HOUSING FINANCE
SOUTH AFRICA HOUSING DATA AND INFORMATION
2000

HOUSING FINANCE
Description of Housing Finance System
South Africa’s housing finance system is striving to address the very large income gaps between its peoples.  For the top 10% of the population (moderate and high-income) that can afford a conventional house, a mortgage finance system based on traditional banking practices operates very successfully.
For the next 20% - 30% of the market (low-income) a range of housing development institutions have been established to facilitate access to finance, either through the banks or non-bank lenders.  These institutions will be discussed individually below.
For the bottom 60% of the market, characterised by very low-incomes, informal employment, unemployment and so on, banks are unable to provide financial assistance.  Here community and group lending schemes are beginning to fill the need for end-user finance.
Relevant Statistics
Non-performing loans for South Africa’s banks totaled R28.8 billion at 31 December 1999.  Of this total, R12.4 billion were in respect of housing.
South African banks have been faced for quite some time with the seemingly intractable problem of the failure of many (formerly) black township residents to pay their rates, service charges and mortgage bonds.  Whether this is because of economic problems, dissatisfaction with their house, or for political reasons, the result is that South Africa’s financial institutions currently have approximately 50 000 township property loans in default.
In examining the reasons more closely, the main cause of this situation is economic.  Borrowers have lost their jobs through retrenchments, redundancy and so on.  A significant number of other hardship cases (illness, death and divorce) have also negatively impacted on this situation.  Moreover, once retrenched, unemployment continues to dog these borrowers, as they often suffer from the “last in/first out” phenomenon.
New Organisations – see Government Policies
Interest Rate and Mortgage Pricing
South Africa has been slowly recovering from the Asian crisis of 1998, which had a severe impact on the South African economy when the interest rates spiked.  While it was subsequently shown that the South African banking system is, indeed, quite sound, foreign investors nevertheless exhibited a “herd mentality” when it came to reducing their exposure in developing markets.
The South African Reserve Bank has worked steadily to bring the interest rate down – currently the prime rate is at 14.5 percent - the same as the mortgage rate. The SARB has publicly stated that it intends targeting inflation at between three and six percent by 2002.  It will therefore no longer try to protect the currency by raising interest rates when outside shocks to the economy occur.
This position is being severely tested with the recent depreciation of the currency due to the strong dollar, the Zimbabwe political crisis and the sharp rise in international oil prices.  Economists predict the rates will therefore begin rising again, possibly nipping South Africa’s economic recovery in the bud.
Over the long term, South Africa is a relatively open, small economy, making it very exposed to international perception and capital flows.
Loan Products
While the problems with mortgage lending have continued in the townships and inner city areas (see below), lending has continued to grow in the suburban areas.  South Africa’s mortgage penetration rate (mortgage book outstanding as a % of GDP) at 30% compares favourably with higher income countries such as Hong Kong, and far exceeds countries of a similar level of development, such as Mexico.
1. The majority of outstanding and new mortgage loans made by commercial banks to the conventional (mod- and high-income) market are characterised as follows:
  • secured by a first lien on the house;
  • self-amortising over a 20 year term;
  • variable interest rate;
  • pre-payment at any time at a nominal or no cost; and
  • 20% or less down-payment
The different banks offer small variations around this standard design, including some relatively limited fixed-rate lending, two year maximum with the ability to review.  This fixed rate lending was a response to the outcry when the mortgage rates rose dramatically in 1998. Unfortunately once people choose the fixed rate, the rates invariably move downward.
Increasingly competition has become price-based, with lenders offering rates below prime to preferred larger borrowers.  The 1999 entry of SA Home Loans (see below), an alternative housing finance company, is a further attempt to induce a price war.  SA Home Loans, modeled on Australia’s non-bank securitisation attempts, prices itself very aggressively.  It believes it will succeed in growing market share due to its non-bank status and the potential to fund loans in the capital markets through securitisation.  Naturally, the retail banks are watching its progress with interest.
2. A variant of the mortgage bond is what is termed an “access bond”.  This bond is written to permit renewed borrowing up to the maximum amount of the initial principal.  Historically house prices in South Africa have appreciated at 10% per annum.  This is no longer the case, placing increased burden on the value as collateral.
3. Another variant of the mortgage bond is the “affordable housing loan”.  Due to severe affordability problems, lower income groups have not been able to purchase a house.  These bonds have therefore been written in such a way as to bridge gaps between what a households earns and what it needs for a deposit, monthly repayments, transactions costs and so on.
In general these loans are written up to the full cost of the house plus transaction costs, provided there is coverage of 20% of the total loan amount by one, or a combination of the following:
  • pledge of provident or pension fund;
  • guarantee by the employer; or
  • purchase of a guarantee for up to half of the amount from the Home Loan Guarantee Company (see below)
The term of these loans is 20 years, they have a flexible interest rate and a payment-to-income ratio not to exceed 35% of combined household income.  As this form of lending, has often resulted in over-borrowed customers, the banks have become less inclined to approve them without the borrower putting some of his/her own cash up-front.
Note:  the best traditional customers can often get a discount of up to 1%.  In the “affordable” market, the interest rate may exceed the average by 1% - 3%.  This is generally to compensate for the higher administration costs; these smaller mortgage bonds attract.
At present the banks hold approximately 300 000 mortgage loans with a value of R14 billion in the townships.  This includes more than 140 000 mortgage loans to a value of R10 billion in areas covered by the (former) Mortgage Indemnity Fund (MIF, see below) 
The MIF was established as an “interim” body in June 1995 – it closed in April 1998 – to facilitate the re-entry of the banks that had withdrawn from township lending during the late 1980s and early 1990s due to political action.
4. Despite the efforts of banks to address home loan requirements of the lower end of the market, the experience has shown that mortgages are not necessarily an appropriate instrument for this segment of the market.  Due to the uncertainty of the economy, borrowers find a 20- year mortgage loan difficult to sustain.  Moreover, the extreme volatility in the interest rate results in households being over-borrowed when the rate shoots up.
Research has revealed that these borrowers prefer to borrow smaller amounts, for shorter periods of time and with a fixed interest rate.  Hence, since the mid-1980s, the banks have offered a non-mortgage backed product, called a “micro loan”.
These loans are very small (+R9 000) by mortgage standards, have shorter terms than standard mortgages and may or may not carry a fixed rate of interest (often prime + 3%). 
They are not secured by the property, but by a pledge of the borrower’s pension or provident fund benefit in the case of being provided by a bank.  If they are from a non-bank micro-lender they will be unsecured, and therefore priced accordingly (see below).
Due to the smaller nature of these loans, they are generally used for building core houses, or for housing improvements.  In particular, government subsidy beneficiaries (see below) can combine them with their subsidy to increase the standard of the housing they access.   The banks hold micro loans to the value of +R3 billion.
From the borrowers perspective, the key advantage of the micro loan is that it is far less complex to manage, the costs are far more transparent than a mortgage loan, with the total cost reflected up-front in the loan amount.  Moreover, if the borrower goes into default, generally only his pension/provident fund benefit is at risk, instead of the actual house, as is the case with a mortgage bond.
6. While micro loans have proved useful to low-income borrowers, they have not made a significant impact on housing demand due to their relatively small size.  Hence, a new innovation, Gateway Home Loans (Pty) Ltd. has been launched.  Gateway is fully described under Housing Finance Institutions.
Identification of Major Lenders
The bulk of lending for housing purposes is by commercial banks out of their own funds and for their own portfolio.  The commercial banking sector is organised primarily around several large banking groups.  The four major groups hold about 85% of the mortgage loans.  They are:
ABSA GROUP
  • Allied
  • Trustbank
  • United Bank
  • Volkskas Bank
  • NuBank
STANDARD BANK
FIRST RAND
  • FNB
NEDCOR
  • Nedbank
  • Perm Bank
  • People’s Bank
The rest of the market is made up of smaller banks, in particular Saambou, NBS, and Investec.
Non-bank lenders
A large portion of the low-income housing market does not have access to a pension or provident fund, despite being formally employed.  Moving in below the bank lenders is a crop of non-bank, for-profit lenders that provide finance to these individuals.  These non-bank lenders make “unsecured” micro loans available to borrowers for the purchase, construction and/or improvement of housing. 
Loans are payroll deducted, for amounts usually less than R6 000, with a repayment period of approximately 24 – 36 months.  They are generally fixed at an interest rate of around 43%.
The micro-lending industry has become a multi-billion Rand industry.  The roots of this industry can be traced to an exemption from the Usury Act, promulgated in 1992, which essentially deregulated interest rates on small (initially less than R6 000, now less than R10 000) short term (less than three year) personal loans.  
A key question is what impact micro lending has had on housing; given the fact that micro loans can be applied to a range of purposes.  The National Housing Finance Corporation (NHFC see below) that supports housing-related micro-loan providers, carries out research to determine what these micro loans are used for.
With the phenomenal growth in the micro lending industry (both bank and non-bank), a form of regulation has been needed.  A Micro Finance Regulatory Council (MFRC), was formed in 1999 to carry out this role.
NGO Lenders
In addition to the private sector micro lending activity, there are also emerging NGO lenders.  The most well known is the Utshani fund, established with a R10 million grant from the South African government working with the South African Homeless People’s Federation.  Women are encouraged to form groups and save collectively in order to access a small loan.  The loan is then used to purchase building materials.  The women pride themselves on their ability to then build homes collectively. 
Recent figures show that over 80 000 people participate in these schemes, with savings topping R2 million.
SECONDARY MARKET
Except for an attempt in the late 1980s by the then United Building Society to securitise R250 million of mortgage loans, South African banks have not been keen to securitise their mortgage books.  There are a number of reasons for this.  First, South African banks use variable rate mortgages that protect them against interest rate fluctuations.  Second, the South African Reserve Bank’s capital adequacy requirements traditionally have been lower for mortgages than for other forms of lending – this has recently changed for loans over 80%.  Third, there has not appeared to be economies of scale, either in terms of securitising a pool of loans or in developing the debt issues to be sold to investors.
Nevertheless, as noted above, a non-bank home loan originator, SA Home Loans, has launched a mortgage finance company.  In line with how securitisation has operated mainly in Australia, this new company will be seeking clients from the middle and upper-end of the housing market, where the risk is much lower.  This means it will be using more stringent lending criteria – 30% equity – than the commercial banks use.  Moreover, lending will be targeted at the low-risk suburbs.  High-risk areas, such as townships, will be avoided.
Are commercial banks ready to follow suit?  During the first half of 2000, some of the retail banks announced their intention of moving in this direction.  Two banks have announced moves into the upper end of the market.  One bank has announced its move into the lower and moderate market.  Another bank has announced a move to securitise its micro lending book.
In addition, to the above example, the National Housing Finance Corporation (see below), tasked with broadening access to credit in the low-income housing market, set up a securitising institution, Gateway Home Loans (Pty) Ltd during 1999.  This initiative is described below.
GOVERNMENT POLICIES AND ORGANISATIONS
Policy
South Africa’s new housing policy arose from a multi-party negotiating body, the National Housing Forum (NHF), made up of representatives of ‘mass-based’ political groupings, the business community, the building industry, the financial institutions, the unions, the civics and development organisations.  Negotiations begun in 1992 and continuing until the election of the Government of National Unity in 1994, were a response to the then government’s racially based housing policy.
Key to the delivery of housing to poor households is the new Housing Subsidy Scheme (HSS) launched in March 1994.  The HSS is based on certain principles:
  • the subsidies are paid to acquire affordable “housing options” with secure tenure and minimum health and safety standards;
  • all households earning less than R3 500 (US $ 600) per month are eligible, but the subsidy levels are linked to actual income so that the poorest households receive the greatest subsidy benefit;
  • a range of tenure and delivery options be accommodated;
  • private investment and sweat equity be encouraged to increase the value of  what the subsidy delivers;
  • the subsidy is accessed as a “grant” and not as a “loan”.
Subsidy levels linked to household incomes are set out below:
Household Income Subsidy
0 – R1 500 R16 000
1 501 – R2 500 R  9 500
2 501 – R3 500 R  5 000
Qualifying households are able, where possible, to combine their subsidy with private sector finance (generally micro loans).
Housing Finance Institutions
An agreement – A Record of Understanding (ROU) … - signed between government and the banks in October 1994 was aimed at creating a “stable public environment” which would be conducive to the resumption and extension of lending to low-income households.
The ROU was necessary to encourage the re-entry of financial institutions into the low-income housing market after their almost total blanket exit from it in the early 1990s.  Financial institutions insisted that their re-entry was being constrained by their inability to repossess a house when a homeowner defaulted on his mortgage repayments.  The defaults may have been politically-driven – as with the bond boycotts that were being used as a weapon of  “the struggle”, or economically-driven due to the worsening financial circumstances of the bondholder as the South African economy deteriorated following its opening up.
Flowing out of the ROU agreement a number of housing finance institutions have been established.  Government found it necessary to set up these intermediaries to provide guarantees to both the banks and non-bank lenders as a means of lowering the risk of operating in this segment of the market.  These institutions are described below.
Mortgage Indemnity Fund (MIF)
The Mortgage Indemnity Fund was launched in June 1995, as a wholly-government owned company to provide cover against political risk that banks would be unable to repossess properties due to a breakdown in law and order.  The MIF was set up as an “interim” measure – it closed in April 1998 – until “normality” was re-established.  The expectation was that it would unlock significant mortgage lending in the township housing market where banks had stopped lending.
As a result of the provision of an indemnity by the MIF, there for a period of time was significant resumption and increased lending in formerly “red-lined” areas.
Fifteen financial institutions were accredited and indemnity cover was provided in 543 areas.  Arising from this situation, 140 000 mortgage bonds were granted, with a value of over R10 billion.  Of this total, in the subsidy-linked segment of the market, 73 000 loans, with a value of R4.1 billion were made.
Servcon Housing Solutions
Servcon Housing Solutions was launched in June 1995 as a joint venture between the government and the banks.  It was given the mission of dealing with the properties that had been repossessed by the banks after a sale in execution, but which the banks were unable to physically repossess due to a breakdown in law and order.  Presently there are 27 000 non-performing loans being handled by Servcon – called the “ring-fenced” book.  The value of these loans is R1.2 billion.  In addition to Servcon’s 27 000 properties, the banks have another 22 000 defaulted on properties on their books.
Despite the optimism that followed the ROU, the problems of repossession and normalisation of the lending environment has not been solved. Under a new agreement, concluded between the government and the banks in April 1998, Servcon was given a fresh mandate to deal with these properties.  A generous package of options was prepared and defaulting households could choose whether to ease back into repaying their bonds according to a revised payment schedule, pay an interim rental, or be moved into more affordable accommodation.  Government agreed to guarantee 50% of the cost of the portfolio.
In March 2000, an appraisal of Servcon was carried out.  Of the original 33 000 properties ring-fenced by Servcon, only 19 240 (64 percent) of the households have signed agreements to enter into one of the above options.  Of the signed up households, only 33 percent of the clients are paying regularly, with agreements being broken as soon as they are signed.
The main cause of this situation is economic.  Borrowers have lost their jobs through retrenchment, redundancy and so on.  Servcon has attempted to use forbearance for these economic hardship cases.
At the same time there are still a large number of households who have refused to join the programme and simply do not repay their loans.   In some cases political and/or civic leaders are able to mobilise communities to not pay.
Servcon will try to carry out evictions, but it is often very difficult, if not impossible, for financial institutions to gain vacant possession of the house. 
In the light of the above, government is being forced to re-think its strategy around normalising the Servcon book.
The National Housing Finance Corporation (NHFC)
The difficulties in providing end-user finance to the low-income housing market necessitated the creation of an actual government-backed development finance institution that can guarantee a lender’s risk and/or make funds available to lenders for on-lending to the man in the street.
The NHFC was therefore established by government in May 1996 as a development finance institution aimed at seeking ways to mobilise housing finance to create housing opportunities for low- and moderate-income households.  The NHFC functions essentially as a wholesale financier.  It takes investments from contractual savings institutions and directs finance and other assistance to bank and non-bank lenders servicing the low-income housing market. 
The NHFC has a variety of focused programmes.  It supports incremental lenders through its Niche Market Lender Fund.  Rural finance lenders are supported through the Rural Housing Loan Fund.  Rental housing institutions receive support through the Housing Institutions Development Fund.  The NHFC also established Gateway Home Loans during 1999.
From its inception until end 1999, the NHFC had approved some R966 million in credit to 36 institutional clients, of which R712 million had been disbursed.  This had resulted in some 144 936 end user housing loans, on average of R5 000 each.
Gateway Home Loans (Pty) Ltd
While more and more low-income borrowers have been turning to micro loans to finance their housing need, they are still faced with the fact that these loans are generally only large enough to do incremental building rather than purchase a complete house.  Hence, the National Housing Finance Corporation launched a subsidiary Gateway Home Loans, in April 1999. 
Gateway has been set up to pilot a new model of lending for the formally employed that cannot afford a mortgage loan and need a larger micro loan than is currently available.  The initial lending product, the Makhulong Home Loan, is similar to existing products in the market, but extends these products to enable the borrower to purchase a house.  The loans will, in fact, be almost double the size of the traditional micro loan, up to a maximum of R50 000.
Gateway accredits primary market lenders (PMLs), that is, banks and non-bank lenders, to offer this new product.  The product is similar to the current micro loans in that it relies on financial security in the form of retirement fund guarantees for half the value of the loan.  It uses default insurance from the HLGC for the remaining 50%.  Installments are to be paid by employers from the employee’s salary using a payroll deduction facility. 
The advantage to the banks and non-banks in becoming accredited lenders is that they will not have to hold the Gateway loans on their balance sheet, resulting in much lower capital asset requirements.  Hence, lenders in the low-income market will find their exposure considerably reduced.  Gateway will pool the loans into a portfolio that it then securitises through a debt issue.  The result is a secondary market process whereby these loans will be sold to a third party.
The National Urban Reconstruction and Housing Agency (NURCHA)
The National Urban Reconstruction and Housing Agency was established in May 1995 as a Presidential Lead Project to facilitate access to finance for subsidy-linked housing projects by providing guarantees on working capital and bridging finance to developers, especially emerging developers. Up to year-end 1999, NURCHA had provided R31.9 million in bridging finance guarantees, which have facilitated 28 191 new houses. 
More recently, NURCHA has moved into providing equity-type funding for developments and guarantees on end user finance.  NURCHA has also been piloting a savings-linked programme through which it intends linking up with a retail bank.
NURCHA’s operational needs were secured by an initial grant of R20 million by the South African government and R18 million from the Open Society Institute of New York, bringing its grant funding to R38 million to be used solely for operational expenses.  On the back of an OSI guarantee NURCHA has raised additional funds in guarantees from the private sector, the South African government and other international donors.
Home Loan Guarantee Company (HLGC)
The Home Loan Guarantee Company was established in 1989.  The main purpose of the HLGC is the facilitation of access to finance for low-income housing by providing guarantees of last resort for mortgage-backed and non-mortgage backed finance, and providing, mobilising and managing mortgage insurance.  The HLGC also specialises in borrower education.
The HLGC has a capital base of R200 million that it can use to gear guarantees.  The total level of loans guaranteed since its inception is now in excess of R1.3 billion.
Both NURCHA and the HLGC are registered as tax-exempt, non-for-profit companies (Section 21 companies).
National Home Builders Registration Council (NHBRC)
The NHBRC was established in 1995 to regulate the home building industry, and to provide fall back warranties to consumers.  This was designed to address the major risk to purchasers and funders of new houses that the building was defective, and that the original builder could not, or would not, repair it.  Originally a Section 21 Company, NHBRC has now become a statutory body in terms of the Housing Consumer Protection Measures Act of 1999, under which all new houses in the country will fall.
REAL ESTATE MARKET
House Prices
The average nominal price of three categories of houses was as follow for the first quarter of 2000:
  • small house (80m²-140m²): R183 850 (18.2% higher than a year ago);
  • medium house (141m²-220m²): R225 920 (13.7% higher than a year ago);
  • large house (221m²- 350m²): R285 730 (7.6% higher than a year ago)
Building Costs
The average building cost per square metre for the various categories of houses were as follows in the first quarter of 2000:
  • small house (80m²-140m²):  R1 524/m² (15.4% higher than a year ago);
  • medium house (141m²-220m²): R1 423/m² (12.1% higher than a year ago);
  • large house (221m²-350m²): R1 349/m²  (4.2% higher than a year ago).
CONTACTS
The Banking Council’s Low-Income Housing Web-site is at www.banking.org.za.   A number of housing-related bodies are listed with full contact details.
Name Web Site
NHFC www.nhfc.co.za
Gateway Home Loans www.gatewayhomeloans.co.za
HLGC www.hlgc.co.za
NURCHA http://wn.apc.org/nurcha/
NHBRC www.nhbrc.org
The Banking Council Annual Review 2000 will be forwarded upon release.
Mary R. Tomlinson
The Banking Council, South Africa
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