Quantifying South Africa's housing economic value chain in 2017

This is the fifth blog in a wider project exploring the role of housing in the economies of developing countries. CAHF’s Housing Economic Model is used to quantify the direct economic impacts of residential construction and rental. This blog announces the launch of two research reports by CAHF in the ‘Housing in the Economy’ series and provides an update to South Africa’s housing economic value chain from the 2014 data analysed in the previous blogs, to 2017, as well as comparing data for 2016 and 2017.

The first report is Assessing the Economic Impact of Housing on Developing Economies: Comparing Housing Economic Value Chains in Four African Countries. This gives an overview of housing economic value chain (HEVC) theory and outlines the methodology used by CAHF to quantify HEVCs in African countries. A comparison of the HEVCs of South Africa, Rwanda, Kenya and Nigeria is also given.

The second report, which is discussed in this blog, is The Estimated Contribution of Residential Housing Construction and Residential Rental Activities to the South African Economy in 2017. We provide an overview of the updated figures for South Africa’s housing economic value chain (HEVC) to 2017, the most recent year for which data is currently available.

We start with South Africa’s housing construction value chain, shown in Figure 1. Contractors (both formal and informal) produced housing valued at R84.9 billion (US$5.3 billion) in 2017. Intermediate inputs valued at R45.6 billion (US$2.9 billion), or 54 percent of total domestic construction value were purchased, and value was added to them amounting to ZAR39.3 billion (US$2.5 billion), or 46 percent of total domestic production.

Figure 1: Estimated economic value chain for housing construction in 2017

Source: CAHF. Comparing Housing Economic Value Chains in Four Africa Countries (2019).

Forty-eight percent of the intermediate inputs purchased for residential construction were from secondary sectors (manufacturing, utilities and construction), with a similar contribution from the tertiary (services) sectors and only 3 percent from the primary (mining, quarrying and agriculture) sectors. An estimated 22 percent of intermediate inputs used in housing construction were imported.   The value of intermediate inputs used in housing construction was equivalent to 1 percent of South Africa’s GDP if imports are included, and to 0.8 percent when the import leakage is taken into account.

The gross value added (GVA) of housing construction amounts to R39.3 billion, comprising labour remuneration (44 percent), gross operating surplus (47 percent) and net indirect taxes less subsidies (9 percent). GVA of housing construction contributed 0.8 percent of South Africa’s total GDP at market prices in 2017. The sum of intermediate inputs and GVA resulted in domestic production of almost ZAR84.9 billion (US$5.3 billion) in 2017, which is also the value of housing used to meet final demand – all of which is classified as gross fixed capital formation.

Figure 2 shows the estimated economic value chain for housing rental. Output valued at ZAR87.6 billion (US$5.5 billion), comprises intermediate inputs of ZAR34.8 billion (US$2.2 billion) and GVA of ZAR52.9 billion (US$3.3 billion) – all of which went to satisfying household demand for rental accommodation.   Seventy-five percent of intermediate inputs were sourced from the tertiary sectors, with the remainder from the secondary sectors. It is estimated that 9 percent of these intermediate inputs were imported.

Figure 2: Estimated economic value chain for residential housing rental activities in 2017

Source: CAHF. Comparing Housing Economic Value Chains in Four Africa Countries (2019).

The ZAR52.9 billion of GVA at market prices consists of:

• ZAR15.8 billion (US$1.2 billion) of labour remuneration (30 percent of sector GVA);
• ZAR28.3 billion (US$2.1 billion) of gross operating surplus (the sum of interest and rent costs and profits) comprising 54 percent of GVA); and
• ZAR8.7 billion (US$0.7 billion) in net indirect taxes less subsidies (making up the balance of 16 percent of GVA).

The GVA of housing rental-related activities overall contributed 1.1 percent of national GVA in 2017, while the intermediate inputs (inclusive of imports) were equivalent to 0.75 percent of national GDP, and to 0.68 percent when the import leakage is taken into account. An estimated 168 000 jobs were supported by residential rental in 2017.

Figure 3 reflects the estimated combined economic value chain for housing construction and rental-related activities in South Africa in 2017. This totals to GVA of ZAR92.1 billion (US$5.8 billion), intermediate purchases of ZAR80.4 billion (US$5 billion) and total domestic production of ZAR172.5 billion (US$10.8 billion). Intermediate inputs accounted for 47 percent of the value of output, with GVA at market prices contributing the balance (53 percent). Sixty percent of the intermediate inputs were sourced from tertiary sectors, with 38 percent from secondary sectors and the remaining 2 percent from primary sectors. Sixteen percent of intermediate inputs were imported.

Figure 3: Estimated combined economic value chain of housing construction and housing rental in 2017

Source: Comparing Housing Economic Value Chains in Four Africa Countries (2019).

Labour remuneration totalled ZAR33.3 billion (US$2.5 billion) and supported at least 732 000 employment opportunities in 2017. The sector is estimated to have contributed ZAR12.2 billion (US$0.9 billion) in net indirect taxes less subsidies, and to have generated an operating surplus (a combination of interest, rent and profit incomes) of ZAR46.7 billion (US$3.5 billion).

The gross value added contributed by these activities was equivalent to 2 percent of national GDP in 2017 – making it almost as significant as the agriculture, forestry and fishing sector. When intermediate inputs including imports are taken into account, the combined contribution is equivalent to 3.7 percent of GDP, and when the import leakage is excluded, this falls to 3.4 percent of GDP.

Comparing the change between 2016 and 2017 figures, overall housing construction and rental grew by R12 billion (7.5 percent) between 2016 and 2017, which is significantly higher than South Africa’s overall economic growth rate (1.3 percent). While there is significant stability in the overall HEVC composition (shares of domestic production, domestic demand and contribution to GDP) there is a 28 percent decrease in the secondary (manufacturing) sector contributions to intermediate inputs in housing construction and a commensurate increase in the contribution of tertiary (services) sector inputs. This may be due to increased outsourcing and vertical disintegration of activities, but this is not persuasive and requires further investigation.

Furthermore, a 7 percent increase in the share of imported intermediate inputs for housing construction is probably due to more accurate import data but may also be due to greater import penetration. A 7 percent drop in the contribution of indirect taxes less subsidies to construction GVA at market prices in housing construction may be due to an increase in housing subsidies received, but this is not certain.

This HEVC update confirms a number of key findings from previous analyses. Housing construction and rental add significant value to South Africa’s economy, and a high proportion of intermediate inputs are procured in the local manufacturing and services sector, supporting local upstream economic growth. Both sectors are significant employers, so long as construction and rental activities are sustained and grown. Employment figures are likely a substantial undercount of total employment because the available data does not accurately capture informal employment.