase of almost 16% in the debt-to-income ratio in the R7,500 to R10,000 bracket. This is due to a high increase in debt repayments (13.6%), coupled with a decrease in nominal income over the same period (2.3%).
“The increase in debt-to-income ratio of the average tenant in this bracket, along with an above-average increase in the percentage of tenants with major delinquencies (up from 33.2% to 36.3% over the past year), indicate that these tenants are under pressure and their credit situation might deteriorate further if left unmanaged. It is worth mentioning that the above-R15,000 rental bracket has the lowest percentage of tenants with major delinquencies at 32.3%, but this number is up by almost a quarter from a year ago, when it was at 26.2%. The average debt-to-income ratio in that bracket also increased by 9%.”
Tenants, therefore, need to do the maths before resigning a lease renewal at an increased rental, or before signing a lease on a new property they can only realistically afford to pay for and live in for one year.