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Over-regulation feeding South Africa’s deficit of affordable housing

Over-regulation feeding South Africa’s deficit of affordable housing

MAIN IMAGE: Renier Kriek, Managing Director at Sentinel Homes

Sentinel Homes

Overregulation of the housing market in South Africa is discouraging the private sector from investing in formal low-cost housing projects.

This is according to Renier Kriek, Managing Director at Sentinel Homes. “With government resources being limited and corruption widespread, private capital must be enticed to join the constitutional project of granting all South Africans access to adequate housing,” he says.

It is apparent that, for all the government’s initiatives, programmes, and subsidies to provide RDP housing, a vast number of underprivileged citizens still reside in informal settlements.

However, while tax breaks exist for new or improved rental housing, with added incentives for low-cost housing, the rest of the legal and policy landscape is much less persuasive to investors.

Mortgage risk

For one, housing consumers who earn less than R15,000.00 per month make up less than 0.6 percent in value and 1.7 percent in the number of accounts granted mortgages in Q1 2023, matching a decade-long trend, because banks tend to avoid these riskier applicants, even when supported by the government’s Finance-Linked Subsidy Programme (FLISP).

The reason is simple: the excessively long and inefficient foreclosure process in South Africa seems bent on ensuring losses for both banks and defaulting consumers. 

In addition, judges are often overly sympathetic to defaulting debtors per case, not considering the overall negative effect this has on banks’ attitude towards financing the larger underprivileged community.

“However, if the cost of terminating defaulting mortgages were low, banks would be less risk averse, thereby increasing the likelihood of access by this segment,” says Kriek.

Rental risk

Similar to mortgages, the time and financial costs of eviction are too high, and the law and courts are too lenient on defaulting renters.

With the supply of formal housing being so low, the cost of eviction should also be low and the rights of a large number of potential tenants should weigh more heavily than those of a few non-paying tenants.

“If the risk was low, more landlords would emerge to invest in satisfying the obvious demand for affordable accommodation,” says Kriek.

Development rules

Lastly, housing development in South Africa is inhibited by long or delayed regulatory processes, as well as building standards designed around first-world circumstances. This is further exacerbated by municipal inefficiency, which affects the delivery of essential services like roads, water, power, and sanitation.

Authorities have also suddenly become deeply concerned with the lack of affordable housing. Their response has been to request that developers include affordable housing units in new developments, even in areas not marked for such housing.

“While laudable at first glance, this does not increase the availability of affordable housing as beneficiaries will often flip the unit at market price to realise a profit,” says Kriek.

The positive intent is therefore negated and leaves the market worse off.

Change is needed

Mortgage risk, rental risk, and misguided development rules, taken together, disincentivise the development of low-cost housing in favour of larger, pricier units.

“Given the state of the country’s housing market, urgent legal reforms and business-friendly policies are needed to ensure all South Africans gain access to constitutionally mandated housing,” says Kriek.

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