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Local government and private sector must find market-based solutions to housing backlog
Despite efforts to close it, the so-called gap market for housing is growing.
The gap market describes the segment between indigent households – earning less than R3 500 monthly – that are eligible for fully subsidised state housing, and affluent households that access bond markets to purchase homes.
Just over a decade ago, the income ceiling on the gap market was defined as R15 000.
Today that ceiling has climbed towards R20 000.
This is the income level required to purchase new entry level homes at market prices, which are priced from R400 000.
In urban areas, where 80% of the population is situated, households above this income level comprise the most affluent 15%.
Indigent households make up the poorest 50%, according to the Helen Suzman Foundation.
This leaves 25%, or more than 5 million households, in the “missing middle”. Unable to afford to buy a home, they are forced to seek limited rental accommodation.
The gap market covers a wide range of productive potential.
At the lower end, households may be dependent on the income from one wage earner in an entry-level formal job – including security guards, shop assistants and office clerks.
At the upper end, lower middle-income households are often headed by civil servants, including teachers, policemen and junior managers.
Disposable income is very limited in the lower gap market, spanning a household income range from R3 500 to R7 500, but less so in the upper gap market, earning from R7 500 to R15 000.
Housing budgets comprise 25% to 30% of household income, or R2 250 to R4 500, for the upper gap segment.
Rental housing is vital to healthy urban property markets as it enables upwardly mobile individuals to be close to economic opportunity while they gain tertiary qualifications, build careers and grow their networks.
But ownership is critical to the accumulation of wealth over the long term.
Lightstone Property indices reveal that residential properties below R250 000 have consistently outperformed other residential segments since 2011, with healthy annual growth in a range of 7% to 15% attributed to immense pent-up demand and constrained supply.
For many emerging households, it is becoming increasingly difficult to gain a foothold on the housing ladder.
In 2017, fewer than 7 000 borrowers with incomes up to R15 000 received mortgages, accounting for less than 5% of total new mortgages.
A decade ago, they received more than 20% of new mortgages, according to National Credit Regulator data.
Around the world, access to mortgages has played a central role in enabling widespread home ownership.
Accordingly, deteriorating eligibility reinforces patterns of inequality. This in turn undermines longer-term urban spatial integration efforts and equal access to wealth.
Inadequate borrower affordability and creditworthiness are flagged as the main reasons for high bank mortgage decline rates in the affordable segment.
The sandwich generation, middle-aged income earners caring for two generations of dependants, is particularly at risk, with income growth failing to keep pace with expenditure.
Over the past decade, the price of new housing has risen more rapidly than household income, amid weak economic growth, so eroding affordability.
Above-inflation escalation in house prices has been driven by land inputs: suitable vacant land and bulk infrastructure to service it, plus the necessary development rights from local government.
Developers are finding it more difficult to contain these costs, citing municipal process delays and infrastructure expansion budget constraints, as towns and cities swell with the ranks of an urbanising population.
Consequences include higher price points and slowing delivery, to the detriment of emerging households.
Creditworthiness is traditionally measured by credit scores compiled by credit bureaus, which correlate positively with total credit facility granted per individual, utilisation of credit facility and demonstrated ability to service obligations.
Excessive use of expensive, unsecured credit has contributed to credit impairments for half of South Africa’s credit-active population, reducing eligibility for long-term loans like mortgages. Consumer education and financial literacy are central to changing this outcome.
Yet these scores may be imperfect measures of creditworthiness, acting as a barrier to credit access for emerging households.
Individuals who are not highly credit-active, or who choose not to use their credit facilities, may – perversely – have lower scores than those who are highly indebted.
Earlier this year, Transunion revealed that use of alternative and trended data identified 3 million “thin file” consumers who were potentially creditworthy: an increase of 10% in the credit-active population.
Shrinking mortgage access is highly visible in the gap market, and it is also declining in real terms for the affluent segment.
In 2017, R150 billion of mortgage finance was granted, compared with R143 billion in 2008 – an increase of just 5% over a decade.
Once inflation is accounted for, a real decline of more than 30% in mortgage advances has taken place.
Apparently, tightening consumer credit and banking regulation (National Credit Act and Basel III, respectively), property losses during the financial crisis, and persistently sluggish economic conditions have dampened mortgage lender appetite.
Can emerging households make home ownership a reality?
In the short term, solutions lie in consumer finance. First-time homeowners, who do not qualify for mortgages through the banks or SA Home Loans, can apply for the Finance Linked Individual Subsidy, which provides deposit assistance of up to R121 626 to bring down monthly instalments and so relieve financial pressure.
The mortgage product landscape is slowly shifting to increase affordability.
Housing Investment Partners offers an instalment profile matched to income growth, ensuring monthly payments do not exceed 25% of income, while SA Home Loans offers tailored solutions to government employees, which usually benefit from housing allowances.
Other upper gap market households are choosing personal loans.
In the medium to long term, a greater spectrum of housing product is needed, with improvements in local government by-laws, processes and infrastructure delivery required to boost growth in stock.
The most popular affordable housing product is currently a 40m² two-bedroom, one-bathroom unit, suitable for families.
Yet close to a third of urban households are single people, who may be willing to purchase more compact units if the location and price points are attractive.
The private sector and local government will need to collaborate more effectively across the housing delivery value chain if market-based solutions to the housing backlog are to be found.
Sager is the founding director of Consulting for Sustainable Solutions
