Rising rents lead to higher sales prices

When assessing the value growth potential of any residential property, it can be very helpful to examine the recent rental performances of homes in the area. In many cases, percentage-wise, the rental growth will initially exceed that of the sales price, but in these situations the sales price rises to catch up with the rentals.

A recent Rode Report would appear to contradict this statement. Rode said that in the latter half of 2013, growth in rental levels year-on-year was only 4% to 5%, i.e. below the prevailing interest rates, which some economists are now saying are likely to be above 6% this year and in 2015. However, rental agents throughout the group and in other agencies are able to show clients many precincts where the rents are rising at a far faster rate than the average quoted by Rode, i.e. by 8% year-on-year. What's more, this leads to greatly improved house prices.

The simple truth

The simple truth is that in new developments like River's Edge, River Song and The Rondebosch, sited in such high demand areas as the Cape Peninsula's Southern Suburbs, if and when a tenant moves out, the rent can usually be increased by at least 12%. If the unit is sold, it will often achieve an even higher markup on its original launch price. Furthermore, owners of other homes in the area will often find themselves able to sell for more than initially anticipated.

In the coming year, it is likely that the demand for rental property will increase as a result of increased interest rates and a growing percentage of the creditworthy population having imperfect credit records. These rental increases in the high demand areas will almost certainly lead to a big increase in sales prices.