Gap housing still poses a huge problem {writer: Piet Coetzer}

There was a shortage of more than 660 000 affordable housing units countrywide in South Africa by December last year, according to a report by the Banking Association of South Africa (BASA).

The shortage is mainly concentrated in the market for homes of 80m2 or smaller for the average income-household with an income of between R3 500 and R9 000 per month.

It is also the category of households that qualifies for 100% home loans and is often called “Gap” housing because there is a gap in the market in terms of the supply of homes for average earning South Africans.

These aspiring homeowners fall through the cracks because they earn too much to qualify for government subsidies, but not enough to qualify for average home financing.

To reduce this backlog by 60% over the next five years, at least 132 000 units will have to be built annually.

New units in this segment are coming onto the market extremely slowly. In fact, supply to this market segment has slowed down further this year.

Between January and June this year, plans for only 13 228 units of 80m2 or smaller have been approved countrywide. That was 29.3% lower than during the corresponding period in 2008.

The group with incomes of between R3 500 and R9 000 are too ‘rich’ to qualify for government subsidies, but too poor to afford a new house in the market.

There is, however, also a gap in the market for those who earn between  R9 000 and R12 000. These people could possibly afford to buy a home of R232 000, but way too few houses in that price range come onto the market.

Despite their income, some 15% of households in the R3 500 to R8 000 income bracket live in informal dwellings, while it is the case for 4% of the income bracket between R8 000 and R12 000.

Research done by BASA in 2005 indicated that the greatest problem why housing in this segment is so slow in coming onto the market, can be ascribed to the capacity shortfalls at local government level – it is not able to drive the home delivery process within its area of jurisdiction.

Lack of capacity

The lack of adequate capacity leads to delays in the clearance of environmental impact studies, township establishment applications, rezoning clearance of plans and engineering designs, and the installation of services. The entire process can take as long as three years.

The process has been further adversely affected by the general financial crisis, which has also placed sales under pressure.

In the meantime, First National Bank’s chief economist Cees Bruggemans recently said that the downward spiral in the residential building sector was probably close to a bottom.

The FNB and the Bureau of Economic Research’s Building Confidence Index (BCI) improved to 32 points in the third quarter of this year, compared to 30 points in the previous quarter. This follows on a decline of 12 index points between the first and second quarters of 2009.

Confidence levels among building contractors had improved with one point, among manufacturers by 23 points, and among retailers by 13 points.

The growth in building activity had remained very sluggish during the third quarter, but did show a marginal improvement compared with the previous quarter.

On the non-residential building front, confidence among building contractors declined from 36 points in the second quarter to 33 points in the third quarter.

The subindex for architects dropped by seven points, the one for quantity surveyors by four points, and for building subcontractors by 15 points – all in line with the fact that a downswing in the non-residential sector was still firmly in place.

Bruggemans said that comments emanating from the survey “revealed that it was primarily the decline in private sector demand that translated into the deterioration of construction workloads.”

However, the slow pace of government capital expenditure programmes at local authority level had also contributed to the moderation in construction activity levels.

Tendering competition remained tight during the third quarter, and a net 83% of the respondents to the survey indicated that competition was more intense than in the same quarter a year ago.

Margins under pressure

As a result, margins had deteriorated during the third quarter and a rising percentage of respondents had reported a weakening in the growth of profitability of their enterprises, Bruggemans said.

He added that in line with the deteriorating level of construction activity executed during the third quarter, retrenchment of labour has also escalated. However, respondents had indicated that as far as the business outlook for the fourth quarter was concerned, no further deterioration was expected.

In the interim, some of South Africa’s largest banks have lowered their house purchase deposit requirements in an effort to attract new home buyers and revive the struggling property market.

The announcement by the banks at the end of the third quarter of 2009 has brought a degree of hope to the sector for better days. Prospective buyers would now only have to raise a deposit of between 5% and 10% for a house they wish to buy.

FNB, Absa and Standard Bank are offering, in some cases, bonds of up to 110% for houses worth R250 000 and 90% to 95% for houses worth up to R1.5 million. This comes after South African banks recently faced criticism that they may be stifling economic recovery by cutting access to credit for hard-pressed consumers through the application of overly strict lending criteria.

Social housing

The social housing sector has also come under scrutiny in research done by the Social Housing Foundation (SHF) under commissioning and in conjunction with the Department of Human Settlements (DHS).

During a presentation by the SHF to the parliamentary Portfolio Committee, a member of its Research and Development Division, Adrian Di Lollo said in response to a question that by and large, Reconstruction and Development Programme (RDP) houses were not considered assets.

The high cost of maintenance to these houses was a burden for the householders.

He said the DHS needed to rethink its mindset on assets. Data showed that people who moved to social rental housing (SRH) did better from an economic point of view than they had in their previous accommodation – usually in informal settlements or backyards. This is due to their better proximity to services and employment.

At the same time, the DHS could only densify RDP projects to a certain degree, and that when entering the sphere of sectional title buildings, the question of levies arose. Those who required RDP houses could not afford the levies.

A consultant to the SHF Andreas Bertoldi added that from an economic perspective, a house could only be an asset if it were tradeable on the market.

There was a legislative requirement that RDP householders could only sell their houses after a stipulated period. Without any market, there was no leverage.

Despite this, many people were using their RDP houses to conduct economic activity and that this was, therefore, creating some benefit, he said.

The SHF research had produced enough information and data to enable a comparison between SRH- and RDP-housing according to a cost benefit analysis, and a full report was to be launched at a later stage.

The research had isolated the hidden costs, had looked to the broader economic impact and ongoing costs to the government and society of both schemes. It produced a longer term view, as opposed to the current debates that tended to focus on short-term benefits, but had of necessity been limited in its approach.

The study concluded that neither model could be chosen as applying across the board, as each was effective in different circumstances. SRH was well suited to densification, but was not an option for the very poor, as it cost about R1 500 per month.

Improving the location of RDP housing could, however, do much to improve its viability.