When Mzukona Mantshontsho approached a real estate agent about buying a two-bedroom, 300,000 rand ($37,500) house in a new development south of Johannesburg this year, she told him he’d need a 10 percent deposit for his application to be considered, and his salary was too low.
Human Settlements Minister Tokyo Sexwale, who spent 13 years in prison with former President Nelson Mandela and served in his first post-apartheid government, is trying to help South Africans like Mantshontsho, who lost his first home and his unblemished credit record when he was laid off 10 years ago. The government’s new Finance-Linked Individual Subsidy Programme is intended to make it easier for low-income buyers to get loans.
“I am in a committed relationship, hence my desperate need to have property,” said Mantshontsho, a 37-year old father of one who earns 6,500 rand ($852) a month as a journalist at a non-profit community newspaper, and rents his home. “I’ve been looking for two years, but affordability through the banks has been an issue. The agent told me I would have to earn at least 9,000 rand for her even to consider my application.”
Reducing the country’s housing backlog, which has grown to 2.3 million from 1.5 million in 1994 when the African National Congress took office after the nation’s first all-race elections, is a key unmet goal in the transition to a multiracial democracy. The government is falling behind even after building 4 million low-cost homes, and 16 percent of the population lives in substandard housing, as banks tighten lending standards while property prices fall.
Down Payment Help
The government plan, known as FLIPS, reduces the initial home loan amount for first-time buyers of properties that cost 300,000 rand or less by serving as a down payment, bringing mortgage-financed housing within reach of low-income earners. The nation’s banks are counting on the subsidies, together with a government mortgage guarantee program due later this year, to help revive lending, stagnant since 2009 as the economy slowed and lending criteria tightened.
Mortgage lending growth in South Africa slowed to 1.2 percent in the year through February, from 3.3 percent a year earlier, according to central bank data. The pace of growth was as high as 9.9 percent in 2009 as the central bank cut its benchmark interest rate to a three-decade low of 5.5 percent and kept it there for a record 18 months. FLIPS may lift lending in the affordable-home segment, which accounts for about 5 percent of the nation’s 831 billion rand mortgage market.
“It’s going to have a huge impact on the market,” Nicholas Nkosi, director of affordable housing at Standard Bank Group Ltd. (SBK) in Johannesburg, said by phone. “One of the reasons for the slump in mortgage lending is affordability, and this subsidy will address that.”
Standard is the biggest lender in South Africa’s low-cost housing market, with 12 billion rand of loans, about 30 percent of the market, Nkosi said. Affordable-housing loans account for 4.2 percent of the lender’s mortgage book.
“We want to double that by 2015,” Nkosi said. “It is a hard target but it is achievable. It is a market we’re focusing on.”
Sexwale, 59, a former member of the ruling African National Congress’s military wing who left government for business in 1997 before returning to President Jacob Zuma’s cabinet in 2009, introduced the new finance-linked subsidy on April 1 and plans to start the mortgage guarantee plan later this year. South Africa should also consider creating a state-owned construction company to reduce the cost of building new homes, he told lawmakers in Cape Town on May 9.
Under FLIPS, households earning between 3,501 rand and 15,000 rand per month qualify for subsidies ranging from 87,000 rand to 10,050 rand, depending on income, in terms of the program. The subsidy amount is inverse to household income, according to government documents.
Prospective home buyers receive the subsidy only if they qualify for a mortgage to buy a new house for less than 300,000 rand in a housing development approved by the National Housing Finance Corp., a unit of the Department of Human Settlements. The subsidy takes the place of a cash deposit.
About 10 percent of South Africans, or 4.5 million people, predominantly blacks, live in self-built shacks in so-called shanty towns in South Africa’s six major urban areas, according to the Human Sciences Research Council, a Pretoria-based, government-funded research organization. Another 6 percent live in rural dwellings.
South Africa’s housing backlog is partly a legacy of apartheid, which consigned black people to rural areas or so-called townships on the outskirts of cities. More affluent suburbs closer to city centers were reserved for white South Africans, who make up about 4.6 percent of the population.
Black South Africans like Mantshontsho, who covers community news for the Cosmo City Chronicle, a free newspaper, were barred from owning property in South Africa’s urban areas. Government houses built since 1994, when the African National Congress came to power, are typically 40 square meter brick structures, with two or three rooms, running water and electricity. The homes, known as RDP houses after the government’s Reconstruction and Development Plan which conceived them, were often built on available land far from urban centers.
Mantshontsho pays 1,500 rand a month rent to share a three-bedroom house in Cosmo City, a sprawling RDP development south of Johannesburg where he is also looking to buy a home. While he’d prefer to live closer to the city center, where his workplace is located, housing there is unaffordable, he said.
Slowing economic growth, unemployment of 24 percent, inflation that’s almost doubled since September 2010 and household debt levels, on average, of 75 percent of disposable income, have put mortgage loans out of reach of many consumers. In addition, South Africa’s National Credit Act came into effect in 2005, establishing strict criteria for bank lending, said Jacques du Toit, a real-estate analyst at Absa Group Ltd. in Johannesburg, a unit of Barclays Plc and South Africa’s second-biggest mortgage lender.
“It’s not that we don’t want to lend,” Du Toit said in a phone interview. “To a large extent, the problem is on the demand side. Mortgages tapered off quite significantly during the recession and haven’t really recovered. The National Credit Act has tightened lending criteria, and many consumers are still battling with impaired credit records.”
South Africa’s economy, which emerged from a recession in 2010, will probably grow by 2.7 percent this year, down from 3.1 percent growth in 2011, Finance Minister Pravin Gordhan said in his February budget speech.
The central bank has kept its benchmark repurchase rate at 5.5 percent, the lowest level in more than three decades, since November 2010 to help support growth in Africa’s largest economy. Inflation (SACPIYOY), which exceeded the bank’s 3 percent to 6 percent target for four consecutive months until February and was at 6 percent in March, will probably peak at 6.5 percent in the second quarter, Governor Gill Marcus said on March 29. The rate was 3.2 percent in September 2010.
Investors are betting the central bank will lift its repo rate by 50 basis points, or 0.5 percentage point, in the next year, with forward-rate agreements starting in 12 months yielding 6.01 percent. An increase in the repo rate, which banks use as a benchmark for mortgage rates, would make the loans even less affordable for many consumers and banks less eager to finance them, Du Toit said.
Falling Home Prices
“It’s not only affordability that is an issue,” he said. “You also have to take into account the property cycle. With real home prices in decline, you’d be financing a depreciating asset. Obviously, banks are reluctant to do that.”
South African small-home prices dropped 18 percent in April from a year earlier to 622,000 rand, compared with a 4.9 percent decline in the prices of mid-sized homes and a 0.5 percent drop for large houses, Du Toit wrote in May 8 research note. That puts a small home of 80 to 140 square meters out of reach of Mantshontsho and many others, who can only dream of owning a 40 square meter house with the government’s help.
Mid-sized houses of 141 to 220 square meters sell on average for 964,000 rand, and large homes of up to 400 square meters for 1.47 million, according to Absa. A four-bedroom home in one of Johannesburg’s more affluent, predominantly white, northern suburbs can fetch between 5 million and 15 million rand.
The average monthly income of a South African household is 14,000 rand, according to Statistics South Africa.
Affordable Home Lending
Absa’s affordable-housing loan book, catering for mortgage loans of 300,000 rand or less, rose by 11 percent to 7.4 billion rand, or 2.5 percent of total mortgages, in 2011 even as its overall home loan book declined by 5 percent, according to the company’s 2011 annual report.
At Johannesburg-based First National Bank Ltd., a unit of FirstRand Ltd. (FSR), the third-biggest lender, residential mortgages grew 2.2 percent to 156 billion, with affordable housing accounting for 8.2 billion, or 5.2 percent of that, according to the company’s 2011 annual report.
“The increase in advances was driven mainly by growth in affordable housing where sales increased 13 percent,” CEO Michael Jordaan said in the report.
Nedbank Group Ltd. (NED)’s home loans declined 1.9 percent to 143 billion rand in the year through December 2011. Affordable-housing loans stood at 3.3 billion rand, or 2.3 percent of the total.
Home prices around Johannesburg, South Africa’s economic capital, start from 242,000 rand for a 40 square meter sectional-title unit, the Centre for Affordable Housing Finance in Africa, a Johannesburg-based organization, said on its website.
Banks Will Participate
The FLIPS subsidy together with the mortgage guarantee incentive would put a 300,000 rand house within reach of a family earning 7,000 rand a month, Kecia Rust, a researcher with the center, said by e-mail in response to Bloomberg’s questions.
“I do think banks will participate,” Rust said. “This is a market that continues to approach them and for whom they can currently do nothing.”
For Mantshontsho, FLIPS represents a glimmer of hope.
“I will definitely investigate,” he said. “I have started asking the questions. I hope it helps.”