Rent deposit too high for many people
This limits physical and economic mobility — but ‘rental insurance’ could provide a neat solution
Thato* is very much the centre of her mother’s discussions with her friends. Her mother scarcely misses an opportunity to share her child’s achievements with her church cellphone group. Thato is one of the many thousands of graduates who made the long trek from rural and peri-urban towns to the big city and successfully navigated the post-apartheid higher education system. Thato, like others, is now the pride and joy of her parents.
Burdened with student debt, she left campus and landed her first job. She was then confronted by a harsh spatial reality — home is too far from the workplace. She needed to either find a place to live that was near the office or face the prospect of spending a larger portion of her monthly pay and time commuting.
According to some reports, we are living in a “renter’s market” because low occupancies and increasing interest rates have led to rental price growth being muted. One might think that Thato would be spoilt for choice. Alas, while she may be able to pay the R4 800 rent required every month, she does not have enough for a one- or two-month upfront deposit. Her only options, it seems, may be her mother’s savings group or a mashonisa (money lender) who may trip up the start of her career with prohibitively high interest payments.
Thato is not alone in facing this dilemma. She joins many South Africans who cannot afford a rental deposit at a moment’s notice. This presents a “market failure” for tenants and landlords alike. To understand the scope of the issue, consider how many South Africans are able to save, because the ability to accumulate savings is reflective of being able to afford a rental deposit.
Figure 1 shows how many South Africans managed to save any money at all over a given year, disaggregated by income quintile. Put simply, we take the whole income distribution across all income levels and split it into five segments from low income earners through to higher income earners. For each income group, we can see the proportion of South Africans who are able to save.
It is immediately apparent that barely any of the poorest South Africans can save at all and although it does appear that those in the upper income categories are saving at higher rates, it still amounts to only 60% of South Africans being able to save at all.
The implications are dire. If 40% of South Africans cannot save, it means nearly half of households have no safety net in instances of unforeseen shocks or stresses to their income such as retrenchment or the death of a breadwinner. It also means many cannot afford a rental deposit at a month’s notice.
The picture does not look much better for the cohort of South Africans who are managing to save, because those who do save are saving very little. If we assume that most households spend 30% of their income on rent, we can work out what a deposit would amount to for each South African based on their income.
For example, if a household earns R12000 a month, then a one-month deposit would be R3 000 and a twomonth deposit would be R6 000. If the household saves 5% of their income every month. They would take five months to save up for a onemonth deposit and 10 months for a two-month deposit.
In Figures 2 and 3, this calculation is applied to all South Africans and we can see how long the average South African household would have to save to afford a one- or twomonth rental deposit respectively. We see that South Africans in the bottom three deciles can spend nearly half their yearly savings on a single month’s deposit or even up to a whole year of savings on a twomonth deposit.
The inability to pay for a rental deposit limits physical and economic mobility. If a work opportunity arises in a different location, most South Africans would need to take out a loan to meet any sort of deposit on a rental agreement.
Consider someone who lives in a neighbourhood that is not only far from where work opportunities are, but has limited or no educational, recreational and other productive opportunities, and add to that potential rising crime. Such an income earner would be restricted in their options of where to move because of an inability to afford a rental deposit.
A potential solution would be to increase the supply of low-cost and social housing in “good” neighbourhoods. Increased supply would put downward pressure on rental costs and consequently deposits. A key way in which this is achieved in developed and developing countries alike is by mandating that all future property developments include a social housing or low-cost housing component.
The Housing Act of 1997 empowers municipalities, as part of integrated development planning, to take “reasonable and necessary” steps to fasttrack the development of affordable housing. This legislation requires municipal councils to drive policies that give effect to this injunction in section 9(1)(f) of the Housing Act. This has occurred to some degree in the City of Johannesburg, where the 2019 “inclusionary housing policy” makes it mandatory for any development application in the city that has 20 units or more to ensure that 30% of the total units are for “inclusionary or affordable housing”. These inclusionary units for rental or ownership must be built on the same site as other “market units being provided”.
Unfortunately, there are other sociopolitical constraints that are hindering this approach. One social element is the Nimby factor — “not in my back yard” — where residents oppose the construction of low-cost or social housing near their more expensive units out of fear that it will reduce the value of property in their area or increase crime.
For example, in Sea Point, a wealthy mixed-use suburb in Cape Town, residents blocked the inclusion of low-cost housing in a new apartment building in 2019. Their arguments followed the classic Nimby canon, ranging from the height of the apartment ruining their views to not wanting low-income individuals in their area. Ultimately, the City of Cape Town sided with the wealthy Sea Point residents. This is not surprising, because municipalities have an incentive to prioritise economic actors who can provide predictable cash flows though rates, levies and service charges.
But even if we had social and low-cost housing mandates on new development, it would only serve to reduce the cost of renting and deposits, we would still need a solution to address those who are unable to save and cannot afford a deposit at all.
An alternative solution that circumvents the Nimby argument and helps those who cannot save at all would be alternative security deposits. The idea is simple: instead of paying a one- or two-month deposit at the start of a rental agreement, you would instead take out “rental insurance” that would protect the landlord against any damages. This could work in monthly instalments or a small upfront fee. You would not get this money back at the end of the rental agreement, but the total payment would be 10% to 20% of a month’s rent as opposed to 100% or 200%.
This has several benefits. It alleviates the security deposit constraint on housing choice, thus freeing up spending for more important things such as childcare, education and any other areas more important to social reproductive activities. Such an approach also removes any uncertainty about getting your deposit back at the end of the rental period. Property managers and landlords would have a higher chance of improving occupancies through an implicit lower cost of rentals and there would be far less of the administrative burden that comes with managing deposits.
Fin-tech start-ups such as Rent Easy are starting to fill the alternative security deposit gap but none appear to be operating at scale just yet. In the United States, some cities have enacted “renters’ choice” legislation, which mandates that landlords offer a range of alternative security deposit arrangements. These regulations have ensured billions of dollars of deposits that were previously sitting in escrow accounts can now be used at the discretion of tenants.
It is time South Africa got its own version of renters’ choice legislation. The Rental Housing Act only stipulates that landlords may ask for a security deposit, but does not mandate it. Amending this legislation to require alternative security deposits in lieu of one- or two-month deposits would not contradict existing legislation.
This, alongside inclusionary housing provisions in municipal development planning, may overcome the logjam confronted by tenants and landlords alike.
‘Renters’ choice’ legislation mandates that landlords offer a range of alternative security deposit arrangements