The impact of housing on an economy can be explored in a Housing Economic Model, comprised of the Housing Construction Value Chain (HCVC) and Housing Rental Economic Value Chains (HRVC). In this blog, we will explore the application of the value chain approach to South Africa’s housing sector. With the help of economist Keith Lockwood, CAHF has analysed South Africa’s housing construction and housing rental value chains using available data for 2014, and will update these figures for 2016 later this year. National statistics for the Construction sector (SIC5) and Finance, Insurance, Real Estate & Business Services sector (SIC8) were broken down to the level of housing construction and housing rental sub-sectors. This process requires certain calculations and assumptions, as housing construction and rental are not separately identified economic subsectors in the national accounts. However, the modelling of this data offers a solid indication of the economic influence of housing in South Africa’s economy, and it is something we will test in other countries later in the year. In this article, US$1,00 = R13. A glossary of technical terms is included at the end.
What is the impact of the housing sector (construction and rental) on the South African economy
The estimated direct economic impact of residential construction and rental in South Africa was R155,6-billion (about $11,7-billion) in terms of sales of direct housing outputs produced and intermediate inputs into new housing construction, ongoing home improvements and rental. This amounts to 2% of total sales and 2,4% of total Gross Value Added in the South African economy in 2014. Together, residential construction and rental contribute 468,040 full time equivalent employment opportunities in South Africa. The economic value chain for the housing construction and rental sectors in South Africa in 2014 is shown in the Figure below.
Adding 2,4% of Gross Value Added to the economy, residential construction and rental in South Africa are about equal contributors as the entire Agriculture, Forestry & Fishing sector; or the Food sector; or the Energy sector. And this is only the start. This calculation only includes direct economic impacts – it doesn’t include the additional economic impacts that arise as a result of the housing sector – the production and sale of furniture, or the establishment of home improvement service providers, and so on.
It is challenging to say exactly how many new houses this construction value chain created, because the stimulus of the residential construction sector on the economy is not only related to new housing construction. It also includes maintenance, renovations, and extensions to existing stock, and the addition of second dwellings and backyard rooms on existing properties. To the extent the data can be captured through the purchase of goods and labour, the economic value chain also includes the construction and maintenance of informal housing, for example, materials being bought and put together to make a shack.
It is useful to split the housing sector into construction and maintenance on the one hand, and rental, on the other. The Figure below shows South Africa’s residential construction value chain for 2014.
Starting on the left, the housing construction process draws on the primary sector (raw materials such as sand and stone), secondary sector (manufactured materials, such as cement, bricks and window frames), and tertiary sector (services such as real estate services, transport and finance). These intermediate inputs together in 2014 involved R30 billion ($2,3 billion) of economic activity. Notably, 79% or R23,6 billion ($1,8 billion) of the total intermediate inputs are for manufactured goods, of which 85% was manufactured in South Africa. This shows the powerful effect residential construction can have on a country’s local manufacturing sector. The balance of the intermediate inputs are shared between tertiary sector inputs (13%) and primary sector inputs (9%).
The processes required to convert these intermediate inputs into houses involved R9,1 billion ($0,7 billion) in labour costs, which remunerated an estimated 241,965 full time equivalent jobs). It also involved a Gross Operating Surplus of R12,2 billion ($0,9 billion) and it generated Net Indirect Taxes of R4,2 billion ($0,3 billion). These together comprise R25,5 billion ($2 billion) of Gross Value Added to the South African economy.
Together, intermediate inputs and Gross Value Added create R55,5 billion ($4,3 billion) in domestic housing supply. This adds to South Africa’s Gross Fixed Capital Formation, which is an indicator of how much new value in the economy is invested in assets as opposed to consumed. In this way, housing construction adds significant economic value during its construction, and is also a strong local manufacturing and employment stimulant. Once added to domestic fixed capital, it contributes to homeowners’ wealth and economic stability, and a portion is also bought by landlords who use the assets in the Residential Rental sector.
South Africa’s residential rental value chain has a very different economic impact. While the 2011 Census shows that only 25% of South African households (3,6 million) rent their accommodation, the value of the total domestic production from the residential rental value chain in 2014 was nearly double that of the housing construction value chain, at R97 billion (about $7,5 billion) in the same year. This is because rental housing has an ongoing economic impact through the regular flow of rentals, specifically in terms of the tertiary (services) sector. Services associated with the residential rental sector include letting agents, rental managers, financial services, maintenance and repair businesses. In any given year, the economic activity associated with the entire rental stock in the country is contributing to the economy.
In the following diagram, intermediate inputs into residential rental contribute 43%, or R41,5 billion ($3,2 billion) of the total value of domestic production, with 57% (R55,5 billion, or $4,3 billion) being Gross Value Added. In contrast to the manufacturing stimulus created by residential construction, 71% (R29,7 billion, or $2,3 billion) of the of intermediate inputs into residential rental are from the tertiary sector (services-related inputs). Manufactured inputs (secondary sector) then comprise 29% (R11,9 billion or $0,9 billion) of intermediate inputs.
Of the Gross Value Added in residential rental, 74% is Gross Operating Surplus, 20% is Net Indirect Taxes, and 6% (R3,1 billion) is labour remuneration compensating an estimated 226,074 full time equivalent employees in the rental sector.
The total domestic production of R97 billion in 2014 meets final demand from households themselves (household consumption).
This is not the end of the impact that residential construction and rental have on the economy. There are further economic ripple effects (indirect and induced economic impacts) that are generated by this direct economic impact of housing. Of course, the economic impact of housing is also felt ‘down-stream’. Housing helps to stimulate demand for furniture, appliances, garden equipment, security and other home-related services such as insurance and financial products. However, we do not quantify these impacts in this analysis. This analysis also doesn’t get into the detail of the role that housing finance plays in the wider economy and the important function it plays in moving money through the economy. However, the significant impact of housing construction and rental on SIC8: Finance, Real Estate, Insurance and Business Services is evident above. And from much of CAHF’s other work, the ability of housing finance to convert housing demand into real housing supply is clear. And where demand can be realized, construction and rental activity follows.
Lastly, we are also missing the full impact of the informal sector in these figures. While a provision is made in national statistics for informal sector contributions, these figures are under-estimating the role of the informal economy in both the residential construction and rental value chains.
Glossary (from Investopedia.com, businessdirectory.com and Wikipedia.org)
Domestic production: The production of goods for use in a home country.
Domestic supply: The supply and demand of goods, services, and securities within a country.
Economic Value Chain: An Interlinked set of value-adding activities that convert inputs into outputs which, in turn, contribute to profitability.
Final demand: the total demand for final goods and services in a sector or economy at a given time. This includes the amounts of goods and services that will be purchased at all possible price levels.
Full-time equivalent employment: The hours worked by one employee on a full-time basis. The concept is used to convert the hours worked by part-time employees into the hours worked by full-time employees.
Government consumption: Government spending used for the purchase of goods and services.
Gross Fixed Capital Formation: Gross fixed capital formation(GFCF) refers to the net increase in physical assets (investment minus disposals) within the measurement period. It does not account for the consumption (depreciation) of fixed capital, and also does not include land purchases.
Gross Operating Surplus: Gross operating surplus, abbreviated as GOS, is a balancing item in the generation of income representing the remuneration of the production factor capital. GOS is the income derived by companies after remunerating employees and paying taxes.
Gross Value Added: Gross value added calculates the value of the amount of goods and services that have been produced, less the cost of all inputs and raw materials that are directly attributable to that production. In national accounts GVA is output minus intermediate consumption; it is a balancing item of the national accounts’ production account.
Highly Skilled employment: Employment requiring a high level of skill, often at a management or professionally certified level.
Household consumption: The purchase of goods and services using household income for use by households directly.
Imports and Exports: An import is a good or service brought into a country from another. An export is a good or service taken from a country to another. For simplicity, we consider houses themselves to be developed and applied in the local market, albeit that small numbers of prefabricated houses may be exported or imported.
Informal employment: The informal sector, informal economy, or is the part of an economy that is neither taxed, nor monitored by any form of government. Informal employment relates to all people deriving income from this economic sector.
Intermediate demand: Demand for a product that is used to produce a final good or finished product. Intermediate goods are sold between industries for resale or for the production of other goods. For simplicity, we consider all supply of housing to be final products adding to Gross Fixed Capital Formation.
Intermediate inputs: Goods and services used in the production process to produce other goods and services, rather than for final consumption.
Labour: Economic measure of work done by human beings.
Net Indirect Taxes: The difference between taxes received and taxes paid. An indirect tax (such as value added tax (VAT) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).
Primary sector: The sector of the economy related to primary industries related to the production or extraction of natural resources, including agriculture, forestry, fishing and mining.
Secondary sector: The sector of the economy related to secondary industries including light and heavy industrial manufacturing of finished goods and services.
Semi- and unskilled employment: Employment requiring less skills than skilled employment.
Skilled employment: Employment requiring a special skill, training, knowledge, and (usually acquired) ability to be productive.
Tertiary sector: The sector of the economy that provides services to customers including wholesale and retail trade, financial, professional logistics and real estate services.
This work was produced with the support of the Cities Support Programme of the SA National Treasury as part of CAHF’s partnership with the Government Technical Advisory Centre.