Cost of entry level housing is bad for transformation

This column was originally published in Business Day on 26 May 2014

By Stuart Theobald

The trend in lending patterns in the banking industry is damaging the transformation of the SA economy, particularly when it comes to home ownership. Since 2008, when banks were hit by a wave of bad debt, home loans have become more expensive and are provided at lower loan-to-value ratios. So whereas pre-2008 home buyers could obtain 110% loans at 2% below prime, now borrowers tend to be granted loans priced at a premium to prime, and at loan-to-value ratios of 80%. At the same time, home buyers are increasingly black.

To find the extra cash to fund the value of their purchase, plus the transaction costs, borrowers are taking large unsecured loans. As I’ve argued in this column before, the actual cost of credit for the post-2008 home buyer has increased substantially – by my calculations monthly repayments for home finance, at least until the unsecured portion has been paid off, have more than doubled. A R500,000 house could be funded with monthly payments of about R4,000 – now the same house, financed with a mix of higher priced mortgage and unsecured loan, costs over R8,000. While not all unsecured credit goes into home ownership, the statistics for the lending industry clearly show how the type of credit granted has shifted. In mid 2008, of the total loan books in SA, 63% was mortgage finance and 4% was unsecured credit. At the end of 2013 that had shifted to 54% mortgage finance and 11% unsecured credit. This trend is even more pronounced for lower-value loans. The National Credit Regulator’s statistics show that for the last quarter of 2013, mortgages of less than R350 000 made up 7% of the total amount of new home loan lending. For the second quarter of 2008, this proportion was 16%. So mortgage finance has become much scarcer for cheaper housing; presumably buyers are relying on unsecured lending instead.

The impact is that fewer South Africans can afford to buy a home, and those that can afford to buy are forced to buy lower valued ones using unsecured credit. This is compounded by the fact that lenders have simultaneously tightened up on credit criteria, so fewer people can access home loans anyway. Why give this a racial spin? At the same time as this trend in lending has occurred, the race of home buyers has shifted. Black South Africans now make up more than half of the middle class, according to a study by the Unilever Institute at the University of Cape Town. But the absolute number masks the fact that a far higher proportion of the newly middle class are black, and it is the newly middle class who are likely to make up the bulk of home purchasers. Homes are an important product for the middle class, alongside cars and other consumer goods. This is naturally speculative – the proper numbers for recent trends are not yet available to confirm what logically should be happening in the market. But when lending trends are overlaid on demographic trends, it is clear that older middle classes benefitted from cheaper access to home finance than the newer middle classes do. The result is anti-transformative – it protects the old white-dominated pattern of home ownership.

Home ownership is not yet the political issue here it is in developed economies. President Zuma’s inauguration speech spoke of land restitution as a priority to drive black economic empowerment, but had nothing to say about urban home ownership. This rural bias in thinking about property ownership reflects the ANC’s performance at the poles, with rural support far stronger than urban. But the political impetus is sure to shift over the next few decades, if not sooner. South Africa reflects the experience of many developing countries with strong population shifts into the cities. Also, as the country develops, the middle class grows within urban areas. That will translate into increased pressure to make urban home ownership more affordable. The trend in the lending industry has gone the opposite way, which will accelerate political demands.

Urban home ownership is naturally not only a problem for the urban middle class. Those with the greatest barrier to entry are the excluded middle, between those qualifying for RDP-style social housing and those who are able to obtain formal home credit. These are, roughly, households earning between R3000 and R10000 per month. This no man’s land has partly been filled by unsecured lenders, but also through some innovative products like instalment finance for property which can effectively lower the cost of credit for homes priced under R300 000.

The financial sector has committed itself to an empowerment charter that includes provisions for investment targeted at the excluded middle, but says nothing about lending to the middle classes. The charter has been in limbo for the past few years due to internal squabbling and is now in a “transition period” due to expire in mid 2015. Its targeted financing provisions may go some of the way to addressing the problem. But it is time the industry thought seriously about what the overall lending pattern is doing for urban black property ownership.