Buy-to-let still in the doldrums

Total property buying remained unchanged from the previous quarter, at its record low point of 7%

According to the FNB Estate Agent Survey for the 3RD quarter of 2010, buy-to-let buying expressed as a percentage of total property buying remained unchanged from the previous quarter, at its record low point of 7%

Along with this weak survey reading, agent confidence in the near term prospects for this segment of the property market deteriorated further in the quarter.

After some mildly encouraging signs a quarter ago that the fundamentals behind buy-to-let buying were starting to improve, more recently there are hints that progress has stalled। Agents pointed to a virtually unchanged average gross yield on rental properties of 8% in the 3rd quarter, which is insignificantly lower than the 7.9% of the previous quarter.

However, this comes after two preceding quarters of significant rise in average yield, and while it could be the lagged result of accelerating house price growth prior to mid-year, it would also appear that the rental market remains mediocre.

As at the final quarter of 2010, Rode's flat rental data showed a return to low positive year-onyear rental inflation, but the 1st quarter of 2010 had shown no improvement on that। CPI data, which records actual rental paid (i.e. the combination of the impact of market rentals and escalations), continues to show a declining trend in overall home rental inflation, with the July year-on-year growth rate being a weak 4.5%.

In the mean time, household sector indebtedness remains high, and 2nd quarter economic growth estimates confirm what the SARB Leading Indicator has been showing for some time, i।e. that economic growth has started to soften.

Slowing economic growth can place pressure on household disposable income growth, and thus on potential buy-to-let buying power

Some mildly positive news for the buy-to-let market has surfaced over the past quarter, however, from TPN, whose report on rental tenants has shown an improvement in the average percentage of tenants that are " in good standing" with their landlords. From 79% in the previous quarter, the percentage of total tenants on the TPN system that are in good standing regarding rental payments rose to 82% in the 2nd quarter, according to the latest TPN report.

This is further improvement in an upward trend spanning from the 1st quarter of 2009, at which time this percentage reached a lowly 71%. The improvement has arguably come largely as a result of a far lower interest rate environment since 2008, which can even assist rental tenants, who may have significant levels of debt elsewhere.

However, the improvement in the average performance of tenants has been insufficient to serve as a strong boost to the rental market to date, it would seem.

So, while capital growth on property is uninspiring to those would-be buy-to-let investors who focus more on that, yields are un-enticing for the investor focused on a rental income stream, and so the long wait for an improved buy-to-let market continues.

For the time being, though, many estate agents appear to have given up the wait in the sense that the survey shows a steady deterioration in their near term future expectations of buy-to-let buying.

In the FNB Estate Agent Survey, we ask agents for their expectations regarding the near term expectation for the buy-to-let market, i।e. do they expect strengthening (a rating of 1), weakening (a rating of -1) or unchanged demand (a rating of zero).

We combine their ratings into an index, which runs on a scale from 1 (most optimistic) to -1 (most pessimistic).

For 4 consecutive quarters, we have seen a steady decline in the FNB Buy-to-let Confidence Indicator, from a 3rd quarter 2009 revised high of 0.149 down to a 3rd quarter 2010 level of 0.014.