South Africa has a developed housing finance sector. As the mortgage market does not yet meet the breadth of the population who might afford a mortgage, most households still finance their housing independently, with savings or non-mortgage credit.
The lowest recorded interest rate on a mortgage in South Africa is 10.5 percent, as of September 2016, and requires at least a 20 percent down payment. There are currently an estimated 1.79 million mortgages in the country, with the average mortgage size being US$ 62 986. The cheapest newly built house by a developer recorded by CAHF is US$ 24 788, which is for a 40 square metre unit. Cement prices are considerably lower than the continental average, at US$ 4.06 for a 50-kilogram bag.
With an urbanisation rate of 2.43 percent, demand for affordable housing will remain strong, both for rental and purchase. Housing microfinance will play an important role in increasing the supply of housing, and efforts to increase access should be undertaken as the current average microloan size is only US$ 1 358. Despite having the highest mortgage to GDP ratio in Africa, many South African households struggle to access housing finance. This is partly due to a high rate of household indebtedness combined with an insufficient supply of suitably affordable houses. Yet there are opportunities to expand access, particularly by stimulating the RDP resale market, which units are fully government-subsidised, and by supporting small-scale landlords. With a good macroeconomic environment, sound policy, better data and increased access to affordable credit, an enabled housing market can increasingly provide housing that the average household in South Africa can afford.
Find out more information on the housing finance sector of South Africa, including key stakeholders, important policies and housing affordability:
- Access to Finance
- Housing Affordability
- Housing Supply
- Property Markets
- Housing Policy and Regulations
- Housing Sector Opportunities
Each year, CAHF publishes its Housing Finance in Africa Yearbook. The profile above is from the 2016 edition, which has up-to-date profiles for 51 African countries.Download yearbook
South Africa is one of the largest economies in Africa, and at US$294.8billion in 2016, is classified as a middle-income country. South Africa has well-developed transportation, IT, and services infrastructure, legislation that supports private investment, a world-class financial sector and a well-diversified economy. The Johannesburg Stock Exchange was established during the gold rush in 1887, and with a market capitalisation of US$0.9 trillion at the end of 2016, up 30.3% since 2015, it was the third fastest growing stock exchange by market cap in 2016. It is the 19th largest stock exchange in the world, and the largest in Africa. Historically dominated by mining, the economy is now led by the services sector. Since the 1994 democratic elections, the country has prioritised an extensive social security programme providing social grants and considerable public infrastructure investment. In 2017/18, a total of ZAR180 billion (US$ 13.1 billion) in social assistance was budgeted for distribution to about 17 million beneficiaries – about a third of the population, and more than those employed. This was additional to the ZAR52.8 billion (US$3.8 billion) budgeted for human settlements, water and electrification programmes.
This notwithstanding, South Africa continues to be one of the least equal economies in the world, with a Gini index of 0.68 in 2015, (based on income data including salaries, wages and social grants). Statistics South Africa reports that the poorest 20 percent of the South African population consume less than three percent of total expenditure, while the wealthiest 20 percent consume 65 percent. The country suffers from a high unemployment rate, which in the second quarter of 2017 was 27.7 percent (or 36.6 percent including discouraged job seekers) – a deteriorating position on the previous year and the highest recorded since StatsSA began the Labour Force Survey in 2008. Among youth aged 15-24, 32.2 percent were not in employment, education or training in 2017. The most significant growth in employment in the year between June 2016 and June 2017 (by 10 percent) was in the informal, non-agricultural sector.
Consumer confidence remained low, deteriorating further in 2017, largely due to continuing fears about the economy, ratings downgrades by Fitch, S&P Global and Moody’s, rising prices, political uncertainty, and social unrest. National politics (with further changes in leadership in the Finance Ministry) and corruption allegations held the nation’s attention in 2017. Support for the ANC is now the lowest it has been since 1994, and four metro municipalities are now run by other political parties.
The economy has been in decline since 2011, and by the end of 2016 had lost US$121 billion. In the first quarter of 2017, GDP decreased by 0,7 percent, but appears to have recovered in the second quarter to a 2.5 percent growth rate. Inflation has hovered within a 3-6 percent target range for a few years, rising briefly to 6.5 percent in 2016, and down to 4.8 percent in August 2017. In 2016, the finance, real estate and business services sector was the largest contributor to the country’s GDP at 18 percent. The construction industry (contractors) contributed 3.5 percent to GDP.
On the face of it, South Africa has investor friendly policies and regulations, but conditions have been deteriorating and the country suffered three credit downgrades in 2017. That notwithstanding, business confidence has improved in the past year, up 6 points to 35 in the third quarter of 2017. In its 2017 Doing Business Report, the World Bank ranked South Africa 74th overall (down, from 72nd in 2016), and fourth in Sub-Saharan Africa, after Mauritius, Rwanda and Botswana. Major declines in its position related to registering property and paying taxes, while conditions for starting a business improved. South Africa was also ranked first in Sub-Saharan Africa in terms of protecting investors, but slipped this year to 10th in terms of getting credit, 11th in terms of dealing with construction permits, and 12th for registering property.
Access to Finance
South Africa has a sophisticated banking system with 36 local institutions: 16 registered banks, three mutual banks, two cooperative banks and 15 local branches of foreign banks. Four banks dominate: Absa Bank, First National Bank, Nedbank and Standard Bank. The capital-adequacy ratio for the banking sector as a whole was 16 percent at Fiscal Year 2016, well above the minimum prudential requirement of 9.75 percent and up from the previous year.
Access to financial services has been an explicit area of focus by the government and the financial sector, since the 2003 promulgation of the Financial Sector Charter. The FSC is now enshrined in legislation, promoting transformation in the ownership and management of the banking industry, as well as increased access to financial services for those previously denied – primarily low-income black South Africans. While the current phase of the FSC does not have explicit housing financing targets, it promotes a broader ‘empowerment financing’ target (housing, SMEs, infrastructure and agriculture) of ZAR48 billion (about US$3.5 billion in 2017). Banks now segment the housing finance market into two parts – the conventional market, and the affordable market (as defined in terms of the FSC).
The 2016 FinScope survey indicates that 77 percent of the South African adult population is banked and 89 percent are financially included, using some financial product or service from the formal sector. Only 3 percent of adults rely exclusively on informal mechanisms to manage their money.
South Africa has a highly active consumer credit market with 24.68 million credit active consumers at the end of March 2017. The total outstanding consumer credit book was ZAR1.71 trillion, over half of which (52 percent, or ZAR884.06 billion – US$64.5 billion) was mortgage debt. There were 1.746 million mortgage accounts (a decline of 2.13 percent on the previous year), of which 3.5 percent were 90 days or more in arrears. Consumer indebtedness continues to be an issue of concern, with only 48.2 percent of consumers being current on their accounts and 39 percent being more than 90 days in arrears, or with adverse listings, judgements or administration orders against them.
The credit indebtedness challenge is likely to be exacerbated by rising interest rates, which declined slightly to 10.25 percent in July 2017. The key monetary policy interest rate (the repo rate) is currently at 6.75 percent per annum. Typically, borrowers in the affordable market access mortgages at a premium of two percentage points above the conventional market. An analysis of performance indicates that borrowers in the affordable mortgage market have more erratic payment patterns than borrowers in the conventional market, although the analysis shows no difference in the proportion of borrowers who cease making payments entirely. While mortgage loan providers may charge a premium to off-set higher risk and costs associated with more erratic payment patterns in the affordable market, this premium may well exacerbate the problem as it places an additional financial burden on households with the least affordability, and becomes an ‘access tax’ of sorts.
At 30.4 percent, South Africa has the highest mortgage to GDP ratio in Africa. The FSC and South Africa’s income distribution notwithstanding, the majority of mortgages are extended to high income earners. Of the 153 702 mortgages granted in 2016, the Banking Association reports that just 21 464 (14 percent) were directed at the affordable market of households earning less than ZAR20 800 (US$1 517) per month. Figures (and thresholds) differ somewhat with data from the National Credit Regulator (which reports 8 895 mortgages extended to individuals earning less than ZAR15 000 –US$1 094 per month), but the point remains that access to mortgage finance is particularly limited for lower-middle class South Africans. There are multiple reasons for this – the entry level price of new housing is about ZAR392 500 (US$28 634), and household affordability for credit is constrained. In 2008, on the back of the global financial crisis, many banks pulled back from offering 100 percent mortgages. However, many have subsequently returned to 100 percent lending in the affordable market where the mostly first-time borrowers do not have equity or savings with which to make a deposit.
Meanwhile, there has been some innovation. In 2016, the Government Employees Housing Scheme was launched with SA Home Loans, providing 30 year mortgages and a discounted rate for government employees paying by salary deduction. Another lender, Chartwell, offers an instalment sale product that converts to a mortgage loan once the borrower has reached a certain threshold in payments. This saves on initial transfer costs and enables borrowers without solid credit records to demonstrate their ability to pay.
The non-mortgage housing finance sector in South Africa has been growing, but remains a fraction in value of the mortgage market. Lending volumes are unfortunately not as well reported and quantified. National Credit Regulator figures showing that in 2015, about ZAR1 509 million (about US$110 million), involving 14 735 loans (down from 18 476 loans in 2015), was originated in the entire pension-backed loans market in 2015. The housing micro loans sector is in part supported with wholesale finance and equity by the National Housing Finance Corporation and the Rural Housing Loan Fund, both state-supported housing financiers. By the end of December 2015, the RHLF had financed a total of 485 827 housing micro loans in rural areas.
In an effort to streamline government’s efforts in housing finance, efforts began in 2015 to consolidate the three state housing financiers, NHFC, RHLF and Nurcha, into a single, consolidated development finance institution. The resultant National Human Settlements Development Bank was officially launched in May 2017. The HSDB will facilitate the increased provision of finance across the human settlements value chain, explicitly supporting construction financing for government-led integrated housing projects in metropolitan areas. A Bill to formally establish the NHSDB was expected to be released in Parliament in September, but is still awaited.
Housing affordability in South Africa is a critical challenge, bedevilling all housing practitioners in the public and private sectors. The reasons for this are many, among which are low incomes (83.4 percent of households earn less than ZAR20 000 per month and 30 percent of households receive social grants); building costs have been rising faster than inflation; and the government subsidised house has had a distortive impact on the base price of an entry-level house. In 2017, the cheapest, newly built house was estimated at about ZAR392 500 (US$28 634), affordable at current mortgage rates to households earning about ZAR15 000 (US$1 094) per month – estimated at about 15 percent of the population.
The situation is not new. In 1994, it was estimated that South Africa had a housing backlog of three million units. To address this and the related housing affordability challenges, the Reconstruction and Development Programme, or RDP, subsidy was introduced, entitling all households earning less than ZAR3 500 (US$255) per month (86 percent of the population at the time), and satisfying a range of other criteria, to apply for a fully subsidised house. In terms of the RDP programme, subsidy beneficiaries get freehold title to a 180-250m2 serviced stand with a 40m2 top structure, entirely for free. This is still true today, although eligibility criteria have changed somewhat. The current government position is that applicants must be older than 40 years of age; those younger are expected to meet their housing needs independently or through the Youth Brigade. In May 2017, the Minister announced that the Housing Needs Register comprised 2.22 million households who had registered a housing need over the past seven years.
Beyond this, there is a “gap” however, of about 6.4 million households (40 percent of the population) earning between the ZAR3 500 upper income threshold for the RDP subsidy, and the ZAR15 000 income requirement for a mortgage for the cheapest newly built house. In an effort address this, the government introduced the Finance Linked Individual Subsidy Programme (FLISP) in 2012. The subsidy offers a once-off capital contribution of between ZAR20 000 and ZAR87 000 (US$1 458 and US$6 345), depending on household income, which is to be tied to a mortgage to purchase a new or existing house. For various reasons, this programme has been unsuccessful, with only 1 195 subsidies issued in 2015 (1 478 in 2014, and 218 in 2013). The target to 2019 is 70 000 subsidies, however this is unlikely to be achieved.
Increasingly, government is recognising this issue of the ‘gap’ market – especially as it impacts upon key public sector workers. In 2015, this issue was one of the key drivers behind the signing of a Memorandum of Understanding between the Banking Association South Africa and the Department of Human Settlements. There were no substantial developments in respect of this agreement in 2016 or 2017, however.
South Africa’s residential house construction and rental sector is a ZAR152.6 billion (US$11.1 billion) per annum industry (2014 data). This refers to output/sales which includes intermediate inputs purchased from upstream suppliers. The value added by housing construction and rental activities amounted to in excess of ZAR81 billion (US$5.9 billion) in 2014, which represents 2.4 percent of South Africa’s GVA. Residential house construction and rental sectors sustain employment of 468 000 people annually.
The Community Survey for 2016 reports that 79 percent of South Africans (13.4 million households) live in a formal dwelling – an increase of 5.7 million households since 2001. However, another 2.19 million households (13 percent of the population) continue to in informal dwellings. Three million households say they rent, while another 1,6 million occupy their homes rent-free. Nine million households say they own their homes outright, while another 1,8 million say they own but have not yet paid off their homes.
Affordable housing supply in the country is dominated by government-subsidised delivery, and between 1994 and 2015, an estimated 4.3 million households have benefited from the delivery of 2.8 million government subsidised houses, and about 121 784 social rental units and 68 640 basic rental units; the transfer of a further 360 000 houses built prior to 1994; the servicing of almost a million sites; and finance-linked subsidies for a further 6 329 houses for lower-middle income earners. An estimated 1.83 million government subsidised houses are formally registered on the Deeds Registry, making government-subsidised housing comprise 29.4 percent of the total residential property market in South Africa.
The Department of Human Settlements reports that subsidised delivery hit a low of 94 566 units delivered in 2014/15; this rose to 103 983 subsidised units delivered in 2015/16 – but deeds registry data suggests that only about 23 179 government-sponsored housing units were formally registered in 2014; 20 976 in 2015; and 28 975 in 2016. In May 2017, the Minister of Human Settlements estimated demand for 320 000 high-density, subsidised rental housing units. She announced the approval of 138 restructuring zones across 38 municipalities. Development applications to the Social Housing Regulatory Authority involved 26 139 units spread across 54 projects.
Housing delivery has been declining across the board since 2012. According to StatsSA, annual delivery by the private sector has declined dramatically since 2008 when 70 058 units were delivered outside the subsidised housing market. In 2016, only 41 489 residential units were reported as completed – a marginal increase on the previous year (39 666 in 2015). Rental housing is increasingly a significant component of new housing delivery, and a new investment target has been the delivery of student accommodation. In 2015, Indluplace Properties became the first residential-focused fund on the JSE’s real estate sector.
Pension and provident funds have been targeting investments in the affordable housing space. Old Mutual’s Housing Impact Fund South Africa (HIFSA) will operate to October 2025, and targets affordable housing both for rent and ownership. Global private equity funder, International Housing Solutions (IHS) is currently managing its second fund which expects its final close in December 2017 and has two separate sleeves, one of which will focus explicitly on South Africa and the other in several Sub-Saharan countries. Currently sitting at about US$180 million, the fund includes equity investments from WDB, Eskom Pension and Provident Fund, and IFC as well as participating debt from Overseas Private Investment Corporation (OPIC), with more than US$50 million in ‘green capital’ from the IFC Global Environmental Facility and KfW. Its predecessor fund, South Africa Workforce Housing Fund (SAWHF), is a US$230 million fund which financed over 28 000 units with a combined total value of more than ZAR8,6 billion (US$605 million).
South Africa’s residential property market is the largest component of the South African property market, comprising the majority of property assets within the country, and an important component of household wealth. The South African deeds registry counts 7.1 million properties on its registry, worth ZAR6.5 trillion. Of this, about ZAR4.7 trillion is in the residential sector, involving about 6.2 million registered properties. Almost 57 percent of the total formal residential property market is found in the eight metro municipalities.
The majority of the residential property market – 54 percent in 2015 – includes homes valued at less than ZAR600 000 (US$43 763). Thirty-seven percent are homes that are valued at less than ZAR300 000 (US$21 881), of which the majority (estimated at about a third of the total residential property market) are estimated to be government sponsored homes.
South Africa has a well-established property market and a world-class cadastral system. According to the World Bank’s 2017 Doing Business Report, South Africa is ranked 105th of 189 countries globally, in terms of how easy it is to register property. It takes 23 days to go through the seven procedures required, and costs an estimated 7.3 percent of the property value. The quality of the land administration index rates South Africa at 13.5, well below the OECD high income country score of 22.7, but above the Sub-Saharan Africa score of 8.4.
The registration of title deeds remains a serious challenge. Just over half of the three million subsidised properties delivered by the state since 1994 are formally registered in the deeds registry, comprising an estimated 29.4 percent of the overall property market. The remaining properties have not yet been registered. Attention to this backlog (estimated at 818 262 title deeds) has become a key area of focus for government, and is the mandate of the Estate Agency Affairs Board. By mid-2017, only 177 295 of these had been resolved. Government subsidised houses cannot be sold for the first eight years, following allocation. Churn rates in this market segment are therefore low, although they are starting to improve, providing an important source of supply for lower income earners seeking to purchase housing.
Housing Policy and Regulations
South Africa has been attentive to the need for a clear policy environment since its release of the Housing White Paper in 1994. This was followed by the Housing Act in 1997, which set out basic roles and relationships of the three spheres of government with respect to housing. In 2004, Cabinet approved a Comprehensive Plan for the Development of Integrated Sustainable Human Settlements, known as Breaking New Ground (BNG). BNG was later incorporated into the broader National Development Plan (NDP), the blueprint for the nation’s ambitions to eliminate poverty and reduce inequality by 2030. The Department of Human Settlements has been working on the development of a new Housing White Paper since early 2015 – this is still awaited.
Within the current national policy framework, other interventions that enhance access to housing finance and improve housing affordability, include the newly established South African Housing Development Bank (a consolidation of the National Housing Finance Corporation (NHFC), the Rural Housing Loan Fund (RHLF), and Nurcha (originally the National Urban Reconstruction and Housing Agency).
To address the scarcity of serviced land for housing, the Housing Development Agency (HDA) was established in 2009 with a mission to fast track the acquisition and release of state, private and communally owned land for human settlement developments. It will now become a fully-fledged property development agency, focused on acquiring and preparing land, to be project managers to assist municipalities and to drive rapid housing delivery. The HDA is also responsible for the government’s catalytic projects. The Social Housing Regulatory Authority was established in 2010 to regulate and invest in the delivery of affordable rental homes, with a focus on social housing.
Housing Sector Opportunities
Residential markets in South Africa behave in very different ways, across numerous property market indicators – growth in values and sales prices, transfer rates of new properties and resales, access to mortgage finance, and growth in equity. Comparing and trending indicators, it appears housing markets are operating in two different economies – those below ZAR600 000, largely government facilitated, growing quickly with private investment – and those above ZAR600 000, growing stably, with ready access to credit, and experiencing an uptick in activity. By understanding more about the strengths and characteristics of these sub-markets, more nuanced and appropriate approaches can be devised to expand housing options more representative of present and future housing needs, thereby enabling property to improve household economic strength and well-being.
Very clear opportunities exist in the below ZAR600 000 market for developers, lenders and investors – the demand is significant and current supply is insufficient. There is a great demand for affordable rental accommodation in centres of economic development for low income earners and students – and some developers have been responding to this.
The affordable housing market in 2017 still is desperate for innovative solutions which might be found in the resale of government-subsidised housing, the delivery of incremental housing on serviced stands, inner city rental, or conversion of office blocks to residential accommodation for sale or for rent. While the state housing subsidy creates some market distortion, demand should be responsive to alternative housing and financing approaches. Large and successful non-governmental funders in affordable housing projects have learned that the key to successfully funding affordable housing developments in South Africa is flexibility.