Economic growth never recovered to the rates prior to the global financial crisis (GFC) in 2008/9, the stagnation of which appears to have been exacting a bigger toll on the poor over the last five years, says financial services provider First National Bank (FNB).

In its property insights brief published this week, FNB explains that, from 2012, a long run of stagnation was seen, and the impact of weak growth seen in more strongly rising poverty numbers. The estimated yearly growth in the number of people living below the upper poverty line reached 4.7% in 2016.

The upper poverty line, according to Statistics South Africa, is about R1 183 a month, as at 2018.

In addition, South Africa's Gini Coefficient, which is a key measure of income inequality, showed a decline from around 2001 to 2016, but income inequality may have begun a gradual rising trend from a 2016 low point, which FNB says may be showing up in the lower end of the residential market.

The slowly changing trends in poverty growth and rising income inequality, the likely consequence of some years of economic stagnation, appear to have become increasingly visible in the residential rental market from 2015 onward.

“We say this because, when viewing the main rental a month segments using tenant performance data, there has been a steady and noticeable widening in the gap between the lower rental/month segments and the middle-to-higher ones since around 2014/15.”

Focusing on the four main rental segments, as at the second quarter of 2014, the “Less than R3 000 a month rental segment" reached its post-GFC high, in terms of the percentage of tenants “in good standing” with landlords, of about 81.95%.

This was around three years after gross domestic product (GDP) growth hit its post-GFC peak in 2011, and the differential between this segment and the top performing "Between R7 000 a month and R12 000 a month segment" was less than six percentage points. The latter segment recording 87.6% of tenants in good standing.

From then on, however, as South Africa progressed further into the longest business cycle downturn in post-World War Two history, this high-low end gap became ever more pronounced, according to FNB, which says the two lowest rental per month segments having deteriorated the most noticeably.

By the final quarter of 2019, the "R3 000 a month segment" had fallen to 71.3% of tenants in good standing, over 15 percentage points below the 86.96% of the top performing “sweet spot” of the "Between R7 000 a month and R12 000 a month segment".

“We must acknowledge that over the past five years there would have been some inflation-related 'bracket creep' by lower-end tenants into higher segments, so the composition of the segments is changing gradually over time. But we nevertheless believe the widening performance differential between the low and high segments that is unfolding is more than just that.”

Further, FNB says there was some deterioration in the second-lowest rental-per-month segment too. From its post-GFC high of 88.1% tenants in good standing in the third quarter of 2011, where the "Between R3 000 a month and R7 000 a month rental segment" was the top performing segment, FNB has seen this segment’s tenant performance decline to 83.3%.

Although FNB says this is not a severe decline to date, the bank warns that it is a more significant decline than the upper two rental segments, and puts this segment below both of those in terms of tenant performance, 3.6 percentage points below the top performer.

What has also been noticed is a narrowing of the tenant performance gap between the highest of the four major rental segments, the "Between R12 000 a month and R25 000 a month segment" (currently in second place) and the "Between R7 000 a month and R12 000 a month segment".

Whereas the former segment’s percentage of tenants in good standing was 3.3 percentage points late in 2013, it had narrowed to 1.9 percentage points by the end of 2019. It therefore appears increasingly plausible that the "Between R12 000 a month and R25 000 a month segment" could become the outperformer at a stage, just going by the trends.

However, this could be in part owing to “sweet spot” tenants from the "Between R7 000 a month and R12 000 a month segment" gradually inflating into the next segment up.

In conclusion, FNB finds that it is plausible that the less skilled or lower income part of the labour force sees its employment and income opportunities recede to a greater degree than the highly skilled or higher income segment, during times of economic stagnation.

IHSMarkit data shows more rapid poverty growth in recent years than prior, as well as early signs of rising income inequality, following prior improvement in this regard.

All of this, in turn, may be increasing the residential rental market’s tenant performance differential by rental/month segment, the lower two major segments underperforming the higher two major rental segments by a widening margin.

This widening in the performance gap was the multi-year trend prior to Covid-19, and FNB says it is likely that the relative pressure of the deepening Covid-19 “will be greater at the lower end of the rental market where financial situations are already significantly more fragile than higher up”.