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.