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AfricaJanuary 8 2007

Home delivery: Africa’s challenge

Africa’s home-financing sector is generally in its infancy. The exceptions are South Africa, Ghana and a handful of east African nations. Cas Coovadia highlights the initiatives in progress.
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The African continent, particularly sub-Saharan Africa, is characterised by the enormous differentiation in the economies of South Africa and the rest of the continent. This is also evident in the housing market and developments in housing finance and delivery. The housing market is very well developed in South Africa, despite severe challenges in the low-income housing market.

However, the market is not well developed in most other parts of Africa, with the exception of Ghana where there is a developing mortgage market. Other parts of Africa are still developing policies and mechanisms for housing delivery, with a virtually non-existent mortgage market.

The South African government is also very active in housing delivery and has developed a mass of policies to enable particularly low-income housing delivery.

In looking at the African market, this article concentrates on South Africa, with some reference to Ghana and east Africa.

South Africa

The mortgage market in South Africa is dominated by the banking sector, which is responsible for more than 90% of mortgage lending. Mortgage advances in South Africa grew by 29.6% year-on-year in September 2006. The total of mortgage advances as at September 2006 was R640.4bn ($91.5bn). The critical challenge for South Africa is the existence of a dual market. The bulk of the mortgage advances are in a very well developed middle to upper income market. A significant part of the population is in the lower-income market, and this sector experiences challenges in housing delivery.

The critical challenge is in the income category between R1500 and R7900. There are issues of affordability, supply and product in this market. Construction costs have increased significantly in South Africa, as in most parts of the world, and this is exacerbated by severe holding costs for developers as a result of delays at municipal level in the processing of registrations and provision of bulk infrastructure.

The affordability issue is critical in a context of rising interest rates. A household earning R3500 per month only has a cushion of about R120 after basic household costs. A 2% increase in rates would make the mortgage payment unaffordable. The prohibitive holding costs have resulted in developers exiting the low-income housing market, thus leading to a lack of supply.

The country needs about 160,000 houses in the low-income market per year to make an impact on the backlog, but is constructing about 19,000 per year.

Rising to challenges

These are some of the challenges that South Africa faces. However, there is a very healthy engagement between government, its agencies and the banking sector to try to address these challenges. The South African government has been exemplary in its efforts to raise the issue of low-income housing to the top of the agenda in the country. The government has instituted a capital subsidy scheme that has benefited 2.9 million beneficiaries since 1994.

Subsidy-linked housing delivery has reached about 2.2 million people since 1994. The government is also engaging the banking sector to develop risk mitigation and sharing mechanisms to enable the sector to lend to lower income people. The banking sector and government are also engaging the construction sector to begin to address the supply issues. And the banking sector is engaging municipal government to address the capacity constraints in that level of government on land registration, bulk infrastructure and other relevant matters.

The banking sector has been active in the area of low-income housing. It has done mortgage lending of about R17bn in the 2005 calendar year to the R1500-R7500 per month income category.

The South African government established a wholesale financing facility called the National Housing Finance Corporation (NHFC) in 1996. The NHFC’s mandate is to provide wholesale finance to retail housing intermediaries servicing the low-income market. The NHFC has approved R2.3bn in finance and has disbursed about R1.9bn since its inception. This has resulted in 1.1 million people getting access to shelter.

The South African government also established an initiative called the People’s Housing Process. This initiative is a further housing delivery mechanism, particularly for that sector of the market that will not be able to afford private sector finance. It brings people together in groups and enhances the government subsidy by organising people to contribute “sweat equity” by building their own homes.

There are significant developments in inner city housing development in South Africa. The government has introduced an Urban Development Zone tax incentive scheme. About 100 companies have registered to access it, with a total investment in inner city regeneration, particularly in housing, of about R1.5bn.

Ghana

There is a developing housing market in Ghana. The leading mortgage finance institution in Ghana is the HFC Bank, which offers a range of products, including:

  • home completion mortgages;
  • home equity mortgages;
  • home purchase mortgages;
  • home improvement mortgages;
  • buy, build and own a home; and
  • non-resident Ghanaians loans.

 

East Africa

A current initiative in east Africa is an example of the positive results of regional co-operation on the continent. Kenya, Uganda and Tanzania have co-operated to undertake a major housing project to address a shortfall of about 3.8 million units in the region. The 20-year project will eventually lead to the development of about 28 million units. The East African Development Bank (EADB) is expected to raise $120m in the next two years for the project. It will expect the three countries to raise $20m each in the next two years for seed capital. The balance will be raised from the private sector in the region and offshore investors will be invited to subscribe to half of the capital needs.

The East African Development Bank estimates the region will need to invest some $12bn over the next 20 years to keep pace with demand. The project is a good start to meeting this need and will go some way towards addressing the severe problems of informal settlements in the region.

These are just some examples of the developments in housing in Africa. The continent is beginning to experience relatively high levels of growth. The governance issues are being addressed, particularly those related to property ownership and protection of property. Issues related to the legal system are also being looked at. Africa is addressing the constraints on housing delivery and that will be of interest to housing actors from around the world.

Cas Coovadia is managing director of The Banking Association of South Africa.

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