end , and helps us to unpack the likely impacts of the pandemic on the country ’ s housing sector , and to identify the areas of opportunity for affordable housing moving forward .
Overview of Market Segmentation South Africa ’ s residential property market was valued at R5.5 trillion at the end of December 2019 . Although the bulk of the total market value is concentrated in higher market segments , most formally registered properties are in the lower end – 55 % of properties ( 3.6 million ) were valued at R600 000 or below .
Government delivery of affordable housing in the past two and half decades has had a profound effect on the residential property market . Subsidised housing makes up a large share of properties at the lower end of the market and assists in bridging the affordability gap for low-income households . In 2019 , 94 % of new housing stock in the entry market was government subsidised , with little to no private sector delivery for new units valued under R300 000 . Private sector delivery of new units valued R300 00 to R600 000 was also very low in 2019 . This trend is also evident in resale market activity .
A critical supply gap exists for the working class ( properties valued between R300 000 and R600 000 ) and delivery in this segment has fallen almost 48 % since 2015 . So , while the highend market remains in excess supply , the bottom end is still in structural supply-deficit . Weakening construction activity , triggered by COVID-19 , could potentially result in a further decline in the supply of new residential units in 2020 / 21 .
Record Low Interest Rates Housing finance is vital in the housing delivery value chain and banks have an important role to play in providing housing finance to low-income earners . Data show that there are less bonded transactions for properties in the affordable market , suggesting low-income earners are largely excluded from the market .
In 2019 , this was true for both new and resale transactions . Resale market data shows that key mortgage lenders , namely Standard bank , FNB , Absa , Nedbank and SA Home Loans ( including Capitec ), are largely financing properties valued higher than R1.2 million , and this has increased steadily in the last decade . The reverse is seen in the affordable segment with the number of properties financed with a mortgage declining . Over-indebtedness of households with other credit products , affordability levels or a lack of savings to enter the market partially explain this trend .
We are now seeing historically low interest rates which creates tremendous opportunities for a first step on the property ladder . Several rate cuts , during the COVID-19 induced lockdown , brought the prime rate to 7 %, as of July 2020 . FNB ’ s sales activity shows that there is considerable uptake by first time home buyers , particularly in the low to mid value market . Although some market activity was due to pent-up demand due to the closure of the deeds office , the volume of new mortgage applications rebounded beyond pre-lockdown levels . Mortgage advances have also been progressive in recent months , given increased appetite for higher loan-to-value ratios and even 100 % mortgages by the
big banks . First time home buyers accounted for more than half of home loans in the second quarter of this year .
Affordability remains a key constraint for first-time ( workingclass ) homebuyers , and cheaper finance means improved affordability and extended market reach within the affordable housing sector . When the prime rate was 8.75 % in March , for example , a monthly income of approximately R12 200 was needed to acquire a R400 000 house ( without a finance-linked government subsidy ). With prime dropping to 7 %, the same house becomes affordable to a household with a monthly income of R10 500 .
Given the immediate challenges brought about by the COVID-19 landscape , the rate cut will assist homeowners to keep up with debt repayments on existing home loans . The banking sector has also been fundamental in supporting affected households with various temporary relief measures , such as moratoriums on loan and mortgage payments . In the current economic climate , a favourable lending environment and prime-linked mortgage loans could be a catalyst for lower residential property markets going forward .
Affordable Housing Key for Building a Resilient Post
COVID-19 Era A large and growing segment of the residential property market is made up of subsidy beneficiaries and lower income households . Across most of South Africa ’ s cities , the gap in entry and affordable housing is absorbed in informal settlements and backyard rentals and through informal transactions of homes in low- value neighbourhoods .
In 2020 , housing became a key site through which COVID-19 is experienced , and looking forward , the prospects for growing demand in the lower end of the affordable housing market are strong , as shrinking incomes necessitate cheaper housing options for households . CAHF estimates that housing construction and housing rental activities contributed 3.7 % to national gross domestic product ( GDP ) in 2017 – almost as much as agriculture , forestry and fishing . For every Rand invested , R3.23 are delivered .
This means that housing construction and rental-related activities provide a significant stimulus to many other sectors of the South African economy . The housing sector thus creates opportunities for government , financiers , investors and households alike . Recognising the potential of the affordable housing market , and supporting it with the necessary investments , can facilitate the acquisition of adequate ( low value ) housing by low-income earners and allow households to move more easily from one property to another over time .
SOURCES CAHF
MARIA NKHONJERA Maria Nkhonjera is a Senior Research Manager at CAHF . She has a special interest in the role of inclusive and innovative development finance in African markets and holds an MCom from the University of the Witwatersrand .
SA Real Estate Investor Magazine DECEMBER / JANUARY 2021 21