Can more houses fix Cape Town’s backlog?

2019-03-01T13:51:34+00:00March 1st, 2019|Features|

Affordable housing is seen as one of the world’s predominant concerns at the moment, with every government grappling with the problem in some way; Cape Town’s situation is no different.

By Warren Robertson

The affordable housing sector backlog can be addressed as long as it is approached carefully and in the correct way, especially by government and financial institutions, says Kecia Rust, executive director and founder of the Centre for Affordable Housing Finance in Africa (CAHF).

Increasingly world governments are applying policies based on the belief that to provide genuinely affordable homes, the solution is to keep on building new houses. In a way they are right, but many economists say there is still a lot that needs to be done in addition to this.

In Europe and America, new financing options are met with new technologies to build homes that are more affordable, which in turn are met with rent controls and ceilings on developer house prices or other social interventions; but none of this seems to make a genuine impact on the supply of homes.

The international situation is clearly reflected in Cape Town where conventional wisdom holds that the lack of affordable housing in the city centre is simply a matter of supply and demand – houses are expensive and people are homeless, because there is more demand than there is a supply of homes for them. We’re not building enough houses, so house prices have rocketed and this in turn has taken home ownership out of reach for growing numbers of young or disadvantaged people in the city.

More houses can’t fix Cape Town’s housing crisis alone. Image: Pixabay.

More houses can’t fix Cape Town’s housing crisis alone. Image: Pixabay.

According to the Mail & Guardian, ‘Activists have been pressuring the City of Cape Town to begin developing affordable housing urgently to facilitate community integration and to alleviate evictions and homelessness in the city.’ Their hope is that by increasing the number of available homes demand will decrease, and as an extension house prices in the area will decrease too.

However, this is not so says Josh Ryan-Collins, author of Why Can’t You Afford A Home?
“Much of the reason why policymakers have failed to tackle the ‘housing crisis’ is because they have not grasped that land is fundamentally different to other economic inputs,” Ryan-Collins argues. “Land is immobile, irreproducible and appreciates in value over time.”

According to Collins the fact that housing costs are higher in Cape Town than normal people can reasonably afford (those who have normal jobs), needs to be understood primarily as a product of the banking system, not a function of construction volumes and represents a market failure, not a supply / demand imbalance.
Director of Prime Policy Research in Macroeconomics and fellow of the New Economics Foundation in the UK, Ann Pettifor agrees.

“Property is a physical, low-risk asset against which both homeowners and financiers can borrow, quickly creating new money,” she explains adding that the more people who see property as an attractive investment, and the more money that is poured into property, the more the prices will climb.

“It’s speculation in the property market that is fuelling stratospheric house price rises, not shortage of supply and speculators are convinced that prices will continue to rise for ever,” she says.

Pettifor says international studies show that in prime locations such as Vancouver, London and Cape Town, increases in housing supply and a contraction of demand thanks to a fall in the number of households, does not dampen house prices.

“At last count there were 28 million dwellings in the UK, but only a predicted 27.7 million households,” she says explaining that there should be more than enough supply – yet house prices continue to spiral upward.

“Similarly, in Ireland more than 90 000 homes were built in a country of just four million people in 2006 and yet prices continued to rise by a whopping 11% that year,” she says.

“Land is unusual in economic terms, in that it exists in fixed quantity; increased lending against it serves, therefore, only to drive up its value,” explains Ryan-Collins.
As speculators invest, so the prices spiral making homes increasingly unaffordable for the average person on the street. But, Pettifor explains, there is a second, dangerous element to people investing in property.

“Investing in business supports capital investment and wages, fuelling growth, while money which is channelled towards speculative property investments starves the real economy of the investment it needs to improve productivity and boost people’s wages – further making homes less affordable,” she says.

So, the key to making housing more affordable in Cape Town may not be to build more homes but to instead stop the flow of cash flooding into expensive areas. Build more without doing this, Pettifor says, and prices won’t fall as the market will simply absorb that extra money and prices will continue a sharp upward trend.

New York tried and failed to implement rent control. Image: Pixabay.

New York tried and failed to implement rent control. Image: Pixabay.

In an attempt to stop this seemingly relentless upward price trend, cities like New York have instituted rent controls in which landlords are forbidden to charge high rents and price ceilings are imposed where developers are required to sell homes at a set low price to keep them within an affordable bracket. According to professor of economics and finance at the University of Michigan’s Flint campus, Mark J Perry, these methods have never worked and instead make scarcity worse.

Perry explains that rent control has increased demand in the city where it is instituted saying, “Who wouldn’t want to live in New York City in a USD600-a-month apartment?” He adds that as a move it can also remove rental housing from the market as people move to turn their properties into businesses, warehouses or anything that won’t trigger rent controls.

“Meanwhile, price ceilings reduce the supply because they decrease the incentive to build,” Perry says.

According to Pettifor the best way to stop the cycle of upward price trends is through the tax system.

“First for consideration should be a property speculation tax (PST), as in Germany. This could be used to levy punitive rates on speculators, or those who own second homes and empty properties, encouraging them to invest their cash elsewhere in the economy,” she explains. Alternatively, incentives (or tax breaks) could be offered for investing in local business.

Limiting the incentive to invest in property means that instead of investing in a second home, the wealthy will choose to put their money into business, boosting the economy, raising wages and lowering both the demand for houses and the rate at which property increases in value, therefore making homes more affordable for first-time buyers.

Pettifor’s other suggestion is to limit foreign investment in property. Back in 2017 Stuart Chait, executive chairman for Land Equity Group was quoted as saying that, “More than one third of our recent [property] sales have been to foreign investors from the UK, Switzerland, Germany, Netherlands, France and Italy which are now focusing heavily on the Cape.”

Similarly a report by Lightstone, released in August 2018, states that South Africa shows an increase of 42% in foreign property ownership in January 2018 compared to the same period in 2017.

These inflows of cash from countries with far stronger currencies are significant drivers behind the booming Cape Town property market.
Limiting this investment could be achieved by heavily taxing capital gains on property for foreign investors or, even as Pettifor suggests, through a Tobin tax on global financial transactions.

While it is clear that there is a desperate need for more affordable homes in Cape Town and throughout the rest of the country, South Africa is also going to need to pay attention to its foreign counterparts for solutions if it is ever going to solve the housing backlog.