AFFORDABLE HOUSING MATTERS
There has not been a visible resolve to develop products that deal with affordability . The obvious consequence should this continue unabated is that the housing finance gap will continue to grow wider as levels in indebtedness worsen and while collateral needs continue to grow . Developers will continue to shun affordable housing developments .
Alternatively , the few that dare venture look for cheaply priced land which is situated at the outskirts of urban areas to maximise their development profits while perpetuating spatial segregation . The beneficiaries that end up buying these homes who are not located closer to their employment destinations become saddled with the excessive costs of transportation . This does not improve their quality of life as the cost of living exerts pressure on their disposable income . In addition , the long hours spent commuting to and from work results in less time spent with loved ones and the family unit takes strain .
CAN INNOVATION BE THE PANACEA TO THE DEMAND AND SUPPLY CHALLENGE ?
Bad credit risk is a result of a behaviour which can be changed with more financial literacy training . However , the biggest challenge is the lack of AFFORDABILITY , which is the ‘ elephant in the room ’. It is incumbent on financial service providers to look at innovative finance solutions that aim to tackle this elephant if QD levels are to be increased to levels that trigger primary stock development . This elephant stands in the way of the target customers ’ ability to enjoy home ownership .
Based on my engagements with developers in the GAP housing market , there is a strong correlation between the QD size and the supply of primary stock . Developers are compromising their ability to significantly reduce the price of housing stock because of their inability to take advantage of economies of scale . This is attributable to the uncertainty regarding the quantum of QD . Hence , most will only build at the pace and growth of the QD and not build at scale to enjoy the resultant economic benefits . The market is faced with a dearth of innovation because existing products do not sufficiently tackle this elephant . One exceptionally courageous attempt has been evidenced by the introduction of a HiP product .
ADDRESSING THE ELEPHANT
The Old Mutual Group and the National Housing Finance Corporation ( NHFC ) created a public private partnership called the Housing Investment Partners ( Pty ) Ltd ( HiP ) to address this elephant .
Hip has been fortunate to receive funding amounting to R1.85-billion thanks to government support in the form of junior debt funding of R270-million from the NHFC and a grant of R100-million from the Jobs Fund ( National Treasury ) plus private sector debt capital of R430-million from Old Mutual Capital Holdings and R1.05-billion from Futuregrowth Asset Managers .
The HiP product enhances affordability . The innovatively-designed product allows the customer to enjoy comparatively lower initial instalments when compared with a conventional home loan . Instalments increase as the customer ’ s salary increases . Instalments do not change with interest rates and this unique benefit allows the customer to climb the housing ladder much earlier .
Other pecuniary benefits include protection against interest rate volatility , credit life cover , predictability of the monthly loan repayments which only increase with the customer ’ s salary increase . Repayments do not fluctuate with changes in the repo or prime interest rates . This innovation has been hugely successful as evidenced by the growth in the assets under management from R100-million in 2014 to R1.3-billion in 2018 . This is a more than tenfold growth within four years . Without any above the line advertising , the business received 50 000 applications amounting to R21-billion to date . This bears testimony that any customer-centric innovation addressing the elephant will be well received as shown by the strong demand .
The challenge with large commercial banks is that their size does not make them agile enough to quickly introduce innovation . The cost of the required systems changes can only be necessitated if such changes meet the approved internal pay back hurdle rates to warrant incurring these development costs . It requires a strong and faithful affordable housing activist within the rank and file with the tenacity to plough through the bureaucratic red tape to get the budget and financial resources needed to create the appropriate innovation . The ideal housing finance solution needs to tackle the affordability dilemma and inevitable changes in the borrower ’ s credit profile .
THE WRAP
The industry needs to develop an economic approach to social investment which is founded on a more customercentric approach to product development . This ensures that innovative housing finance solutions that adequately address the core problems facing the GAP market are developed . The challenges in both the supply and demand sides of the GAP market housing value chain cannot be over-simplified into just an innovative housing finance solution owing to other dependencies that must be addressed by both private and public sectors . It is also clear that many processing costs are wasted from the large differential between the QD and AD .
The QD is somewhat 80 % to 90 % lower than the AD . It is an irrefutable fact that customers are deprived of their home ownership aspirations because of affordability and bad credit risk barriers . While the latter is a function of behaviour , the former to a large extent is not within the ambit of their control . Financial institutions need to make a determined and concerted effort to revive lending in the GAP market through the provision of more innovative housing finance solutions that increase qualifying demand to provide the necessary impetus for developers to continue building primary stock at scale . The HiP example is just one innovation among many that need to be introduced as a panacea to the supply and demand challenge bedevilling the GAP housing market .
ABOUT THE WRITER
Andrew Chimphondah is a PHD student with the Da Vinci Institute for Technology and has been a property practitioner for 16 years . He is currently the chief executive for Housing Investment Partners ( Pty ) Ltd , since 2014 . HiP is a member of the Old Mutual Group in association with the National Housing Finance Corporation . Prior to this appointment , he worked at managing executive and director levels at Standard Bank of South Africa , Absa Home Loans and the National Housing Finance Corporation .
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MAY - JUNE 2018
AFFORDABLE
SA HOUSING