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The gap in the gap: Why affordable housing income thresholds result in de facto exclusion of lower income earners

Isandla Institute | 2023-06-14 | 546 views

There is currently a housing shortage of approximately 3.7 million, which is estimated to be growing at 178 000 annually. It is broadly accepted that state-subsidised housing programmes are not able to keep up with the growing housing shortage, while private sector housing development mostly does not cater for the majority of lower-income households. Additionally, publicly-enabled housing programmes/support (e.g. social housing, affordable housing) also leave key populations out, either because they do not meet the eligibility criteria, or because the eligibility criteria are interpreted in ways that result in de facto exclusion (for example, the affordable housing income bracket reaches from R3 501 to R22 000, which can incentivise developers to provide housing for those at the higher end of this income band). Unfortunately, social housing developments are limited as grants are not automatically adjusted for inflation, operating costs are rising, larger grants are needed and well-located public land release is slow.

While the recently re-launched and expanded Finance Linked Individual Subsidy Programme (FLISP), now known as First Home Finance (FHF), provides support for those who fall within the R3 501 to R22 000 category, it now also caters for beneficiaries who are not approved for home loans but intend to, among other options, build their own houses. First Home Finance can now be combined with unsecured housing loans, beneficiaries’ savings or financial resources raised through cooperative and community-based saving schemes (stokvels), housing loans supported by pension or provident funds or employer-based housing schemes; or instalment sale or rent to buy agreements. These changes should be welcomed. However, there is still an effective gap in the gap market. Here’s why.

According to the Centre for Affordable Housing Finance in Africa’s (CAHF) 2022 Housing Finance in Africa Yearbook, the price of the cheapest, newly built house by a formal developer or contractor in an urban area in South Africa (at 55m2) is R679 000, with the typical monthly rental for the same size house at R4 734. CAHF also notes that of all bonded transactions in 2021, only 10% were for properties valued under R600 000 and less than 1% were for properties valued under R300 000, indicating a lack of accessibility to affordable properties and housing finance at the lower end of the gap market. The maximum subsidy quantum available via FHF is R130 505 in the monthly household income increment band of R3 501-R3 700.99. Therefore, a household with an income just above R3 500 per month would not be able to purchase the cheapest, newly built house (let alone afford to rent it), and would not be able to build their own house for R130 500, assuming that they would have to make up the R548 500 deficit with own savings, loans from cooperative and community-based savings schemes or unsecured loans.

In addition, as the 2021 average resale value of government subsidised properties (GSP) 0-8 years old was R249 380, and those over 8 years old was R267 606, the same household would also not be able to afford to purchase a GSP, formally or informally. At March 2022 finance rates (20-year mortgage at 10,75% interest and 25% instalment to income), a household would need a monthly income of about R12 000 per month to afford such a GSP property, excluding almost the bottom half of the gap market income band, and the majority of South African households.

The backyard rental housing market, however, provides affordable rental options that cater to this lower end of the gap market. 2019 Stats SA data indicated that over 60% of backyard flat rentals ranged between R500-1 000 per month, and roughly 20% were more than R1 000 per month. It is one of the fastest growing housing subsectors, even outpacing informal settlement growth. While backyard housing is often viewed as transitory, for many residents backyard housing is not a short-term, interim or transitory housing option. However, despite the sector’s contribution to affordable urban housing and the issues backyard residents face regarding access to basic services and tenure security, among others, backyard housing is neglected in legislation, policy frameworks and programmes at national, provincial and local level.

So, if FLISP/FHF is not the solution to the housing needs (and self-build potential) for the majority of low-income households who either live in or rent out backyard structures, what else needs to be done or considered to plug this gap in the gap? It is clear that this issue needs further investigation and a different subsidy instrument that is targeted to this particular segment, which could be embedded in a broader support programme for self-build via the establishment of Housing Support Centres.

If self-build is supported and enabled, it can play a role in meeting the housing needs of those at the lower end of the gap market income range, who currently face de-facto exclusion from all state-led housing programmes/support.

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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