South African Finance Minister’s Speech at the International Housing Solutions Conference

The speech given by South Africa’s Finance Minister, Nhlanhla Nene, on the country’s housing sector at the International Housing Solutions Conference on 7 September 2015. See Citymark‘s South African Housing Market Overview 2015 for context.  

National statistics show us those activities in the construction and construction services segments of the economy contribute significantly to economic growth and employment. In particular, the domestic output multiplier for the construction industry indicates that for every R1 million increase in the final demand related to construction output, there is a R2.05 million increase in the value of domestic output.

Furthermore, the employment multiplier reflects that for every R1 million increase in final demand in output from the construction industry, around about 5 jobs are created.

In particular, Gross Fixed Capital Formation for Residential Buildings alone contributes between 1.5 per cent and 3 per cent to Gross Domestic Production (GDP) annually. The point I am trying to make is that the residential construction industry matters- it makes a big impact on economic growth and employment in South Africa and we recognise the importance of the sector for increased socio-economic development of our country.

My presence here is testament to the fact that we as government are serious about working with the private sector in making the residential construction industry work well, to the benefit of all South Africans.

A new approach to housing through demand side subsidies:

The current system in South Africa is a supply-side subsidy system where government provides full housing subsidies for those households earning less than R3 500 per month. In other words, it is the state that subsidises and leads development, delivering a standard housing product for the poor. The private sector makes very little contribution to this sector of the housing market. Of course, this is largely as a result of the market failure that persisted after 1994 which the government has worked extremely hard in trying to correct. Although there have been some mistakes, government has done a good job at stabilising the housing market at the lower end, providing over 3 million subsidised housing units to the poor since 1994.

However, government cannot afford to continue under the same trajectory of providing fully subsidised houses as in the past. Besides being fiscally unsustainable in the long-run, supply-side subsidies are known to distort housing and finance markets with only a portion of the subsidies materialising to the beneficiary in the form of better housing products or lower prices. As a result, many countries have shifted away from supply-side subsidies and rather, have opted to provide up-front, lump-sum subsidies directly to the individual or household.

South Africa needs to follow this movement towards a more demand-driven housing solution for the poor, but particularly for the affordable or gap-market segment where the private sector also has a large role to play. In support of this, government needs to consider making more demand side initiatives and subsidies available to individuals (as opposed to supply-side developer subsidies) in order to stimulate further contribution from households and the private sector. Demand side subsidies increase the individual household’s willingness or ability to consume a particular type of housing solution or product of their choice instead of waiting for government to supply a standardised housing unit. This provides a platform for private sector financiers and developers to enter more deeply into this market.

The Finance Linked Individual Subsidy Programme, or FLISP, of the National Department of Human Settlements is one particular type of demand-side subsidy which provides an up-front lump-sum subsidy (on a decreasing sliding scale ) to households earning between R3 500 and R15 000 per month.  It was intended to catalyse the affordable housing market and invite private developers and financiers into the market by effectively reducing the risk of lending or developing in that segment of the market.  However, the subsidy has not seen effective take up since its revision in 2012 with only about 2 793 FLISP subsidies disbursed to beneficiaries. In particular, the FLISP has not attracted much private sector contribution and support.

This raises the question as to why the FLISP programme is not working. I pose this question to the forum today; should we as government be expanding and enhancing a more demand driven focus and if so, what sort of demand-side subsidy instruments are needed to entice the private sector into participating deeper in the affordable housing market? In essence, what would catalyse more private sector involvement going forward?

To further add on to the above; some very interesting research has been conducted by the Centre for Affordable Housing Finance (CAHF) that shows how the existing so-called ‘RDP’ stock is increasing in value at a greater rate than the middle and higher valued properties. This has been achieved through the sale and re-sale of the existing RDP stock- sometimes illegally as these households have not received their title deeds. Some of these RDP units have increased in value so much that they can be regarded as affordable houses and not low cost housing anymore.  This gives government and the private sector a unique opportunity to capitalise on what is currently occurring in this market, where new entrants in the low income market can access existing RDP stock as the original beneficiaries tap into the available equity and move up the housing ladder into the affordable market segment.

However, this means that; firstly, government should focus its attention on 1) ensuring that all beneficiaries receive their Title Deeds so that they are afforded the opportunity to legally trade their houses, and 2) enhancing demand side subsidies such as the Finance Linked Individual Subsidy Programme (FLISP) to allow first time buyers in the low income market an opportunity to purchase existing RDP stock when the original owner wishes to sell.

This will achieve several key things:

• The FLISP provides the new low income house seeker the ability to access an affordable house because the FLISP gives the beneficiary (depending on their income bracket) a lump sum of up to R80 000. This means, he/she only needs to finance the difference, making it incredibly affordable to the household and reducing risk to the lenders.
• The seller of the RDP unit who wishes to ‘move up the housing ladder’ is now able to access the increased value or equity (of the RDP unit through private sector loans) and is now able to afford a bigger and better unit, in a slightly higher market, if the supply of affordable housing solutions exist.

However, in order for this to be successful, this means that banks and financiers need to position themselves to provide more access to affordable mortgage finance and developers need to position themselves to supply, innovative and affordable housing solutions. This not only allows the property market to function well, but it also stimulates demand at the lower end and supply in the affordable sector. As a result, it is a win-win for both government (as it further multiplies governments 20 years of investment) as well as for private sector developers and financiers.

We are not naive to the constraints of providing affordable mortgages to low and  middle income households, considering their over indebtedness, the impact of Basel III on liquidity and capital requirements in future, among other constraints, but again I put it to you; how can government and the private sector work together to make this a reality? What are the challenges and how do we overcome them? What are the opportunities and how can they be exploited?

The need for more private and public sector collaboration in the social housing:

Further public-private partnership in the housing sector is incredibly important in the affordable rental segment. In particular, the National Department of Human Settlements has a Social Housing programme which aims at providing low to middle income households access to medium density affordable rental units, close to socio-economic amenities.

This is probably one of the most important housing programmes for government going forward. This programme meets all the criteria of a sustainable and affordable housing programme that also invites private sector collaboration and contribution. Furthermore, social housing promotes densification and spatial transformation, racial and income integration, affordability, access to adequate shelter, and a mix of government, private sector and household contribution- all the ingredients promoted by the National Development Plan.

Through this programme, government contributes to funding a portion of the capital costs of building social housing units which are developed and managed by accredited private sector institutions known as Social Housing Institutions. This allows for a lower capital cost for the Social Housing Institutions to fund, which ultimately results in lower rentals for the tenants which makes these projects viable for the target market.

This programme has proved itself in the past and we as government want to enhance and expand this programme, as a major housing programme, going forward. There have been several evaluations on this programme, including an independent evaluation from the private sector under the National Association of Social Housing Organisations (NASHO), which has made recommendations on what government must do to improve the programme as well as the institutional arrangements of the Social Housing Regulatory Authority. National Treasury is working closely with the National Department of Human Settlements to ensure that these recommendations are taken forward in order to improve the performance of this programme.

This programme provides a unique platform for government and the private sector (developers, financiers and property management companies) to work together to make a difference and change the current housing landscape.

Although the Human Settlements Development Finance Institutions such as the National Housing Finance Corporation (NHFC) play a critical role in financing the debt component for social housing projects, more collaboration is needed with private financiers to provide innovative and unique financing solutions to the sector. However, I would like to hear from developers and financiers as to what are the barriers to entry faced by you and how can we work together to overcome them?

Tax incentive for businesses:

Additionally, the National Treasury Tax Policy Unit continually looks at ways to incentivise businesses to provide housing assistance to its most vulnerable employees.

For example, the sale of low-cost residential units on loan accounts tax incentive. This is where a tax deduction is granted to an employer who sells a low-cost residential unit to its employees through a repayable loan. The tax deduction, equal to 10 per cent of the amount still owing to the employer by the employee at each year end, may be claimed over the same period. So, for example if an employee who receives a housing loan from a company still owes R300 000 on the loan, then the company can claim R30 000 tax deduction for that year.

In addition, National Treasury also promotes employer provided low cost housing in the mining industry. This incentive takes the form of a 10 year accelerated deduction of housing infrastructure expenditure incurred by the employer. An employer in the mining industry will get a tax deduction in respect of the following expenses:

• Expenditure incurred for the acquisition, erection, construction and improvement of residential accommodation of employees and furniture.
• Hospitals, schools, shops and other amenities operated by the employer mainly for the use of that employer’s employees.
• Recreational facilities operated by the employer mainly for the use of that employer’s employees.

These are just some of the examples that show how government is continually striving to make it more appealing for businesses to invest in the residential property market for low and middle income households. Ultimately, the intention of all these programmes and incentives is to stimulate more public-private partnerships in achieving a transformed sustainable and integrated South Africa.