Financial constraints to low income housing in South Africa : 1994-2000

Abstract

The new government inherited in 1994 an estimated housing backlog of 1.2 to 2.5 million units and rapid expansion of informal squatter settlement. This was largely a result of high levels of urbanization, poverty, high unemployment together with the history of apartheid and separate development. The housing finance system also suffered serious defaults on home loans that were precipitated by political boycotts and civil disobedience prior to 1994. Reasons for th is failure are argued from three different levels, viz. policy constraints, end-user perspectives and experiences of key sector ro le players, which include lenders, developers and academics. The objective of this thesis is to identify and examine the reasons why both the private and public sector are unable to resolve the above crisis in ensuring adequate access to housing finance. The following research questions had been formulated to assist understand the housing crisis: Do shortages in new and existing homes across different price ranges meet the price expectation of the homeowner? Is homeowner affordability a factor hindering purchasing of a home? Does credit rationing by lenders to low income borrowers increase backlogs and restrict access to housing? To validate the above research questions three hypothesis were set up and tested. Empirical data was gathered from face to face interviews with homebuyers, lenders, housing experts and activists in the low income housing sector. The results show that one in five potential buyers are frustrated because they have not yet acquired a home. The majority of potential buyers are already homeowners who are unable to sell their existing property. Borrowers do not consider low income as an impediment to accessing housing although currently less than 4% of gross monthly income is spent on housing. The study shows that there is measure of affordability if the right house can be found. Factors such as not being able to find a home that meets borrower requirements, and the inability to sell existing homes and the unwillingness of banks to grant home loans are seen as obstacles in the delivery process. Savings has been highlighted as a potential factor that could improve affordability and lower lender credit risks. Housing preference seems to imply that potential buyer's specification and expectation of a desired home exceeds their income ability to afford such a home. Although the majority of potential homeowners see banks as the main source of a home loan, only a few attempted to access a loan and an even smaller number were successful in getting a loan approved. Banks are still viewed as inflexible institutions whose credit criterion makes it difficult for low-income borrowers to access a home loan. Banks were also perceived with suspicion, which tended to put-off potential homebuyers. This study also found that the housing purchase process is not a chaotic and unstructured process. Respondents did follow a systematic approach in trying to access information about the availability of homes from developers and pointed out the different steps taken to find a suitable home. While some potential buyers were able to access some information the majority were unable to access accurate information on the primary and secondary housing market which adversely influenced their ability to purchase a home. Solutions to the housing problem entail improving the production of appropriate stock, changing borrower behavior and attitude towards credit, banking and parastatals designing instruments and products to cater for the moderate and low income borrower. National policy modifications and change to the subsidy scheme could also minimize risk and deepen private player's role in the ownership and rental markets