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The title deed backlog, access to finance and what this means for those wanting to self-build

Isandla Institute | 2023-05-10 | 645 views

Self-build housing is evident at a large scale across South African cities, from higher to lower income areas. In lower income areas this mostly takes the form of backyard dwellings, while there is a growing trend of blocks of up to 8 or 12 small-scale rental units in the backyards of an existing property or on an erf where the main house has been demolished. Ensuring that this housing is of good quality means enabling more investment by owners in their properties.

A title deed is important to prove ownership of a property when one wants to access housing finance. It provides a citizen with secure tenure, a leverageable asset, household wealth and economic inclusion, and allows a municipality to assert citizen administrative visibility by billing for service delivery and improving governance and revenue.[1] An important outcome of secure tenure is that the owner has the right to bequeath property to heirs and to lease, lend or grant property to others on a temporary or long-term basis, with reasonable guarantees of being able to recover the property.

However, there is a significant backlog in the transfer of title deeds to beneficiaries of state-subsidised housing, which is currently estimated at over 1 million units.[2] In addition, the National Department of Human Settlements estimates 400 000 properties from pre-1994 to recently completed projects are still subject to the completion of township establishment processes, delaying the upgrading of land tenure rights.[3] Of these, it is estimated that just under half are affected by the lack of bulk infrastructure, which acts as a barrier to completing the township establishment process. To give a further understanding of the scale of the problem, hundreds if not thousands of townships across the country have township establishment processes outstanding; by way of illustration, in just two of the largest metros around 700 townships are affected. Government’s Operation Vulindlela aims to address these issues, among others. There are other challenges, such as issues with inheritance of properties due to deceased beneficiaries and informal (off-register) property sales not captured in the Deeds Registry, that further complicate the picture.

But do you really need a title deed to access finance to build a house or extend an existing dwelling? A title deed is not required to take out a personal (formal) loan to, for example, buy building materials, as it is an unsecured personal loan and property is not provided as security for the loan. This means that the interest rate for a personal loan is generally much higher than for a mortgage (housing) loan, and the amount one can borrow is smaller. For an unsecured personal loan, a bank will look at creditworthiness and a lender’s ability to pay back the loan. Other assets apart from a house, such as a car or other moveable assets, could be used a security for a personal loan, but if a lender doesn’t repay the loan the bank can repossess the asset.

It is important to acknowledge that high levels of indebtedness in South Africa, together with significant rates of informal and irregular employment, mean that finance institutions will not offer unsecured personal loans at an affordable rate and only then to those that are deemed creditworthy. This situation and the large title deed backlog (compounded by off-register sales), mean many people may struggle to access an affordable personal loan to pursue self-build, if they are able to access a (formal) loan at all.

The lower income homeowner and backyard landlord sector is highly diverse, so finance institutions should consider this when determining credit risk and thus the interest rate and affordability of a loan. Finance institutions have shown some appetite for lending to communal savings schemes or stokvels. The scale and the associated lower risk of lending to these schemes and stokvels mean that this is a promising avenue for further engagement with the financial sector. Individuals who cannot access personal loans may then be able to loan from savings schemes or stokvels.

While it can fairly be claimed that finance institutions are risk averse, their business model requires some kind of security for a loan. They should consider other proof of income (apart from payslips) or evidence of a right to hold land, as many people may not have formal employment, a regular income stream or a title deed. Alternative proof of tenure could be considered, such as a utilities account or a written lease agreement with a tenant (in the case of a loan to extend or upgrade an existing backyard dwelling). A certified informal lease or sale agreement may also serve as proof of occupation or sale. Municipalities should drive a focused effort to rigorously verify land rights and tenure status, creating stepping stones to title, and made possible with new technology.[4] Efforts to improve tenure security through recognising alternative proof of tenure can also allow for improved land and development use rights for those wishing to self-build.

If a recipient of a housing subsidy doesn’t yet have a title deed, their listing on the Housing Subsidy System (HSS) can perhaps function as proof of having received a subsidised property. However, the acknowledged discrepancies with this system, and the fact that subsidised properties are being sold on without title transfer, complicates this. Ultimately, the current prohibition on resale means that if people need to sell, they will do so off-register because there is no other way of doing so.

Off-register sales raise the question of whether efforts to address the title deed backlog will be effective. Off-register sales are mostly due the costs, time and bureaucracy associated with conveyancing and registering sales with the Deeds Office. There have been calls to reform the Deeds Registry system to be more affordable and accessible to incentivise on-register sales. Technology like blockchain could also be used to ensure the security of the deeds register, and perhaps also reduce administrative costs.

In conclusion, it is vital to consider tenure security, the diversity of those seeking finance, and the complexities and difficulties involved in accessing funding. If self-build is to be enabled, tenure security (including township establishment backlogs) and access to finance will need to be concerted focus areas.

[1] CAHF. 2023. Land and Property Rights in Relation to Small Scale Affordable Rental: Insights from the Tenure Support Centre. National Housing Symposium on SSAR. 3 May 2023.
[2] Operation Vulindlela. 2022. Progress update: two years of progress in accelerating economic reform.
[3] CAHF. Op. cit.
[4] Ibid.

Image credit: Isandla Institute/Alexia Webster: Site C, Khayelitsha

Slum upgrading remains the most financially and socially appropriate approach to addressing the challenge of existing slums. UN Habitat (A Practical Guide to Designing, Planning, and Executing Citywide Slum Upgrading Programmes 2015 (PDF), page 15)

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