Landlords, home owners squeezed
UTILITIES HIKE: EXPECT MORE THAN WHAT’S ON CARDS
Electricity prices up 3.5 times faster than inflation since 2008; municipal rates and other utilities nearly double CPI.
The cumulative inflation rate in electricity over the past decade, as measured by the consumer price index (CPI), is a “massive” 274.45%, according to FNB Commercial Property Finance property sector strategist John Loos’ new report.
Loos starts this measurement at the first quarter of 2008, “about the time where the Eskom Crisis first gathered steam”. Over the decade, the increase in municipal rates and non-electricity utilities (ie. water, sewerage, refuse removal) was 147.16%.
These cumulative inflation rates are well-above headline CPI, “which inflated by 79.55%”. Electricity prices are up 3.5 times faster than inflation since 2008, with municipal rates and other utilities up nearly twice that of CPI.
The National Energy Regulator of SA’s recent decision to allow a further above-inflation hike of 9.4% for 2019 doesn’t “appear too harsh in isolation”, says Loos, but “one has to evaluate the trend of tariff hikes well in excess of CPI inflation over more than a decade, which has significantly altered property operating costs and thus property affordability”.
PowerOptimal CEO Sean Moolman’s calculation, starting at 1988, shows just how rapidly electricity prices have increased since 2008 (see figure 1).
On the residential property front, these sharply-rising administered tariffs “have long since become a housing-related affordability challenge,” argues Loos. FNB calculates an electricity/per-capita-income ratio index starting in 2008 by using the CPI for electricity. “It shows that the electricity tariff increases applied to consumers have far outstripped per capita income growth, with this index increasing by a massive 92.15% from 2008”.
Loos says this “provides a strong incentive” for households to lower electricity consumption or cut broader operating home costs, e.g. by buying a smaller home with fewer ‘frills’ like swimming pools, to have more energy-efficient homes or use alternative energy sources.
Unsurprisingly, “building statistics show an increasing portion of building activity being flats and townhouses, much of this assumed to be sectional title, as opposed to free-standing houses, the former being more land efficient and often more economical to maintain.”
Over time, he says “sharply-rising electricity costs also ‘crowd out’ disposable income, some of which would otherwise be aimed at funding property purchases”.
For landlords, electricity usage is generally recovered from tenants, but most other utility charges and rates are not. In sectional title schemes, rapidly-rising levies aren’t either.
With rental inflation far more moderate, landlords are having to absorb much of this inflation. Tax practitioners suggest most ‘buy to let’ residential properties are actually loss-making.
Loos says homeowners can expect “more of the same” if one looks at high electricity cost inflation over the past decade. This will continue driving the longerterm trend towards building more land/operating cost-effective flats and townhouses relative to the number of free-standing homes, he says.