Affordable Housing Institute : South Africa

I wrote this article for the current issue of ACCESSHousing (No. 5, January 2007) which is available on the FinMark Trust’s website.  I thought it might be a useful way to get back to a regular posting…

 

By now we should all know that the old saying “what you don’t know can’t hurt you” can’t be right.  To know whether a snake is poisonous is useful information when faced with a hissing serpent that is advancing on your ankle.  Information makes one better equipped to deal with the situation at hand, to respond appropriately, strategically, and competitively. 

An ongoing mission of the FinMark Trust has been explicitly this: to provide critical information into the sector in support of evidence-based policy making, transformation and innovation towards making financial markets work for the poor.  In the process of doing this, FinMark hopes that other players will see the benefit of this approach and integrate it into their systems and processes.  The information that we generate, through the FinScope[1] survey, as well as through other targeted research initiatives, is not an end in itself, but a tool that promotes effective policy change and stimulates competition and innovation on the part of providers. 

While there is increasing recognition that those people outside formal financial services provision collectively represent a substantial untapped market into which services can be provided on a sustainable basis (“the fortune at the bottom of the pyramid”[2]), there is a lack of credible information on what this market looks like, how it operates, what it wants.  This is also true in housing.

Key studies in the past few years[3] have addressed some of this gap, but in the process have raised far many more questions.   In an environment of (quite understandable) delivery impatience (last year was the worst year on record in subsidised housing delivery, and the delivery of ‘affordable’ stock is meeting only 14% of the estimated demand annually), there is a  danger that we will be complacent with what we know and overlook what is inexplicable.  And whether such ignorance obscures market opportunities or market realities, the outcome is something that today’s financial sector can ill afford.

These are some of the questions which need to be answered:

What does the ‘affordable market’ look like?  It is remarkable that this is something we don’t know.  With instruments and periodicals such as the ABSA House Price Index and Residential Property Perspective, the Standard Bank Residential Property Gauge, and the FNB Property Barometer, one would think that information on the supply, churn, and appreciation of the affordable housing market would be in abundance.  ABSA’s analysis[4] does have a category for “affordable housing” and defines this as houses between 40-79m² and costing less than R226 000.  However, while property prices in the higher income segment are analysed by province and by metro, ‘affordable housing’ statistics are only provided in national averages and no differentiation between ‘new’ and ‘existing’ is offered.  FNB’s Property Barometer[5] is a useful addition, basing its analysis on surveys with estate agents.  However, while it has recently included township-based estate agents in Gauteng, Cape Town and Durban, their comments are also generalised and neighbourhood specific dynamics are not reported. Standard Bank’s December edition[6] has an excellent section on Soweto, suggesting that there is indeed data to analyse – but what about the rest of the country?  Without this critical information, banks cannot know the risks of lending into the ‘affordable’ market – they will be unsure as to whether there is a sufficient secondary (resale) market to support their collateral risk – and this will dampen their enthusiasm.  As it is, FSC housing finance attention is on new build.  Perhaps with more information, secondary market churn could also be stimulated.

How do people turn money into house?  Current housing finance debates are dominated by a concern with three product categories: mortgage, pension-backed, and unsecured or micro loans.  There is a growing recognition of incremental housing as a delivery process, but how households actually do this, what makes it easier and what makes it more difficult, remains a mystery.  As a result of the mystery, a bias in favour of large scale developer-driven projects on open tracts of land persists, when opportunities for urban infill that is owner-driven might be more sustainable.[7]  The Financial Diaries data, explored briefly in this edition of ACCESShousing, shows that most households in the sample were perfectly capable of their own project management on their homes, with or without a programme to help those efforts.   This would seem to strengthen the case for housing micro loans, but how widespread are such skills?  And critically, from a finance perspective, how can lenders support the process so that the finished product is mortgageable?

How do people turn house into money?  Current information systems count the number of subsidised houses complete or under construction, and the number of subsidised beneficiaries (i.e. households with a title deed).  With the advent of government’s Breaking New Ground policy, the delivery of sustainable human settlements becomes an area of inquiry.  But sustainability is a long term prospect which arises as a result of a confluence of factors.  What a subsidy beneficiary does with their house is a critical indicator in this equation.  We need to know if people are upgrading their homes, and if so, with what sorts of finance.  This will give us a sense of the level of investment in housing and whether households see their homes as an asset – be it social, financial or productive.  It will also respond to the R2479 debate that says people must contribute to government’s investment – could investment be happening after the subsidy is allocated?  We need to know if subsidised houses are being sold – how, why and at what price.  If we don’t understand this we’ll never understand the role housing plays in the economic lives of low income people and whether through its housing subsidy, government is investing in economic growth as well as shelter.

What is actually happening in the FSC space?  The FSC update later in this edition tells of the frustration of the Financial Sector Charter Council with the data provided by lenders in respect of the housing loans that have been originated.  Clearly these are teething problems which the FSC process will iron out – the information requirements necessitate systems changes (i.e. to capture the relevant data) which are complicated all the more by additional requirements for compliance with Basel 2 and the National Credit Act.  The critical need for the information, however, does not go away.  Quite simply, we need to understand how low lenders can go[8] in extending housing finance into the target market.  An important segment of the target market to watch is those households earning just outside subsidy eligibility: if they can access neither subsidy nor loan, this becomes a critical issue of concern for government seeking to meet its Constitutional obligations in ensuring that all residents in South Africa have access to housing.

Are lending patterns changing in South Africa? On the 24^th of November last year, the draft regulations for the Home Loan and Mortgage Disclosure Act (HLMDA) of 2000 were released for public comment.[9]  In the six years since it was promulgated, the HLMDA has been effectively dormant without the regulations.  The issuing of draft regulations for comment was therefore a significant event.  Once approved, the regulations will provide the sector with much needed information on the nature, scale and scope of lending for housing purposes and this will assist in determining where the blockages are in the housing finance value chain.  While the Department of Housing considers the various comments it has received, it is hoped that it will also consider how the regulations, once accepted as final and implemented, support the development of a publicly available (and accessible) database.  Ideally, all information should be made publicly available to enable researchers to identify trends and to provide incumbent and potential lenders (and other financial service providers) with critical industry information. While such information may currently be regarded as proprietary and confidential, greater disclosure can materially improve competition in the industry and enhance market functioning particularly in under-served market segments.

For policy makers as well as product providers, the lack of information regarding the low income housing sector is a major barrier to effective engagement.  Without adequate market information, product providers find it difficult to devise innovative new products for the low income market, or to justify broad based roll-out.   For their part, policy makers struggle to define the problem of access with sufficient granularity to develop a targeted response.  And access to housing finance and the property market by the poor suffers as a result.  The danger of what we don’t know is not only that we’ll overlook a potentially big and vibrant market, but also that we’ll undermine the opportunity for the majority of our population to build their housing wealth.

I’m aware that I haven’t written for quite a while.  As an interim offering, here is a useful website I just happened upon.  Apparently, the Social Housing Foundation collects SA news clippings relating to social and other forms of low income housing.  Go to http://www.shf.org.za/newsroom/archive.html for regular updates.

There have been a few new mortgage products launched over the past couple weeks.  In the context of rapidly rising consumer debt and rapidly falling rates of house price growth, this could be construed as an effort by the financial sector to retain their customers and stretch the boom period for a little longer… it certainly is a response to an evolving market in which affordability is becoming an issue even for higher income earners. 
Interest-only mortgage
At the beginning of the month, SA Home Loans launched an “interest-only mortgage”, the first ever in South Africa.  Offered over the full 20-year term, the loan gives borrowers the option of paying only the interest on their home loan for up to 20 years.  SA Home Loans says that the product is “aimed at new home buyers struggling with a cash flow squeeze, as well as individuals who own businesses or earn commission and who have predictable annual earnings but uneven monthly income.”  A mortgage of R1 million (only just above average these days and at today’s exchange rate of $1 = R7.71, about $130 000), would ‘save’ the purchaser R1240 a month – that is, until they have to pay it back eventually, either through the sale of the property (in which case they would lose potential equity gains) or through some other form of capital payment.
Essentially the product is an indication of SA Home Loans’ confidence in the property market in South Africa.  They wouldn’t offer it if they suspected house prices were to suddenly drop.  It also is a response to the rising interest rate climate – and our exchange rate which as risen from R6 to the dollar to now almost R8 to the dollar.  Every day expenses are becoming more expensive, and so this product seeks to assist borrowers manage the crunch as the economy stabilises. 
The product has its critics.  ABSA Home Loans Managing Executive Gavin Opperman says “dig deeper and it becomes obvious there are a number of inherent risks especially in the current volatile environment and the slowing property market”.  SA Home Loans responds with an argument that suggests that the product is targeted at those who are highly financially literate, suggesting that the R1024 saving on a R1 million mortgage, for instance, could be better invested in equities in the short term as that market outperforms the property market.  Very de Soto-esque, it will have to be carefully managed.  And this is the comment from other banks who suggest the product could be useful to ‘mature’ consumers but could be a ‘debt-trap’ for ordinary consumer’.
Reverse-equity mortgage
A variation on the affordability theme is a reverse-equity mortgage which allows borrowers to draw on the equity value of their loan as a way of supplementing their incomes.  Just launched by two service providers, Nedbank (one of the big four SA banks) and Senior’s Finance (a company established by Alexander Forbes and Sentinel, a market leader in the provision of home equity release products in New Zealand, Australia and elsewhere), the product is targeted at senior citizens seeking to enhance their monthly budgets with the value of their homes. 
Nedbank’s new “Home Income Plan” is available to people aged between 65-85.  The loan size can be anywhere between 10-45% of the property value, depending on the age of the borrower and other factors including property market dynamics, but cannot be less than R250 000.  The property must be the borrower’s primary residence, and must be mortgage free.  The current interest rate is prime plus 1.95%.
Seniors’ Finance Home Equity Lifetime Provider is available to anyone over 65 who own mortgage-free homes worth more than R500 000.  The minimum loan size is R50 000, also at a rate of 1.95% plus prime.
Interestingly, the idea was raised in the Mail & Guardian in May, where UK, French and American examples are cited.  In that article, the failure of SA Banks to innovate was cited.  Meanwhile, it appears that Virgin Money is intending to enter the home loan market, also with a reverse equity product.  Virgin’s Richard Branson promises that “within two and a half years Virgin Money will have a greater range of products at highly competitive prices, than any other banking institute in South Africa.” 
The introduction of new products seeking to ameliorate loan affordability is certainly important.  However, I can’t help feeling disappointed that the major fanfare in innovation has been around a market largely served – and that its about enhancing access to cash flow rather than access to housing.  In sharing this dismay the other day, I was scolded by a banking colleague – he suggested that innovation where the risks are understood and easily managed is a necessary first step.  Once systems are in place, we can expect innovation to trickle down, as it were, to those with greater affordability challenges.  Let’s hope so - there are a lot of people in South Africa who cannot afford a home – but who might if they had access to the right product.

I am thrilled to copy out here an email I received yesterday.  The Johannesburg Housing Company has fundamentally altered Johannesburg’s inner city, introducing residential accommodation where for years there was none, and making a place for low-middle income people in the city.  I’m sure all of South Africa is just as delighted as I am.  Well done JHC.

 

 

 

 

PRESS RELEASE

 

JOHANNESBURG HOUSING COMPANY SCOOPS THE UN HABITAT AWARD

 

EMBARGOED UNTIL 26 SEPTEMBER 2006

 

The Johannesburg Housing Company (JHC) is delighted to announce that it is a recipient of the 2006 UN Habitat Award.

 

The UN Habitat Award is the longest standing and most prestigious international award for innovative and sustainable housing solutions.

 

Two awards are given annually to projects that provide practical and innovative solutions to current housing needs and problems.  The award of a trophy and £10,000 are presented at the annual United Nations global celebration of World Habitat Day.  This year the UN Habitat Celebrations will be held in Naples, Italy, on Monday 2nd October, 2006.   The other award winner this year is the Aga Khan Planning and Building Service, Pakistan - Building and Construction Improvement Programme.

 

The UN Habitat Awards were established in 1985 by the Building and Social Housing Foundation.  The awards recognise projects that provide practical and innovative solutions to current housing needs and problems.  The projects have to be able to be transferred or adapted for use as appropriate, view the term habitat from a broad perspective and bring other benefits as well such as energy or water saving, income generation, social inclusion, community and individual empowerment, capacity building or education.

 

National Minister of Housing, Lindiwe Sisulu said she was very proud of the JHC for getting the award. “This is the first time it has been awarded to a South African housing institution and is recognition, not only that JHC is a world-class institution, but of the pioneering role JHC has played in the regeneration of Johannesburg’s inner city over the past ten years.”

 

“In selecting JHC, UN Habitat has recognised the innovative solutions the company has applied to the problem of urban renewal, specifically within the battleground that is Johannesburg’s inner city. Since 1995, JHC’s board, staff, tenants, consultants, contractors and service providers have invested R250 million and developed 2700 homes in 21 buildings, adding a further 8% to the residential stock of Johannesburg’s inner city. Some 8000 men, women and children now call a JHC building their home in the city,” said Murphy Morobe, JHC’s chairperson.

 

City of Johannesburg Member of the Mayoral Committee responsible for the inner city, councillor Ruby Mathang hailed the award as “a recognition of JHC’s role in contributing to the turn around of the inner city”.  “Not only is JHC now one of the largest residential landlords in the inner city, but its contribution to the city coffers for rates and utilities stands out, not only for its size, but because what were once non-paying derelict properties, are now productive contributors to the city’s fiscus.  JHC’s Lake Success building in Hillbrow was the first building to be upgraded under the City of Johannesburg’s Better Buildings Programme and JHC remains the largest participant in the programme,” he said.

 

JHC’s eKhaya Neighbourhood Programme, which involves landlords getting together to clean up the precinct, has also been recognised as an international best practice.  Over two years, JHC has facilitated the programme which now embraces over 30 buildings in Pietersen Street, Hillbrow.  The programme has succeeded in bringing down crime, controlling grime and engaging local council departments to ensure proper management of the streets.  The programme has been recognised by the City of Johannesburg, and inspired a further three neighbourhood management initiatives in the Hillbrow/Berea/Joubert Park areas.

 

All JHC’s buildings are mixed income developments, thus avoiding the establishment of ghettos of poverty which internationally have been the site of major social disorder, most recently in riots in Paris.  Integrating income groups provides any development with social and financial stability.  Higher rents subsidise poorer residents, and social integration allows for good role models to influence social behaviour   This is particularly true of interaction between children, and JHC’s community development programmes are pioneering as a way of addressing the social disintegration so evident in Johannesburg’s urban transition.  Makhulong a Matala, JHC’s community development arm, runs 5 aftercare centres and libraries, supports four crèches and administers sports leagues for 14 building based soccer teams and 4 netball teams.

 

JHC has never in its 10-year history had arrears or vacancies levels above 5%, a true indication of consumers voting with their feet. At the end of the 10the financial year, JHC had a bad debt rate of 0.03% and a 1.54% vacancy rate.

 

“At 98% occupancy and 3% arrears, JHC’s achievements in these two key areas of sustainability are widely acknowledged. We have kept at around these levels throughout our 10-year existence. Our buildings are the envy of visitors from other social housing institutions both locally and from around the world.  We achieve high occupancy and low arrears because JHC tenants recognise the excellent value for money through our management and maintenance of our buildings.  All JHC buildings have an in-house caretaker, a 24-hour security service and a daily cleaning service.  In addition, there is a commitment to a 24- hour turn around on any maintenance complaint.   JHC also has a long-term asset preservation programme which deals with large expenditures such as lift refurbishment, waterproofing and painting,” said Dombolo Masilela, JHC’s Communications Officer.

 

JHC’s building management practices have also given a significant boost to emerging contractors.  Over 1000 people are indirectly employed in the various services JHC procures.  A number of black owned businesses in the cleaning, security and maintenance areas have grown substantially over the ten years they have had a relationship with the company.  This growth is not only in terms of revenue and jobs, but also in terms of the levels of service and skills required to meet JHC rigorous standards.

 

An important feature of JHC’s method of operating has been the constant level of innovation in architectural design and construction management.  Excellent design and planning are fundamental to building healthy communities.  JHC has collaborated and consulted with both local and international companies but used only local design and planning firms. Prior to building or renovating, the company runs workshops to discuss the building work. Critical evaluation has been done on projects by international consultants from Singapore, England, Belgium, France, the United States and Canada.  Indeed JHC runs exchange programmes with similar social housing institutions in both advanced and developing countries, and many JHC staff at all levels have experienced their first overseas trip as part of these exchanges

 

Focus groups of tenants, building managers and service providers are brought in before renovations or new construction to consider the design of the new apartments. The result has been larger internal spaces, more robust materials, higher-quality flooring and external face-brick construction and balconies. Experts have commented that JHC developments are equal to what is being provided in more expensive locations in Johannesburg’s northern suburbs.

 

JHC has developed a number of initiatives to reduce energy consumption benefiting both tenants and the environment.  These include geyser blankets to improve geyser insulation; ripple relay devices which turn off the geyser driving peak city demand periods thereby saving tenants peak electricity rates; and load-shedding devices which turn off the geyser when the stove is turned on.  An important pilot project is the solar energy system has been installed at Smitshof which has 118 apartments.  This is a first for the residential housing sector. The solar system provides all the energy that is required to heat the water which is stored in insulated tanks. Other measures that are used in JHC buildings include the use of energy-efficient light bulbs and day-night sensors which turn off various lights in the day time.

 

Breaking the financial red line in the inner city must count as one of JHC’s major contributions to the turn around of Johannesburg’s inner city.  In mid-2000 JHC made a significant breakthrough in securing an R11 million loan from ABSA on the back of a commitment from New York bankers, JP Morgan Chase, to subsidise the interest on a formal South African bank loan. USAid also offered a guarantee for the commercial loan. This was the first commercial loan granted to a social housing organisation in South Africa since the banking sector had redlined the CBD in the 90’s.  This was followed in 2003 by both debt and equity investments by commercial institutions into the pioneering Brickfields development in Newtown. Between them Absa Bank, the National Housing Finance Corporation, the Gauteng Partnership Fund, Anglo American Corporation, AngloGold Ashanti and ApexHi, as well as the Gauteng Department of Housing, invested a total of R121 million into the largest social housing complex in the country.

 

The JHC has always worked on a market-based demand policy. Extensive research is done before acquisitions of buildings are made. The JHC has always insisted that building costs are covered by rentals. Buildings have never been subsidised. Each unit pays an administration fee which covers the JHC overhead costs. Systems are put into each building whereby regular maintenance, inspections and reports are done. These lead to financial sustainability. Within 10 years, JHC has grown to a business that generates rental income of R55 million in June 2006 and closed the year with a net operating income of R18,9 million. Net reserves over the period have grown to R28,2 million.  JHC’s assets have grown from R1,5 million to R262 million over its eleven year existence.

 

OTHER JHC AWARDS

The JHC has received numerous awards for its projects.

* 1998  Most Innovative Inner City Project awarded by the Gauteng Department of Housing and Land Affairs.

* 2000 Best Project in a Best Construction Practice Workshop hosted by the Social Housing Foundation: Carr Gardens

* South African Institute of Architects ‘Architects Project Award’ for urban design: Elangeni.

* Top Twenty Award in Business Day’s Unlisted Company of the Year Awards.

* Gauteng Housing Developer of the Year award by the Gauteng Department of Housing and Land Affairs.

* 2003   Concrete Manufacturers’ Association Award for the best concrete and roof tiles- Tribunal Gardens.

* 2004  South African Property Owners Association (SAPOA) Best Social Development Award: Tribunal Gardens

* 2005   South African Property Owners’ Association Social Environment Category for excellence in property development: Smitshof

* 2006   UN Habitat Award for innovative and sustainable housing solutions

 

For more information please contact:

 

Lindi Malinga

Cell: 082 886 8193

Tel: (011) 241-6924

 

Please find background information about the JHC attached with this e-mail.

 

E-mail requests can be directed to juanita@jhc.co.za

 

Juanita Prinsloo
Corporate Affairs Officer
Johannesburg Housing Company
Direct             : +27 11 241-6924
Fax                  : +27 11 836-0469
E-mail             : Juanita@jhc.co.za
Website         : www.jhc.co.za

 

 

More on last week’s Department of Housing’s “pre-plenary” session regarding its social contract for rapid housing delivery. 

 

The Social Contract was signed by over forty delegates and housing sector representatives attending a 3-day symposium in Cape Town, last year September.  That meeting was followed by a plenary session in March of this year, at which six task teams were formed to address key problems undermining the goal of rapid housing delivery. This week’s pre-plenary meeting was convened to enable the six task teams to present their recommendations towards rapid housing delivery, for ratification at the upcoming annual plenary meeting, originally scheduled for 20 September 2006, but now postponed until sometime in November. 

 

A lot of wheels are spinning.  There have been many meetings, at which a variety of government, private sector and civil society representatives have been present.  People have flown from different parts of the country to convene in Johannesburg or Pretoria.  Is the Social Contract actually realising rapid housing delivery?

 

An overview of the six task teams, which together address (1) finance and economics; (2) land matters & legal; (3) product & delivery; (4) development planning; (5) supply chain; and (6) consumer education, capacity building and communication; suggests that the vast range of issues are being addressed. 

 

But after spending the day listening to their various presentations, and in the context of the time that has elapsed since the social contract was signed in the first place (12 months), I found it a challenge to be optimistic.  I can’t see anything rapid at all.  No concrete proposals were presented – only proposals for proposals, behind which a lot of work still needs to be done.  Most of what was reported has already been very clearly documented in the very good research undertaken by the Banking Association on Housing Supply and Functioning Markets – if anyone would care to read that (albeit lengthy) report.  I found myself wondering if the consultative style that has been such a success for South Africa as it has built its democracy and moved away from its apartheid past is becoming rather something of a liability.  In waiting for talks, neither the private sector nor the government have moved anywhere in the past 12 months, and yet much of what they reported last week was reported even a year ago… if they hadn’t been talking, they might have been delivering.

 

An interesting article in the weekend papers highlights some astonishing, depressing facts (many of which I’ve raised previously in these posts):

§         Only 19 000 houses are being built in the sub-R200 000 category – that is ‘affordable’ stock which a household earning between R1500 – R7500 per month could buy with Financial Sector Charter mortgage finance.  This is versus the estimated 132 000 such houses required annually to address the backlog in this segment of the market.

§         According to Statistics SA, building plans for only 18 668 houses of less than 80m² were passed in the first six months of this year.  This is a 9.9% drop from those passed in the same period last year.

§         The number of houses completed in this category dropped by 16.4% from last year’s 6-month figures, to 10 496 in the first six months of this year.

§         Proclaiming land and establishing new housing stands takes 30-59 months when it used to only take 12-18 months.  Building houses on these stands and transferring them to residents, now takes 19 months versus the five it used to take.

§         Meanwhile, land is becoming too expensive for the FSC target market.  Absa’s house price index reports that a stand that cost R46 000 in 2003 went up to an average R93 000 in June this year.

§         Building material costs are also rising more rapidly than inflation: cement prices have increased by 7.2%, timber by 12.5%, aggregate crushed stone by 9.5% and basic forms of aluminium by 29.6%.  Mittal Steel SA has raised steel prices by 12% (4 and then 8%) this year.

 

In my mind, a “social contract for rapid housing delivery” should be about improving these statistics – not seeing them become more dire. 

 

At the same time, the article reports that government’s planned housing expenditure is to double from R4,2 billion in 2003 to R9,5 billion in the 2008/09 financial year.  This raises many questions about government’s focus:  Surely this is a level of purchasing power that the Department of Housing could use to engage with the suppliers of housing and housing materials to reduce costs at least to inflation?  If bulk buying works in other circumstances, why can the Department of Housing’s budget not be used to mobilise bulk buying conditions for the country’s housing programme?  And why are they wasting their time talking rather than actually engaging in the problems identified a year ago, and fixing them? 

 

The problems facing housing delivery in South Africa do seem intractable.  And it is much easier to talk.  But this won’t get us anywhere.  Whether or not government actually engages in the issue won’t stop the market from moving along – pricing housing way out of the realm of what is possible for the majority of South Africans.

Township ideals?  Nuance is important

 

Last week the Department of Housing convened a “pre-plenary” session regarding its social contract for rapid housing delivery.  In the course of the proceedings, there was an interesting moment which I think sheds far more light than its authors would like on just what we’re building through our housing focus in South Africa…

 

The moment arose when the National Home Builders Registration Council presented a short video of 3-D computer-generated graphics of what an integrated settlement developed in line with the new Department of Housing policy (Breaking New Ground) would look like.  The video showed the inside and outside views of 2-bedroom, 3-bedroom and 5-storey walk-up units and how these three models would together be laid out in a newly established township.  As the viewer follows the camera through the various units, seeing stereotypical black families eating, playing, and working in units with high quality finishes, traditional ‘kwela’ music plays in the background.  

 

It’s all very motherhood-and-apple-pie in a South African sort of way, but with one problem.  The song that is playing in the background is Meadowlands, a song written in 1956 by Strike Vilakazi as a comment on the forced removal of Sophiatown’s residents to the newly created township of Meadowlands (now part of Soweto).  

 

   

 

The question in my mind was this – after 12 years of democracy and two major housing policy developments are we now aspiring to the apartheid settlements of the past?  Meadowlands was reviled as an entirely non-integrated community (it was created explicitly to destroy the integration of Sophiatown), with substandard, “matchbox” houses that had limited access to services and amenities.  I wonder if the makers of the video even noticed their slip – after all, the actual song has quite an upbeat tune.  It scares me that they didn’t. 

 

 

 

(For an interesting background to the song and the story of forced removals, visit http://www.writingstudio.co.za/page744.html, which includes a background to the play “Sophiatown” which featured the song).

 

Another website reports: “The destruction of Sophiatown and the removal of its people to Meadowlands and other new parts of Soweto provided (sub)texts for a number of such songs, the most famous of which was ‘Meadowlands’, composed in 1955 by Troubadour ‘talent scout’ Strike Vilakazi and sung unforgettably by songbird Nancy Jacobs. Relying on a direct, unannotated translation, the government believed the song supported their removals programme. Black record buyers, however, thought the opposite, and ‘Meadowlands’ became a protest anthem against the Sophiatown removals.”  Perhaps our government is not as transformed as we’d thought?  The NHBRC is a government-owned agency…

The 50 basis point increase in the interest rate announced by the Reserve Bank last week (the second in recent months) should not, on its own, make a huge dent in household affordability.  With prime now at 11,5%, up from 10,5% at the beginning of June the average monthly payment on a twenty-year, R200 000 mortgage (the top end of the Financial Sector Charter target) is about R136,00 (just under US$20 at current exchange rates).  Surely most households can afford this kind of pressure on their monthly incomes?

 

Not.

 

The problem is this: while the Reserve Bank rate impacts on mortgages, it also impacts on the cost of other finance – so while households have to pay another R136, or so, on their homeloan, they have to pay more for their other credit, as well as for food, clothing, transport and other essential items.  At the same time, the petrol price has also increased to an all time high (R7.04 per litre), which puts further pressure on the cost of essential items.  And, in the context of enhanced financial access (something we keep on saying we want, and a clear policy of government and supported wholeheartedly by the financial sector) a lot of families have accessed a lot of credit. 

 

The statement of the Monetary Policy Committee regarding the interest rate hike in June highlights this increased access to credit explicitly as a reason for the first rate increase:

 

These developments continue to be reflected in the growth of credit extension. Twelve-month growth in bank loans and advances extended to the private sector measured 23,1 per cent in April compared to 24,3 per cent in March, while asset-backed credit extended to the private sector continued to grow strongly at a year-on-year rate of 27,2 per cent in April, reflecting strong growth in mortgage advances. This has resulted in a further increase in consumer indebtedness. In the first quarter of 2006, the ratio of household debt to GDP had risen to approximately 68 per cent, compared to 65½ per cent the previous quarter. The cost of servicing the debt has remained fairly stable at around 7 per cent.

 

Another motivation behind the rate hike was the surprising increase in producer inflation, which rose to 7,5% year on year in June (up from 5.9% in May), its fastest pace in more than three years, and far above expectations.  Largely because of the weaker Rand and higher international oil prices, this meant that between May and June this year, prices increased by 3%.  Everything is becoming more expensive.

 

That is, except housing, which as a result of all of this, is finally cooling off.  Standard Bank, in their recently released Residential Property Gauge, offers an analysis that vaguely sounds like good news for first time homebuyers:

 

“The deterioration in households’ financial situations on the back of record-high indebtedness, an all time low savings rate, record high petrol prices and rising interest rates will constrain their ability to pay increasingly higher house prices.  At the same time, investors’ appetite for buy-to-let properties has declined following lower yields.  House price growth will therefore be constrained in the short term.”

 

So, while household affordability for credit is diminished, the pace at which house prices have been running away from household affordability is decreasing.

 

This would be fine in the context of a normal market – eventually the demand and supply capacity would even out and house prices would reflect the affordability of homeseekers – a buyers’ market so to speak.  But in the current South African context, the Financial Sector Charter has imposed a deadline of December 2008 by which time the banks have to have extended R42 billion worth of housing finance to moderate income households – those earning R1500 – R7500 (now R8200 given CPIX increases).  These are exactly the households that are getting all sorts of credit from all sorts of other sources: furniture stores, credit cards, store cards, and so on.   And in the absence of a working secondary (resale) property market at the bottom end, how will households cope if they can’t service their debt?

 

And how will the banks’ anxieties about meeting their targets (already banks are talking about taking on the delivery of housing themselves) interact with the decreasing capacity of their FSC target market to accept the credit they’re offering?

 

Is anyone nervous?

 

I did a double-take surfing the internet the other day.  Under the heading “Developers bailing out”, it was reported that a higher interest rate, “coupled with softer housing demand are likely to force a number of developers out of the market, with those active in the lower to middle end likely to best survive the expected downturn.”

 

My eyes nearly got whiplash – those in the lower to middle end likely to best SURVIVE?  I read the article a second time. 

 

The normal story is that the constraints inherent in the lower to middle end of the market, coupled with low margins, are a serious disincentive to developers – such that the Banking Association reported late last year that there is a shortage of 625 000 ‘affordable’ houses (those costing less than R200 000) in South Africa.  Current supply of affordable housing is about 17 000 units a year, compared with the 132 000 needed to reduce the shortage by only 60% in five years.  The banks are anxious about the shortage because they’ve committed themselves to providing R42 billion worth of housing finance to low-moderate income households by the end of 2008.  If those households have nothing to buy, they won’t demand loans and the banks won’t meet their targets.

 

An analysis I did with colleagues earlier this year for the City of Johannesburg demonstrated the skewed housing delivery patterns that persist notwithstanding the distribution of household affordability for housing.  The table below shows the number of units delivered per type in Johannesburg in 2004, versus the percentage of the population for whom such housing was affordable.  While the population is clearly skewed towards the bottom end of the income pyramid, delivery is skewed towards the top end – the explanation being that higher end properties afford developers a wider margin. 

 

Monthly household Income category	% population (Johannesburg)		Housing type affordability (indicative)	Number delivered in 2004	% of total delivery
>R10 001	15%	15%	Mortgage >80m² Sectional title	6,217	36%
R7001-R10000	5%	18%	Mortgage <80m² Social housing	9,594	56%
R5001-R7000	6%
R3501-R5000	7%
R2501-R3500	9%	68%	Subsidised housing (RDP)	1,436	8%
R1501-R2500	10%
R0-R1501	49%
Total	100%			17,247	100%

 

On this basis, it stands to reason that demand is waning at the top end – developers are running out of a market to sell to.  Speaking at the Rode Property Conference reported on in the news article, Dean Yeadon, MD of residential developer 2tribes, said that while it would have taken only one week to sell all the units in a new, mid-priced sectional title development a year ago, it could now take six to nine months to achieve that.

 

Given this, Yeadon said that “the best opportunities for developers were now at the lower middle end of the sectional title market, R300 000 – R600 000 …”.  Certainly, in an environment where the average house price is R792 627 in the second quarter of 2006 – up from R773 225 in the first quarter 2006 (according to ABSA), it is reasonable to suspect that there will be demand lower down.  But here, I saw what I was expecting… the “lower” market starts at R300 000, already outside the Financial Sector Charter range of sub R200 000 houses, and really only affordable at current rates to households earning at the very least, R9000 per month (which in Johannesburg at least comprise only just over 15% of the population).

 

If the supply shortage lower down the income pyramid is about margins, then the waning demand at the top – and the longer timeframes for selling of stock – bode well for an increased focus down the pyramid.  This (very gradual) normalisation of the supply market in line with the affordability distribution of the demand side presents local authorities seeking to stimulate housing delivery in the affordable market (are there any with such a goal, or are they all focusing on subsidised housing delivery?) a significant opportunity, especially given the Financial Sector Charter-driven availability of end user finance.  The Banking Association’s research into housing supply and functioning markets found that the shortage of stock “reflects a range of factors… zoning and getting approvals for new developments can take up to three years, and that raises holding costs for developers and ultimately the cost of the house for the buyer.  Also there is a shortage of serviced sites” (reported in the Business Day).  These are specifically local authority-driven activities.  If municipalities were to address the stumbling blocks in the housing delivery process, NOT for the high end properties which yield a happy margin anyway, but rather for the subsidised AND ‘affordable’ (just out of the subsidy eligibility range) market, developers looking for opportunities in the residential development space might actually bite and forget the joys of sectional title Tuscan villas that have characterised their appetite in the past.  Certainly this is the direction the banks themselves are looking, as they move into the development side to create the stock that they need to have available if they are to meet their FSC targets.  But their efforts in this regard will not be sustained if it continues to be as difficult as it has been.

 

As the market shifts towards the demand side, it will be increasingly important for local authorities to play their part and not stand in the way.

Here’s the last of the four “update” posts to cover the period while I was away.  After yesterday’s revelation that the supply of new housing stock is limited and capacity to accelerate the rate of delivery appears very limited, the resale market seems to be the only option.  Unfortunately, however, the secondary (resale) market will not offer salvation on its own.  Affordable housing stock is in short supply all round, whether new build or existing.

 

Recent press reports have highlighted a slow down in South Africa’s runaway property price index.  While frustrating for those who have just entered the market as investors with the intention of making the 30%+ annual returns enjoyed by some in past years, this is welcome news for first time homebuyers. 

 

In part, the slow down has been due to a sobering market that has been struggling the afford the higher and higher property prices.  The recent interest rate hike, and the threat of more hikes this year, is also contributing to a declining rate of house price growth.  FNB property economist John Loos expects that house price inflation will bottom out at an average rate of 8,4% next year, considerably down from its 35% peak in September 2004.

 

This is at the top end of the market.  At the lower end, reports are that the market continues to flourish.  Properties costing less than R600 000 (below the national average property price of about R798 000) reportedly find a buyer quickly and can be resold in a year or two at a 15-20% profit.  In many instances, however, this is an investor seeking to participate in the ‘buy-to-let’ market – a form of downward raiding that is driving prices up. 

 

Quite clearly evident in these reports, is that the property market is not uniform, and that the focus of the press on the high end is actually only relevant to a minority of the population.  The continued appreciation of the lower end of the market does mean that lower income earning property owners will benefit, but that property ownership will continue to be a significant challenge for those not yet in the market.

While (as noted in yesterday’s post) the capacity of the state machinery to facilitate housing delivery has been called to question, Rand Merchant Bank and First National Bank both announced new projects. 

 

RMB’s project involves a loan agreement with the Dutch Development Bank (FMO) in the Netherlands for 33 million Euros, and the French Development Agency (AFD) for 40 million Euros.  This funding will be directed towards the development of 15 000 homes and the extension of end user finance to over 1000 low income earners.  The Mail and Guardian reports that thirteen housing delivery projects have been approved, using a risk model that focuses on key risk-management factors such as home ownership education, community involvement, ‘rigorous quality control and the vetting of credit’.  Another 37 projects are in the pipeline.

 

In terms of RMB’s model, the 33 million Euro loan from FMO will focus on project funding while the 40 million Euro loan from AFD will provide risk underwriting for the bank so that it can extend its end user finance further down market.

 

FNB’s project involves a joint R800 million commercial property and housing finance deal to build over 3000 homes in a new Soweto suburb to be known as Glen Ridge (currently known as Protea Glen Ext 16).  This is on top of FNB’s Cosmo City project involving R368 million in the building of over 1000 affordable houses (all three bedroom, one bathroom, at an average cost of R168 000 each).  In total, the bank reports that they’ve invested R1.17 billion in affordable housing this year. 

 

Like the RMB approach, the FNB investment is both for property development (R300 million of the Glen Ridge project will be for this) and end user finance (R500 million at Glen Ridge). FNB also reports that they are involved with a non-profit micro finance organisation providing loans to low income earners in Khayelitsha, Cape Town, for home improvement purposes.

                                                                                          

This is all very exciting, and feeds quite critically into the need for affordable housing supply so banks can meet their Financial Sector Charter housing targets.  And yet, other news reports a slow down in the housing tender index.  Industry insight reports that “the slowdown in the supply of housing defelpoments started in the 1^st quarter of 2005 as an increasing number of developers struggled with obstacles such as the price and availiablity of land, legislative bottlenecks at municipal level, a slowdown in property sales off plan (causes by higher house prices that erode affordagbility) and skills shortages that delay project completions, to name but a few”.  At the same time, demand for smaller homes has accelerated from 62% of homes passed with smaller square meterage in 2005 to 81% in 2006).

 

An interesting article in the Business Day highlights an issue I’ve raised previously in this spot: that unlike the Financial Sector Charter which encourages service delivery to the poor, the Construction Charter focuses primarily on internal ownership and management arrangements of the construction industry.  The Construction Charter does not provide “an incentive for building contractors who build in [the low income] sector of the market.  Social infrastructure spend only gets scant mention in the corporate social investment chapter of the charter and counts only five points towards a total of 100 points on the scorecard, which is used to measure overall empowerment performance.”  When contractors can realise double digit profit margins in the development of large scale commercial projects, low cost housing project profit margins of 3% are not enough to encourage engagement in this sector. 

 

A forecasting director at the Bureau of Economic Research suggests that profit margins need to be pushed up – however, this would add to the cost of construction and undermine affordability.  Rather, it would seem a rethink of the Construction Charter would be in order.

 

Without this, the banks fears that they’ll have nothing to fund will certainly be realised.  Speaking to the Business Day, Banking Association housing task team head Jopie von Honschooten argued that the supply of land and new housing stock is “the biggest single stumbling block in the process of low cost housing”.  Standard bank concurs, and fears that while delivery is happening now, the consequence of the supply shortages will be felt from June of next year (2007).  To this, ABSA has suggested that the secondary (resale) market will be one of their focus areas.  This is perhaps also the FNB strategy in supporting the Khayelitsha micro lender in offering home improvement loans.

 

Tomorrow: Property market dynamics