The missing middle: Affordable housing in question
By Kecia Rust
MUCH HAS BEEN made in the media of dramatic increases in the prices of houses countrywide. Fuelled by improved consumer sentiment on the back of 35-year low mortgage interest rates and sustained building cost inflation, the rapid increase in house prices has been described by some as the ‘normalising’ of the South African property market against its international comparators. But while the media celebrates South Africa’s progress, the majority of South Africans have become increasingly disadvantaged.
ABSA House Price Index figures between 1999 and 2005 show increases both at the top end (houses between 80m²-400m²) and in the ‘affordable market’ (houses between 40m² and 79m²). However, the split between the two (the missing middle) has become more pronounced.
At the bottom of the property pyramid are RDP subsidy beneficiaries. While there is little research on the tradable value of subsidised housing it is widely understood that there has been substantial depreciation in formal sales. Thus, as the upper end of the market creeps away from the ‘affordable’ market, so too does the ‘affordable’ market creep away from the subsidised housing market. There are, in fact, two ‘missing middles’.
The consequences of this are vast. Families living in RDP houses are unlikely to ever climb the housing ladder into better housing because they will not be able to afford to make the jump. For instance, in Johannesburg’s Cosmo City, where RDP houses sit alongside bonded houses, the cheapest house you can buy with a bond is R210 000. Even if a family in an RDP house could sell their house for R35 000, they would still need a monthly income of at least R7 000 to pay the R1747,16 installment on their R175 000 bond (over 20 years at current interest rates of 10,5%). But to be eligible for a housing subsidy they will have had to earn less than R3 500 per month. For the 75% of SA households that earn less than R3 500 per month, the next rung of the housing ladder is too far away.
Meanwhile, households who do not qualify for a subsidy and who are first time homebuyers must earn at least R8 000 per month to afford the average ‘affordable’ house price of R193 000. This means that households earning between R3 500 and R8 000 per month (about 11% of South Africa’s population) are possibly worse off than those that are poorer – they cannot get a subsidised house for free, and they cannot afford the houses that are on the market.
The gap between those who can afford the ‘affordable’ house, and those who can afford the ‘average’ house is also significant – about 11% of households earn between R8 000 and R26 000 (a R662 447 bond implies a R6 614 instalment, which implies an income of at least R26 456).
At the same time, the housing construction sector is increasingly focusing on high end housing. A study done last year for the City of Johannesburg found that low- and middle-income housing delivery has almost disappeared in Johannesburg, decreasing from 5 081 units (63% of total supply) in 2000 to 1 434 (19%) in 2003. In contrast, larger houses (80m² plus) have increased significantly in number over this period, up from 1 198 in 2000 to 2 197 in 2003. The most significant growth area has been in townhouses, which in 2003 accounted for 46% of Johannesburg’s total formal supply. And yet, only 2% of South African households can afford the ‘average’ R662 447 house that developers are building.
This situation has at least three consequences:
1. Downward raiding and informal settlement growth: When the supply of housing is not matched to the affordability of the market, aspirant home owners find the next best house they can buy. Thus, a household earning R4 000 might under-report on income in order to access the RDP house. While waiting for a subsidy, this household will probably live in sub-optimal housing conditions: overcrowding existing housing (which has an impact on the sustainability of local services) or in an informal settlement. The Financial Diaries study, published last year, found even households earning upwards of R7 000 (who should be able to afford a product of about R175 000) living in informal settlements.
2. Residential immobility and dead capital: When a household is unable to afford housing that is better than where it currently lives, it is less likely to move. The market loses out on a potential buyer and a potential seller, and this reduces its overall thickness. The 2004 Township Residential Property Market Research found that the ‘affordable’ market and below is extremely thin, largely as a result of this factor. Households are unable to realise the asset value of their housing, which undermines housing as a potential investment class for low income households, at a time when it is realising astonishing returns for high income households.
3. Limited take up of Financial Sector Charter-targeted housing loans: The Financial Sector Charter commitment, to extend up to R42 billion of housing loans for borrowers earning between R1 500 and R7 500 by 2008, is unlikely to be realised, given that there is so little to buy for those households who earn in the target range. At the same time, the limited supply will increase prices, possibly beyond the Financial Sector Charter target of mortgages of R180 000 or below, and certainly beyond the affordability of the majority of home seekers.
Clearly this is an issue that must be of great concern not only to the home seekers who cannot find the right house at the right price, but also to the Minister of Housing and the financial sector. But what can be done? Critically, the gaps in the housing ladder need to be filled in and housing construction valued between R35 000 and R193 000 must increase substantially. To make this happen, however, government must shift its focus to include policy that seeks to promote the development of affordable, non-subsidised housing.
A key area for policy focus must also be the home improvement market, specifically for RDP home owners. If RDP home owners improve the value of their R35 000 homes, they will create something that is desirable for Financial Sector Charter target market borrowers to buy. Banks can help them in this by offering home improvement loans as part of their Financial Sector Charter portfolio. And when this happens, subsidised housing will become the financial asset that government expects.
Indeed, as the Minister herself conceded, attention needs to be given to the whole housing market. This means broadening the focus beyond subsidised housing, and beyond new construction. The problem of the missing middle(s) is about more than just housing. It is about the equitable distribution of South Africa’s economic success and the broad based economic empowerment of those who helped bring us to where we are.