Fleshing out the vision a better model

Housing - the building block for wealth creationSouth Africa  |  06 June 2016 | Insight

Authors and contributers

Alexander ForbesResearch Institute

Section 1: Understanding the housing needs of low- to middle-income employees

When we asked our retirement fund members about their preferences for longterm savings, providing for housing ranked ahead of education,medical expenses, risk benefi ts and retirement income – in that order. And it ranked fourth to providing for funeral coverage, a lump sum atretirement and emergency savings. Let’s investigate how we could use retirement funds to leverage improved housing as an important part ofthe retirement package and fi nancial wellness programme of low- to middle-income employees who earn between R7 500 and R25 000.

How well do employers really understand the housing circumstances of their employees? For many employers, this is not typically thoughtof as their primary concern. But when lack of housing becomes a destabilising factor in employees’ lives, employers might fi nd value inexamining the problem more closely. The fact of the matter is that employers and pension fund trustees can do signifi cantly more to help theiremployees or members with this most fundamental problem. To do so, though, demands that we spend a bit more time understanding thedynamics of the problem more fully.

How low- to middleincome employees are housedThe Quarterly Labour Force Survey  for Quarter 4 of 2015 indicates that there are 16 million individuals employed in South Africa. Theseindividuals are employed in a range of sectors and by large, medium and small employers. Two-thirds are between 25 and 44 years of age.Approximately 40% are married and a further 40% are single. Of all employed individuals, 86% make contributions to a pension or providentfund. The survey doesn’t show salaries, but most are likely to be low- to middle-income employees. According to the Quarterly EmploymentStatistics for December 2015 , employees in the formal non-agricultural sector are paid R17 517 a month on average.

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Housing - the building block for wealth creation | Chapter Content page

Less than half of low- to middle-income employees own their own home. Thefollowing percentages are taken from Census 2011 for all households in South Africaearning between R7 000 and R25 000: Approximately 46% live in formal houses that they own. Their housing needs are predominantly access to loans to improve their homes.

Some may want to sell their house and buy another one, and both the buyer and the seller will need access to housing loans to effectthese transactions.

Approximately 39% live in formal rented accommodation. Their housing needs are to become home owners either through buying landand building themselves or buying a newly built or existing house. Some may have savings, but most need access to housing loans.

Approximately 6% live in shacks in an informal settlement. Some may want to become home owners either through buying land andbuilding in stages or buying a newly built or existing house. Some may want to buy materials to improve their shacks. Some may havesavings but most will need access to small loans to finance these improvements.

Approximately 5% live in formal and informal dwellings in the backyards of small landlords. Some may want to become home ownerseither through buying land and building in stages or buying a newly built or existing house. Most will need access to housing loans.

Approximately 4% live in traditional dwellings o�en on tribal land. Such households will not have registered title deeds to their homesbut rather certificates of title which grant indefinite occupancy rights. The housing needs of these households are predominantly access toloans to improve services and to complete or upgrade their homes.

Within all of these housing circumstances the quality of the housing is o�en very poor, with high levels of overcrowding and limited access toservices.

Employees’ housing needs reflect their current housing conditions and their desire to improve these conditions. Whether they can participate inthe housing market depends on how much they can afford and the extent to which there are opportunities available and accessible in themarket.

One of the most significant constraints inhibiting a low- to middle-income employee’s ability to transact in the housing market is o�en a highlevel of consumer indebtedness and impaired credit records. As a result of the widespread use of unsecured credit, it’s estimated that inSouth Africa 9.22 million consumers have impaired records (47% of 19.6 million credit-active consumers) . Statistics compiled by debtmanagement firm Debt Rescue show that South African consumers owe the bulk of their monthly salaries to creditors, and more than 11 millionof South Africa’s creditactive consumers were over-indebted . They found that consumers owe as much as three-quarters (75%) of their monthlypay as instalments to creditors.

Low- to middle-income employees meet their accommodation needs as an integral part of their socio-economic development and survivalstrategy. The way they invest in housing is not necessarily a single large transaction that occurs once or twice in their lifetime, as is the case withhigher earning employees, but is rather multiple or a series of incremental investments.

Moreover, low- to middle-income employees don’t invest in one place but rather in a number of places, as this enhances their access to socialand economic opportunities. For example, a single household may:

have a shack in an informal settlement which is going to be upgraded and is also close to the workplace (providing cheap, accessibleaccommodation)

have a home in the traditional rural area (providing a space to build up and maintain some agricultural assets and tenure over a tribalhomestead)

rent backyard accommodation (providing access to nearby schools, healthcare or transport).

Different members of the household will live in the different locations to access different education, health and economic opportunities and tomeet social objectives.

Many employees lack knowledge and are inexperienced in operating in the housing market, making them vulnerable to high-risk transactions.Their low incomes exacerbate their vulnerability . Research indicates that for the most part, these employees rely on friends and family foradvice and support in accessing housing, and most of these advisers also lack experience .

On the supply side, while there are professionals providing housing-related services, the houses available are either poor value for money(new developer housing) or constitute higher risk transactions because of the poor functioning of the lower end of the housing market,including unreliable or fraudulent service providers and poor information. It’s also highly difficult to access loans because financial institutionsare reluctant to lend in certain areas and employees are unable to meet the financial institutions’ eligibility requirements for affordability and adeposit.

This is more significant for low-income employees, as the Income and Expenditure Survey (2010/11)  indicates that the success rate of securing ahome loan for households earning between R3 500 and R16 000 per month is roughly one home loan for every 32 households. For householdsearning above R16 000 the success rate is one home loan for every 12 households.

Recent work undertaken by the South African Housing Club – a newly formed organisation that provides housing wellness support to largeemployers – shows that demand far exceeds the availability of existing supply that is affordable to low- to middle-income employees acrossSouth Africa. Buying a stand and building a house in stages is o�en the most practical and costeffective way of becoming a home owner. A keyproblem in urban areas, however, is access to affordable stands and appropriate home loans.

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What do people need?

All of the above results in many employees taking unnecessarily high risks when transacting in the housing market, o�en losing scarce savingsand failing to effectively acquire or complete building a house.

The success rate of securing a home loan for households earning between R3 500and R16 000 per month is roughly one home loan for every 32 households.

For households earning above R16 000 the success rate is one home loan for every 12households.

Buying a stand and building a house in stages is often the mostpractical and cost-effective way of becoming a home owner.

The policy contextThe government’s key focus is on households earning below R3 500 living in informal settlements and backyard dwellings, as well as on meetingthe needs of new families. However, government policy and subsidy also focus on the affordable housing sector – o�en termed ‘gap’ housing –which is formal housing for ownership for low- to middleincome employee households. This is likely to increase, given new policy frameworksincluding the National Development Plan.

The following figure shows an overview of this financial framework. Currently the government is providing extremely limited support to low- tomiddle-income employees. Some employees earning below R15 000 could access support from the government through the Finance LinkedIndividual Subsidy Programme (FLISP). The once-off FLISP subsidy ranges between R10 000 and R87 000, depending on the applicant’s monthlyincome. The sliding scale applied results in the subsidy making a more substantial difference to affordability for applicants at the lower end ofthe income scale. Funding availability varies from province to province as it depends on the amount of funds each province allocates to FLISP.Generally FLISP funding is limited and not always available .

South Africa’s financing framework for housing

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Source: Rust, 2013

Generally low- to middle-income employees are expected to make their own investments in housing, as well as pay for rates and services. Theymake these investments either through savings or loan finance raised from financial institutions. How easy it is for individuals to access loanfinancefrom financial institutions depends on income and levels of indebtedness, with individuals with higher incomes having better access. They caneitheruse secured loans (home loans or pension-backed housing loans) or unsecured loans.

Home ownership is good for the economy and for individualhouseholds because it encourages people to save.

clear in 2008 was that there’s a big difference between good and badhome loans.

During the sub-prime mortgage boom of 2003–2007 in the UnitedStates, home loan credit was extended under terms and conditionsthat were unsustainable and feeding a house price bubble that wouldinevitably burst, as occurred in 2008. In its wake, these lendingexcesses le� a foreclosure crisis, a credit crunch, a global recession,double-digit job losses, and the loss of a staggering $7 trillion inhousing wealth .

Despite this, there’s still a strong argument in favour of homeownership as an asset. Finmark Trust  asserts that housing as anasset provides three components of benefits for the household, inaddition to providing shelter. According to this concept housing is asocial asset, in that it offers a social safety net for family members, itcontributes towards citizenship building and provides access to othersocial benefits, including networks and community support.  It is alsoan intergenerational asset that gets passed on from one generation toanother. It is a financial asset, in that it can be traded, or againstwhich home loan finance can be accessed. When traded, the value ofthe transaction contributes towards a household’s actual wealth andcan then be reinvested in better quality or more appropriate housingfor the family.

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It is also an economic or productive asset when it is used to generate income either through renting out a portion of the house or property orthrough using the house to sell services and goods or for manufacturing.

Since 2008 there has been extensive research into the benefits of home ownership as an asset generally and for enabling retirement. Despitethere being arguments on both sides of this issue, the one overriding fact is that home ownership is good for the economy and for individualhouseholds because it encourages people to save. “Perhaps the most compelling argument for housing as a means of wealth accumulation,”argues Richard Green of the University of Southern California, “is that it gives households a default mechanism for savings ”. Becausepeople have to pay off a home loan, they increase their home equity and save more than they otherwise would. This is indeed a strongargument. Social science research finds that people save more if they do so automatically rather than having to choose to set something asideevery month.

Default on home loans in South Africa is relatively low. On the one hand, analysis by Ilana Melzer from Eighty20 indicates that for home loansoriginated between 2009 and 2014, the percentage of loans that are in arrears by 90 days or more is 5% or less. On the other hand, creditproviders, including a range of non-bank players, indicate that over 40% of borrowers with a clothing or furniture account are 90 days or more inarrears on their worst performing account in the category . Given the high levels of indebtedness in South Africa, we can’t underestimate thevalue of home ownership and its importance for retirement arrangements of low- to middle-income employees. We can’t ignore the strong linkbetween home ownership and financial well-being.

At the same time, housing is only an asset when the financing is affordable and sustainable and holding it provides value in the context of anemployee’s retirement plans. If investments are overly ambitious or focused on opportunities that don’t resolve the employee’s priorities,which may not be at a place of work, then the member risks becoming financially overstretched. The dilemma therefore for the employer is theextent to which they support investments of this nature.

Home Loans: 5% in arrears 

 Other Loans: 40% in arrears

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Section 2: Supporting home ownership for low- to middle-incomeemployees

The importance of supporting home ownershipThe success of a business is directly linked to the performance, commitment and well-being of its employees. It stands to reason that there’s anegative effect on an employee’s performance and well-being when they live in inadequate accommodation or accommodation that does notsuit their needs and lifestyle, or where the employee is under financial stress. While it is also not the employer’s obligation to care for anemployee once they leave their employment, most employers’ reputations are affected when, on retirement, employees live in squalidconditions.

 Housing as a retirement assetThe recent boom and bust in housing markets has made the conceptof housing as an asset controversial. While previously home ownershipwas considered a keystone of opportunity, what became painfully

Given the housing circumstances and extent of indebtedness of low- to middle-income employees currently in South Africa, their low levels ofunderstanding of housing markets and the extremely fraught market through which housing is provided, there’s a strong argument foremployers to support employees to become home owners on condition that it’s effective and reduces associated risks. This is not only toaddress the shelter and asset creation aspects of home ownership, but is also a good motivation for financial well-being. Unless an employeeaddresses creditworthiness issues, levels of indebtedness and budget realignment, they can’t access finance for housing and transact in themarket. At the same time, once they’ve invested well and become owners, housing enables them to improve their financial sustainability. 

It’s important to recognise that accommodation is a personal decision and employees have the right to make decisions around accommodationin terms of their own lifestyle, values and priorities. Employers therefore need to balance the extent to which they make resources available toenhance the ability of employees to live in formal, well-located accommodation and own their home in a way that enhances wealth creation. Wealso have to consider the extent to which employers can support employees, given that housing is not the employer’s core business.

In South Africa at present, generally only large employers support employees in accessing home ownership. The type of support varies asfollows (for more details on the financial products indicated, see Table 1 further beloww):

At its minimum the employer provides advice usually through the human resources department. In some instances the employercontracts an expert to provide training or information.

The next level of support is providing access to small short-term loans for education or home ownership secured against a portion ofpension or provident fund savings. Generally the employer comes to an arrangement with a financial institution who may offer reducedinterest rates if the employer deducts repayments directly from the employee’s monthly salary.

Employers also improve access to home loans. Employers o�en arrange with financial institutions to offer reduced interest rates as longas repayments are deducted from the employee’s monthly salary and paid directly to the lender. Some employers provide additionalsupport in the form of a guarantee or grant to assist with the deposit for the home loan or to pay a portion of the monthly repaymentamount.

Mining sector employers in particular provide a living out allowance. This means an additional amount is added to the employee’ssalary, who may choose how to spend it. However, this form of support o�en results in the employee using this additional income toservice consumption spending or loans rather than investing in housing.

Building and providing accommodation for employees o�en occurs where an employer has operations in remote locations and there isno housing market. This is usually at a reduced rental, with the employer covering the bulk of the operational costs. In the past in themining sector hostels were mostly provided as housing for low- to middleincome employees. These notoriously offered very pooraccommodation where employees lived far from their families. A key element of the Mining Sector Charter is that employers must do awaywith these hostels and in most instances they’ve been converted to family accommodation or bachelor units. Generally employers nowtend to focus on employing low- to middleincome employees from the local area.

More recently, employers are providing a once-off housing grant. The grant is not paid to the employee in cash, but directly to the seller,the builder or the financial institution providing the house or loan. Where the employee is upgrading an existing house, the grant is paid tothe builder or material suppliers.

In providing support, employers have two objectives: to make sure their employees have good living conditions, and that the employee canaccess home ownership and asset creation. Sometimes these two objectives have no locational alignment. What this means is that employers’support programmes need to balance both these requirements and should be flexible enough to accommodate both.

Accommodation is a personal decision and employees have theright to make decisions around accommodation in terms of theirown lifestyle, values and priorities. Employers therefore need tobalance the extent to which they make resources available toenhance the ability of employees to live in formal, well-locatedaccommodation and own their home in a way that enhanceswealth creation.

Improving home ownership supportThe best housing support for employees earning below R25 000 per month is likely to be that which responds directly and effectively toemployees’ own personal housing and financial circumstances, and where employees are proactively responsible for their own housingdecisions and transactions. At the same time, employees need advice to decide on practical and sustainable housing transactions, access tofinance and housing opportunities, as well as support to resolve creditworthiness constraints and transact effectively in the housing market.

In structuring a programme, it’s necessary to understand that employees need to go through a complex decision-making process before they’reready to transact. This process enables them to set their housing aspirations consistent with their financial reality so that they have a practicalhousing action plan that is affordable and achievable. They will also need sufficient affordability, creditworthiness, information, and social andemotional skills to transact. The South African Housing Club takes employees through such a decisionmaking process as shown on the right.

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Once an employee has clarified their home ownership plan, they need support to implement it.

This support includes:

Creditworthiness and affordability support that enables employees to overcome financial barriers to accessing housing, including over-indebtedness, tainted credit records and poor affordability, as well as to accessing the appropriate housing loans to undertake a housingtransaction.

Housing transaction support that comprises a range of services to assist employees to transact effectively in the housing market.Transaction options include buying a house in the existing market or from a developer, building a house, or upgrading or completing anexisting house.

Home ownership support that ensures employees understand and fulfil their roles and responsibilities of home ownership in a financiallysustainable way.

The financial support that low- to middleincome employees could access comes from three sources in addition to their own savings, namelyfrom the employer, financial institutions and the government, as shown in Table 1 on below.

Regardless of the financial support provided, a key element to the success of enabling access to home ownership is information and coaching.This is not only about the importance of home ownership and how to go about becoming a home owner, but also on the best financial productfor an employee, as well as how best to transact to meet realistic housing aspirations.

Table 1: Overview of financial support provided to employees 

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Section 3: Pension-backed housing loans – a critical part of thehome ownership support package

Pension-backed housing loans are key to any employee home ownership programme. It’s o�en the best option for an employee who doesn’tqualify for a home loan or enables employees to pursue a wider range of housing opportunities which are o�en more affordable and in preferredlocations. These loans are important for the following reasons :

Many lower-income employees o�en have difficulty in accessing home loans in areas that are not proclaimed. While these propertieshave secure tenure (with some form of certification), the title is not registered in the deeds registry and consequently mortgage-backedloans are not available. These types of properties include: houses in traditional areas with certificates of title  houses in formal areas where the authorities have not yet proclaimed titling houses where the housing transaction value is below a certain amount, which makes the costs of a home loan prohibitive.

Many employees want to manage building their own house in stages on land they already own or wish to buy. Pensionbacked housingloans are appropriate for owner builder housing transactions, as the conditions of these loans don’t preclude the use of local labour-only

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contractors and incremental home building over extended time periods.

Many lower-income employees are living in sub-standard housing which they own and want to upgrade themselves in stages. Pension-backed housing loans are appropriate to home improvement projects, as the average size of these loans is relatively small, interest ratesare competitive and the cost of accessing such a loan is less than that of a mortgage-backed loan.

Pension-backed housing loans are enabled through the Pension Funds Act, but can only be provided if they are explicitly indicated in the rules ofthe pension or provident fund. The key elements of a pension-backed housing loan are as follows:

The employee applies through the pension-backed loan administrator to the financial institution for the loan. The financial institution applies normal credit criteria in assessing the loan application. The employee pledges a portion of their pension or provident fund to the financial institution as security for the loan. The pension or provident fund stands as co-surety for the employee’s loan from the bank. The employer o�en underwrites this pension or

provident  fund liability. The loan instalments are deducted directly from payroll.

When structuring pension-backed housing loans, take the following factors into consideration:

The table below sets out the key risks and mitigating factors.

Table 2: Key risk

Protection of the pension or provident fund’s assets: Mitigate the risks for the pension or provident fund by limiting the portion ofretirement savings pledged as security to the lender.

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Maximum loan size: Base the maximum loan size on sound credit principles and fund rules.2Lending arrangement: Offer the loan according to an agreement with the lender. Base the granting of loans on clear qualifying andaffordability criteria. The key terms of the loan will include:- initiation and monthly fees- the term, not exceeding the date of retirement- variable interest rate instalments- payroll deduction by the employer.

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The employer and the lender should undertake the administration of the scheme as part of their normal processes and procedures: Toguard against exploitation and fraudulent loans, the facility should be offered through a housing support programme or a process ofmonitoring house expenditure (see Table 2).

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Concluding thoughtsHome ownership is a good motivation for financial well-being. Unless an employee addresses negative creditworthiness issues, levels ofindebtedness and budget realignment, they can’t access finance for housing and transact in the market. At the same time, should theysuccessfully transact and become home owners without overcommitting themselves financially, their financial sustainability and robustness

will be substantially improved.

Owning a home, particularly where there’s no outstanding home loan, is also a critical retirement asset, as it provides employees withaffordable accommodation, is a financial asset and can also be used to supplement postretirement income.

We believe that employees earning below R25 000 per month need housing support that responds directly and effectively to their personalhousing and financial circumstances, and where they are proactively responsible for their own transactions. Employees need advice, access tofinance and housing opportunities, as well as support to resolve creditworthiness constraints and effectively transact if they are to meet theirown housing needs.

However, this must be done in a way which empowers these employees to use their own networks and control the process of becominghome owners. This generally results in more cost-effective outcomes and increases employees’ control over their housing outcomes andongoing maintenance.

Pension-backed housing loans, particularly when linked to properly structured housing support, are critical in enabling low- to middle-income employees to become home owners, improve the quality of the houses they live in and strengthen their financial sustainability.

References1 Statistics South Africa, Released March 20162 Ibid3 Rust, 20134 BusinessTech, 20155 Lipietz, 19996 Shisaka for FinMark Trust, 20067 Melzer, 20158 Smith, 20139 Manturuk, Riley & Ratcliffe, 201010 FinMark Trust, 200811 The Economist, 200912 Melzer, 201513 Sing, no date

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