Government policies causing a housing crisis in South Africa

Despite being in high demand, South Africa has a severe lack of affordable housing due to policy and regulatory barriers, which are discouraging private investment and limiting the effectiveness of government subsidies.

For the gap market – the middle 30% of consumers – housing supply is extremely low and even declining, despite significant demand.

This is according to Sentinel Homes managing director, Renier Kriek, who argued that a market design error is to blame for this unmet high demand.

Adverse incentives arising from poor market design lead capital holders to invest in almost anything other than affordable housing.

Kriek said capital has choices, and to the extent it is not flowing into the affordable housing market, it must be assumed that something is chasing it away from this underserved market.

The biggest hurdle is the unnecessary, prolix, cumbersome, and expensive processes associated with evictions and foreclosures.

The cost of resetting the transaction – evict or foreclose – is prohibitive in South Africa and does not align with market conditions.

Kriek recommended that South Africa should adjust its regulatory environment to attract private-sector investment and expand supply.

“We need to reduce the transaction cost for the holders of capital to take their chances on consumers who are not acceptable risks in the unduly high tenure security environment,” he said.

“In this way, some people will move into the formal housing market and fall out again, and perhaps more than once in their lifetime. If we go through enough of these cycles, eventually everyone will be housed.”

Kriek acknowledged that this solution may sound callous and counterintuitive. However, it is better than continuing with the current system.

“The alternative, retaining our restrictive policy environment, is even more callous and is currently barring people from ever getting the opportunity to enter the formal housing market.”

“What use is being born free if you will never realise that constitutionally mandated right of access to adequate housing?”

Unintended consequences

Kriek explained that another prevalent and reasonably fixable market-design problem concerns government subsidies.

The Department of Human Settlements has been offering the First Home Finance (FHF) subsidy, formerly known as FliSP, to households in the gap housing market.

It aims to subsidise affordable first-time home-ownership opportunities for households earning between R3,501 and R22,000 per month.

It is an inverse means-tested subsidy, meaning that the cash grant is lower the higher the household income becomes.

“Millions of rands earmarked for this subsidy have remained unclaimed in the past and continue to remain unclaimed,” he said. “This is not because people do not know about the incentive or do not desire it.”

The first challenge is the scarcity of gap housing stock, which is driven by poor demand due to incentives that are adverse to the deployment of capital in this segment, whether by landlords or home loan providers.

Kriek argued that the subsidy design has unintended consequences, leading market participants, such as estate agents, to be unwilling to sell to subsidy recipients.

Each property transfer involving an FHF subsidy is too complicated, and everyone involved prefers doing the same transaction with a consumer who does not rely on a subsidy.

“Usually, it’s the estate agent waiting for the subsidy payment to receive their commission, and that is simply an unacceptable adverse incentive if government’s intention is to have the subsidy reach its intended recipients.”

Though recent developments seem to favour addressing the market-design shortcomings of FHF, the subsidy administration remains overly complex.

It will take significant political capital to implement market design solutions that can address the problems facing the housing market and improve affordability.

Kriek warned that if South Africa does nothing, which is the current posture of the government, it may even get worse.

Unfortunately, he said he fears that the current government may not have the ability to diagnose the problem, and much less the political will to effect the necessary policy and regulatory changes.

However, if it succeeds, the job creation that could follow from finding solutions to the housing supply problem could go a long way toward achieving the government’s job-creation goals.