Consumer spending patterns changed significantly in the first 12 months of the pandemic. Not surprisingly, no category of consumer credit escaped the harsh lockdown in the second quarter of 2020, as jobs were lost and revenues slashed.
Short-term credit in this period took the hardest hit, falling to the lowest level on record at just 50.59% of credit accounts paid in ‘current’ terms, although these levels quickly recovered in the third quarter of 2020 from new to more than 70%.
Read: Tenant Lockdown Hangover Hits Buy-to-Rent Landlords
In a tight financial environment where income and jobs are at risk, credit facilities such as credit cards, store cards, and bank overdrafts become a critical line of credit for consumers. Since the start of the hard lockdown in the second quarter of 2020, consumers have reprioritized credit lines to move up the payment ranking with 74.19% of these deals classified as ‘current’ payment terms.
As many people continue to be forced to work from home, consumer spending has shifted to items such as hardware and furniture, which saw a 124% increase between January 2020 and January 2021, according to card transaction data. by FNB. Similarly, medical and pharmaceutical spending increased 118% and general retail spending increased 111%. Spending on groceries, automobiles, and clothing, on the other hand, remained fairly stable compared to this same period.
The industries that were the biggest losers were dining and entertainment (82% less), fuels and tolls (84% less) and tourism (50% less).
In the run-up to the pandemic, reputable consumers on credit bureaus were in decline, falling to 57.1% in 2019. Job losses and income vulnerability acted as a catalyst to boost customer service. vacation pay customer and rental relief across the industry. Ironically, the paid holidays implemented in 2020 actually improved the number of healthy consumers to 62.6%. However, these were only intended as short-term relief measures. By the first quarter of 2021, healthy consumers had once again started to fall to 61.8%.
The rent relief provided by residential owners in 2020 is reflected in the decline in the number of tenants who are more than three months past due. However, like consumer credit, rent relief was a short-term solution to help tenants who had lost some or all of their income. Once the movement restriction was lifted in May 2020, data from TPN reveals that tenant arrears skyrocketed in value to new registrations with 13% of tenants in arrears now more than six months behind in the rent. The challenge for landlords is that these tenants were still occupied despite being in arrears.
Although the performance of tenant payments has shown a steady improvement since the third quarter of 2020, there are indications that this improvement has now slowed down. Overall, the recovery of the residential rental market after the impact of the hard lockdown in the second quarter of 2020 has seemed to stagnate with the sector now characterized by declining demand, increasing vacancies and slower rents escalation. The FNB Commercial Property Brokers Survey Q1 Market Activity Report noted a perceived increase in activity in the top three commercial property sectors (industrial, retail, and office). However, despite this progress, activity levels have not yet returned to pre-pandemic levels.
TPN’s Residential Rental Monitor confirms this, revealing that residential rental tenants continue to scale down and the number of tenants in good standing from a payment performance perspective has yet to return to pre-Covid levels. TPN data for the first quarter of 2021 reveals that the worst performing tenant category from a payment performance perspective are those in the most affordable rental market. Two thirds of renters rent for less than R7,000 per month and one third of rents are in the price range of R4,500 to R7,000 per month.
Rents below R3,000 per month remain under pressure with only 65.73% of tenants in good standing. Approximately 17.76% of the tenants in this category cannot make contributions towards the payment of rent.
The rental category from R7,000 to R12,000 per month, on the other hand, showed a growth of 23.3% with 84.37% of tenants in good condition and only 4.86% of tenants unable to make any payment. This category clearly represents a sweet spot for homeowners.
In today’s environment, the increasing rate of long-term delinquent tenants, those who do not make rent payments for a minimum of 4 consecutive months, represents an increasing risk for landlords. Our experience shows that although tenants do not intentionally set out to be serial squatters, they can become criminals if their circumstances change unexpectedly. The challenge for homeowners in these circumstances is that mediation is often not a viable solution and leaves them no choice but to resort to legal action. However, taking the matter to court can be a lengthy and time-consuming process. Not only are courts required to consider a new eviction law based on state disaster regulations, but court dates are not readily available. Given the difficulty of evicting non-paying tenants, most landlords would rather endure a vacancy than a non-paying tenant.
Our data indicates that vacancy rates appear to have stabilized in the second quarter of 2021 at 13.1%, which represents a slight decrease from 13.31% in the first quarter. Rent increases are usually negative, with the exception of the lowest segment of the market, with rents of less than R3,000 per month.
TPN’s Residential Rental Market Strength Index for the second quarter of 2021 reflects the widespread sentiment that supply in the residential rental market exceeds demand, driven by tenants cohabiting to reduce costs.
There is no question that consumers remain cautious about how they spend their money as income remains under pressure. Despite the fact that some jobs returned to the market in the last quarter of 2020 and the first quarter of 2021, the reality is that unemployment remains at record levels. The question now will be whether the GDP growth of the first quarter of 2021 can be sustained.
Michelle Dickens, CEO of TPN.