Bottom end of housing sector threatens stability

The residential construction sector has been one of the saddest stories of the recession. Loads of foreclosures as well as consistent falls in house prices have pushed demand for new homes to deep lows.

Construction companies have been desperately hoping for a turn in fortunes, but that is unlikely to happen before there is an upturn in the residential housing market.

Draft legislation, if passed by parliament, will see property tax and prices of residential rental units going up dramatically; and could give the residential construction sector another body blow.

The proposed new property tax dispensation for rented residential units in the Municipal Property Tax Amendment Bill proposes that rented residential properties should be taxed at a much higher rate than those occupied by the owners.

According to some experts, the implication of the proposal will be that property tax on properties being rented out could go up by more than 200% in some instances. Apart from the impact on people who invested or planned to invest in rental property as part of their retirement plan, it could also adversely affect the affordability of rental property.

What is more than likely to happen, is that the increased property tax would be added to rents and effectively be paid by tenants. These people, who mostly could in the first instance not afford to buy their own home, would be forced to downgrade dramatically or even be forced back onto the street.

It can further be anticipated that it will impact negatively on the creation of new housing stock, as investment in residential properties will become substantially less attractive.

Challenging times for property market

The South African residential market is already going through a very challenging period – the worst experienced in many years – with prices in 2010 dropping to 3% below 2004 levels, but recovering since then by 8.5%.

It is at the very bottom end of the housing sector where South Africa’s greatest challenge lies – where the poorest of the poor often battle to find accommodation in informal housing. It is here that the threat to social and political stability is lurking.

Despite all its problems, however, the South African formal property sector is not in such dire straits as is being experienced by this sector in the United States, the United Kingdom, and many parts of Europe and Australia.

South African residential house prices have increased some 10.5% since the low point of 2009, and its residential property has come back from a 40% reduction to a point where it has now risen to about 8% above the 2004 level, according to Bill Rawson of Rawson Properties, who recently returned from a trip to the US.

Putting off purchases

According to recent research, despite highly affordable housing and low interest rates, negative economic sentiment is motivating qualified buyers to put off the purchase of homes.

KB Home’s second quarter revenue fell 27% from last year to $271.7 million.

One problem has been that many investors with large amounts of cash are making purchases in the resale market, thanks to attractive valuations. Companies in the sector are trying different strategies to lure buyers back into the new-home market.

Some, for example, are making more features optional instead of standard in order to help improve margins and attract buyers.

Companies are targeting buyers looking to move up or trade down in the quality of their home.

While these strategies could help matters, no real headway will be made until the economy makes a meaningful recovery in housing demand, experts say.

Pressure on available stock

In sub-Saharan Africa, 265 million (35%) of the total population of 747 million are now officially classified as urban dwellers; and of these, 187 million (72% – double the standard world average) live in slums or informal settlements.

Forecasts indicate that by 2030, the world’s urban population will have grown to 650 million (i.e. 2.5 times its level in 2000), according to a report by Gerry Adlard of the African Centre for Cities, which is associated with the University of Cape Town.

In South Africa, this urbanisation process is taking place at an even faster rate than almost anywhere else, with 56% of our 50 million people living in towns and cities. This urban population is growing at a rate of 3% per annum (with the growth in the small towns being even faster).

Cape Town, by way of example, now has a population of close on four million (i.e. almost one million households).

According to Professor Simon Bekker of Stellenbosch University, this figure is growing annually by some 50 000 people (i.e. 16 000 households) as a result of in-migration (the move to the cities); and by 11 000 people per annum as a result of natural population increase.

Informal sector

It is estimated that 77% of people in Cape Town’s informal settlements live below the official poverty line, which the Census authorities in 2001 set at a monthly income of R1 600.

The current situation is that 200 000 extra households are now living in formal housing (or its yards) designed for one family only, while another 150 000 families are living in informal settlements. The total backlog on formal subsidised housing, therefore, is in the region of some 400 000 homes.

The annual supply of subsidised housing is 6 000 to 8 000 units, and the backlog in subsidised formal housing is likely to increase by nearly 20 000 per annum. The result is that these ‘surplus’ people end up in informal settlements, with complex problems and challenges associated with it. Squatting or land invasions are often associated with serious legal, urban planning and social stability problems. Shortages of land often lead to conflict between new migrants to the urban environment and older residents.

According to Adlard’s report, because extensions to informal settlements have been so difficult to achieve, on average every 10 poor households now have another eight living with them – a figure that is likely to increase.

Some businesspeople have argued there should be the recognition that private enterprise firms with reconstruction and development programme (RDP) development experience have to be encouraged once again to become part of the delivery process. Their track records, in many cases, have been far better than those of the municipalities, they claim.

It is true and common knowledge that in many instances, the quality of work delivered by RDP contractors was often shockingly below par. Getting some of the RDP houses fixed is an ongoing battle.

Adlard’s report, however, states that informal settlements initiated with the correct controls and with the services already installed can become attractive workable communities and can be part of the solution.

It is not so much the settlements themselves as the severe overcrowding in them that has always been the fundamental problem.

In a recent article under the heading, “How stable is South Africa?”, the celebrated analyst Dr Lawrence Schlemmer wrote that the core of recent “open protest among African voters was largely limited to the 17-20% of people living in typically badly neglected temporary shack, backyard or inner-city housing.”