During the past 25 years, the South African Government has financed and transferred a staggering 1.88 million residential properties to qualifying beneficiaries as part of the national housing subsidy programme.
By Kecia Rust, executive director of the Centre for Affordable Housing Finance in Africa (CAHF)
Delivery of affordable housing over the past 25 years has had a profound effect on South Africa’s residential property market; today, the majority of residential properties (58%) fall in the ‘affordable’ category of properties that are valued below R600 000.
From the end of 2017, almost a third of all residential properties on the national deeds registry (1.88 million homes), were financed by the state as part of the Finance Linked Individual Subsidy Programme (FLISP), the national housing subsidy programme. Not surprisingly, this astonishing achievement has had a dramatic impact on the lives of the beneficiaries.
Still, South Africa’s housing sector faces three main problems:
- No growth in the mortgage market, with limited access for low income earners. While origination grew in real terms between 2010 and 2015, the nominal book value of bank mortgages remains below pre-global financial crisis levels in real terms. Critically, the contraction of the mortgage market has been especially acute for low income earners.
- Limited delivery of affordable, entry-market housing in both new and resale markets. In 2017 only 22 835 new units in the sub-R300 000 market were registered on the deeds registry (principally government subsidised stock). In part, this is a function of housing affordability as many buyers don’t qualify for sufficient mortgage finance to cover the purchase price and do not have sufficient equity to cover the difference.
- Poor realisation of asset value for government subsidy beneficiaries. While subsidy beneficiaries benefit from the physical shelter their home provides, their ability to realise the financial value of their housing asset is constrained for a number of reasons. In the lower value market (properties valued at less than R300 000), transactions are difficult to navigate, take longer than is financially feasible for the buyer and seller, create more risks and ultimately (as a proportion of the property value) cost more. As a result, sellers often pursue informal sales transactions and participation by mortgage lenders is limited.
Government’s FLISP offers a significant opportunity to address all three problems and promote a viable, integrated housing market that serves the needs of all South Africans and promotes growth in our economy. By applying the FLISP in support of the secondary market – including the resale of government subsidised housing stock – government can stimulate effective demand for new-build affordable housing by buyers with equity, while creating a new mortgage market niche and enhancing the asset value of government subsidised housing.
The potential is significant: of the estimated 1.88 million government subsidised houses on our national deeds registry, 951 850 are in the major metros. Of these, 847 292 are older than eight years making them eligible for resale. Each year 2.58% of residential properties transact. Applying this churn rate to eligible government subsidised stock in the major metros therefore suggests the potential for 21 860 new mortgage loans per year.
The potential sale of these 21 860 units creates both buyers and sellers: buyers could be households in the lower-gap market earning between R3 500 and R22 000 per month, who would otherwise be unable to afford to purchase a home. With the FLISP and a small mortgage loan, a person earning as little as R4 100 could afford to buy a R210 000 house. The seller of this unit then becomes a buyer with R210 000 in equity to buy the next home on the housing ladder and this means the loan to value ratio for that home would be much lower, reducing lending risk considerably. The potential sale of 21 860 units would therefore create effective demand and activity all the way up the property ladder.
The challenge is not just for government and the FLISP alone, for the market to work mortgage lenders need to explicitly engage with the potential of this RDP resale market with new products and services. At the same time transaction support is critically needed to enable smooth, efficient, legal resale transactions, ensuring adequate consumer protection and supporting the development of a formal resale market in existing, low-value neighbourhoods. It will be well worth the effort.