Affordable Housing Institute : South Africa

I did a double-take surfing the internet the other day.  Under the heading “Developers bailing out”, it was reported that a higher interest rate, “coupled with softer housing demand are likely to force a number of developers out of the market, with those active in the lower to middle end likely to best survive the expected downturn.”

My eyes nearly got whiplash – those in the lower to middle end likely to best SURVIVE?  I read the article a second time. 

The normal story is that the constraints inherent in the lower to middle end of the market, coupled with low margins, are a serious disincentive to developers – such that the Banking Association reported late last year that there is a shortage of 625 000 ‘affordable’ houses (those costing less than R200 000) in South Africa.  Current supply of affordable housing is about 17 000 units a year, compared with the 132 000 needed to reduce the shortage by only 60% in five years.  The banks are anxious about the shortage because they’ve committed themselves to providing R42 billion worth of housing finance to low-moderate income households by the end of 2008.  If those households have nothing to buy, they won’t demand loans and the banks won’t meet their targets.

An analysis I did with colleagues earlier this year for the City of Johannesburg demonstrated the skewed housing delivery patterns that persist notwithstanding the distribution of household affordability for housing.  The table below shows the number of units delivered per type in Johannesburg in 2004, versus the percentage of the population for whom such housing was affordable.  While the population is clearly skewed towards the bottom end of the income pyramid, delivery is skewed towards the top end – the explanation being that higher end properties afford developers a wider margin. 

On this basis, it stands to reason that demand is waning at the top end – developers are running out of a market to sell to.  Speaking at the Rode Property Conference reported on in the news article, Dean Yeadon, MD of residential developer 2tribes, said that while it would have taken only one week to sell all the units in a new, mid-priced sectional title development a year ago, it could now take six to nine months to achieve that.

Given this, Yeadon said that “the best opportunities for developers were now at the lower middle end of the sectional title market, R300 000 – R600 000 …”.  Certainly, in an environment where the average house price is R792 627 in the second quarter of 2006 – up from R773 225 in the first quarter 2006 (according to ABSA), it is reasonable to suspect that there will be demand lower down.  But here, I saw what I was expecting… the “lower” market starts at R300 000, already outside the Financial Sector Charter range of sub R200 000 houses, and really only affordable at current rates to households earning at the very least, R9000 per month (which in Johannesburg at least comprise only just over 15% of the population).

If the supply shortage lower down the income pyramid is about margins, then the waning demand at the top – and the longer timeframes for selling of stock – bode well for an increased focus down the pyramid.  This (very gradual) normalisation of the supply market in line with the affordability distribution of the demand side presents local authorities seeking to stimulate housing delivery in the affordable market (are there any with such a goal, or are they all focusing on subsidised housing delivery?) a significant opportunity, especially given the Financial Sector Charter-driven availability of end user finance.  The Banking Association’s research into housing supply and functioning markets found that the shortage of stock “reflects a range of factors… zoning and getting approvals for new developments can take up to three years, and that raises holding costs for developers and ultimately the cost of the house for the buyer.  Also there is a shortage of serviced sites” (reported in the Business Day).  These are specifically local authority-driven activities.  If municipalities were to address the stumbling blocks in the housing delivery process, NOT for the high end properties which yield a happy margin anyway, but rather for the subsidised AND ‘affordable’ (just out of the subsidy eligibility range) market, developers looking for opportunities in the residential development space might actually bite and forget the joys of sectional title Tuscan villas that have characterised their appetite in the past.  Certainly this is the direction the banks themselves are looking, as they move into the development side to create the stock that they need to have available if they are to meet their FSC targets.  But their efforts in this regard will not be sustained if it continues to be as difficult as it has been.

As the market shifts towards the demand side, it will be increasingly important for local authorities to play their part and not stand in the way.