Will the Extended Housing Subsidy in South Africa Work?

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President Jacob Zuma delivered his 2012 State of the Nation address in Cape Town, South Africa, last night.  In setting the scene, the President outlined the findings of Cabinet’s mid-term review of progress since 2009:

… “The mid-term review indicated steady progress in various areas such as health, education, the fight against crime, human settlements, energy, water provision, rural development and others.

However, the triple challenge of unemployment, poverty and inequality persists, despite the progress made. Africans, women and the youth continue to suffer most from this challenge.”

A key contributor to not only persistent but rising inequality in South Africa is the housing market – while our policy regime includes a substantial subsidy providing free housing for the 60% of the population with a household income of less than R3500 (about US$450) per month, another 20% of the population or so (those earning between R3500 – about R10 000) cannot afford to buy the cheapest newly built house.  This “gap” has been noted by the President before.  Two year’s ago, in his 2010 State of the Nation Address, President Zuma promised

… “A key new initiative will be to accommodate people whose salaries are too high to get government subsidies, but who earn too little to qualify for a normal bank mortgage.
We will set up a guarantee fund of R1 billion to incentivise the private banking and housing sector, to develop new products to meet this housing demand.”

We know that the guarantee fund has not yet been implemented – but discussions in Parliament have suggested developments, and last night the President announced that the scheme will start operations from April of this year, managed by the National Housing Finance Corporation.  In addition, he promised what looks like a revised “Finance Linked Individual Subsidy Programme”:

“…from April, people earning between three thousand five hundred rand and R15 000, will be able to obtain a subsidy of up to R83 000 from Provinces, to enable them to obtain housing finance from an accredited Bank.”  (That’s people earning between about US$450 – US$2000 per month, able to obtain a subsidy of up to about US$10 600)

The original FLISP has been criticised for some time for failing to understand the economics of housing affordability.  Available previously to households who earned R3500 – R7000, the amount provided (up to R54 000, or just under US$7000) was insufficient to raise their affordability sufficiently to buy the cheapest newly built house available on the market.  Do the new terms, which increase the upper income threshold and extend the value, do any better?

Assuming the new policy works as the old one did, on a sliding scale where households on the bottom end of the range get the most subsidy and those on the top end get the least, one might assume that a household earning R3550 might get the full R83 000.  With a 30% instalment to income ratio, this household could afford to pay about R1065 per month.  At the current prime rate of 9%, this would afford the household a mortgage of R118 369.38.  Add to this the housing subsidy of R83 000, and the household can afford a house of R201 369.38 (assuming they have savings to cover transfer and conveyancing fees and the other costs of moving).  In South Africa today, there is no market-based housing for sale at that price.

Cosmopolitan, a large scale developer of affordable housing, advertises a house for R245 000  on their website: this is a 40m2 structure with very basic finishes.  There is no new build available for less than this.

One of the reasons, of course, is that it costs anywhere between R100 000 and R200 000, depending on area and infrastructure, to build the government-subsidised house that is given away for free to households earning less than R3500 per month.  The government-subsidy house is also a 40m2 structure with formal services.  With such a house being given away for free, no developer or bank will risk offering a similar house on the market with a 20 year loan obligation.  By simply extending eligibility for government funding to a larger proportion of the population, the President’s announcement has not addressed the fundamental issues arising from the housing subsidy scheme. (For a very useful set of analyses that get to the heart of the problem, see the presentations given that the Financial & Fiscal Commission’s public hearings into housing finance)

Housing affordability of just over R200 000 for someone who is not eligible for a free house, however, is not something to sneeze at.  Certainly, the R83 000 subsidy is a valuable contribution to the household earning R3550 per month.  While he won’t be able to buy a new house, his affordability is perfect for the resale market – and could very usefully be used to stimulate trade of existing housing, creating the housing ladder that has been lacking for so long.  The resale market at this end of the property market, however, is full of challenges – many of which are outlined in a study recently released by the CAHF.  The President must know that the success of his promises depend hugely on a long list of other challenges also being worked out.

There is also the question of housing supply – will the new guarantee scheme, coupled with this extended housing subsidy, increase the scale of delivery?  Again, a host of issues undermining rapid housing delivery must be addressed if the President’s promises are to have any effect.

South Africa has probably the most ambitious housing subsidy policy in the world, and its success in delivering houses these past 18 years to a population previously excluded from the property market is internationally renowned, hugely respected, and the envy of many nations.  The persistence of inequality, however, is in part due to the unintended consequences of the housing subsidy policy.  It is these that must be addressed.  Simply extending the subsidy’s reach is not going to address the underlying problems.  It may well exacerbate them.

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10 responses to “Will the Extended Housing Subsidy in South Africa Work?

  1. Thank you Kecia for the thoughtfulness of your analysis. For those of us who work in this sector this seems like much of the same of what we have heard before. I sincerely hope that it will lead to more people being able to buy, also I cannot see where that stock will initially come from.

  2. Where can I apply for this subsidy? Even though ou registration went throug in Jan 2012. Will we still be able to apply?

    1. Hello Lettie. Its not yet clear where you’ll be able to apply for the subsidy, and if it will apply retrospectively – as far as I know it will be effective from 1 April 2012. The best approach would be to approach the National Department of Human Settlements directly (www.dhs.gov.za) or your provincial department, and pose your question to them. When I get more news, I’ll post it.

  3. I’m a married mother of two children who has a house hold income of R5400.00 and would like to know how much do I qualify for a subsidy and if so will the house be build around Soweto.

    1. Hello Nozipho. According to the announcement, you will qualify for an amount somewhere in the region of R83 000 – R10 000. I would guess that at your income you’d qualify for about R70 000. The details have not yet been made public, however. You will be able to use this together with a mortgage loan (or possibly a pension-backed or unsecured personal loan – I’m not sure yet) to purchase either a new or existing house or to build a house on a piece of land you can buy or already may own. You need to lead this process, however. I would recommend that you look for the house or land that you want and think of all your options in terms of how you will finance it, and then approach either the national Department of Human Settlements or your provincial department. When I get more news on the specific rules and procedures, I’ll post these.

  4. Does this subsidy only apply to people on the housing waiting list or to everyone hoping to buy a house

  5. Luthando Wotshela on 8th March 2012 at 12:23 pm

    How is this going to work? Will people need to apply through the bank or where?

  6. hi Kecia can you tel me for how much will i qulify, my in come is R4900 WITH OUT DEDUCTIONS

  7. hi
    I am currently working in FET college and getting paid by government ( on persal). i wnat to know where can i apply for this subsidy and i am currently earning a gross of R12115 with net of (R7200) and would like to know how much can i qualify for as i am in the process of buying a house

  8. I work as an education therapist (i.e occupational therapist) in a school and am employed by the WCED – my gross monthly income is currently approx R13000. This amount is supposed to increase sometime during 2012 to R15000 due to OSD. Do I qualify for a housing subsidy when purchasing a property, and what amount would it be?