Transforming human settlements and the national spatial economy receives significant attention as a national priority in the NDP, in order to respond to entrenched spatial patterns that exacerbate social inequality and economic inefficiency. For this reason, the NDP proposes a strategy to address the legacy of apartheid spatial patterns and geography and the creation of more human and environmentally sustainable living and working environments.

It is noteworthy that the South African banking sector is a significant player in the market for commercial, industrial and residential property finance and development at varying scales and degrees of specialisation in relation to high value commercial property and low-income social and gap housing. This includes both individual banks and industry wide compacts entered into between The Banking Association and government.

The NDP’s focus on human settlements and the spatial economy therefore emerges as an interesting national priority focus area for greater banking-state collaboration, with potential benefits cutting across multiple NDP priorities, namely infrastructure and the green economy.

Housing delivery within the Affordable Housing market segment remains a vital area of focus within the Financial Sector Code (FSC). It is expected that in respect of the FSC targeted investment target for the banking sector of R48bn at least R24bn (50%) will be achieved through the provision of housing finance. This will require lenders to originate loans of approximately R60bn over the next five years.

Housing finance interventions by banks to achieve this stretch target could include the following:

• Creation of dedicated business units or specific FSC focused divisions
• Specific borrower education programmes for borrowers in this segment
• A multi-pronged housing finance focus which includes both the provision of end-user and wholesale finance to intermediaries
• End-user products for usage within the primary, secondary and improvement market include:
  • Mortgages
  • Secured housing personal loans (used primarily within rural areas where individual title is problematic and for incremental housing purposes)
  • Unsecured housing personal loans (used primarily for home improvement and incremental housing purposes)
• Wholesale finance
  • Residential development finance to intermediaries (developers) for the construction of both ownership and rental stock
  • Finance to intermediaries who provide either end-user finance or rental agreements to end-users
• Since the first phase of the FSC, banks have institutionalised the provision of housing finance for the Affordable Housing market segment and this is now part of competitive business, as this segment serves as a vital feeder to the growing middle class in South Africa. Over the past decade, the provision of housing loans to this market segment has proven to be both sustainable and commercially viable.
• This segment has displayed resilience to adverse economic conditions comparable with that of end-users that are more affluent.

Nevertheless, there are still two primary challenges that require urgent attention to take critical mass to a level to address housing backlogs estimated at 600 000 within the “affordability gap” market and a further 150 000 within the affordable market, namely:
Affordability
This relates to both the profile of end-users as well as product type and there have been a number of interventions by government to attempt to improve affordability, including:

• The introduction of the Finance Linked Individual Subsidy Programme (FLISP) that addresses the “affordability gap” market. Limitations include; subsidy quantum that is insufficient to bridge the affordability gap, the budgetary trade-off that the State has to make between the provision of subsidy to “Breaking New Ground” (BNG) units and FLISP aided homes.
• The introduction of a State mortgage default insurance scheme announced by the President in 2010. This has not yet been implemented, as National Treasury is grappling with introducing a scheme that is both commercially viable and sustainable and yet reduces the “cost of risk” which mortgagees include within their overall pricing of a mortgage.
• The Minister of Finance announced, in 2011, a tax incentive for developers who build a unit priced up to R300 000 (“gap” market) National Treasury has as yet, not implemented it.
• Lenders have also introduced longer term and lower equity requirement loans in order to increase exposure levels. However, prudential risk frameworks and the imperative to maintain profitability within this segment prevent significant further loan standard relaxations.

Supply constraints

Supply constraints continue to bedevil both the subsidy and affordable housing market segments. The current offering is neither sustainable (fiscal affordability), nor has the required critical mass been achieved, with the result that housing backlogs within both the subsidy and affordable market segments have almost doubled since 1994.

Moreover, the number of informal settlements have increased from 300 to almost 3 000 over the past 19years. Whilst urbanisation and smaller family units are a core cause of this deterioration, we must address a number of policy and institutional issues urgently, namely:

• Product: South Africa has departed from the 1995 White Paper which promoted “width over depth” in order to achieve critical mass and which would provide everyone with a core unit to that of “depth over width” with a few benefiting from a product which is triple the initial Reconstruction and Development Programme (RDP) housing standard (the current BNG home costs in excess of R200 000).
• Process: Inefficiencies within municipalities are delaying township establishments by, on average, double the recommended timelines published by the Department of Human Settlements (DHS). We estimate that this is adding 25% to the overall cost of a subsidy unit (R50 000 plus) and 32% to the cost of an entry level bonded unit (R96 000 plus).
• Release of land: Municipalities, State Owned Entities and DHS need to release well-located land to developers cheaply, instead of banking such land.
• Physical infrastructure (bulk services): Has reached capacity in most towns/cities and invariably additional capacity is required, together with link services. The provision of services currently contributes approximately 29% to the overall cost of a unit.

South Africa needs to address both the affordability and supply constraints as outlined above. Without that, housing backlogs will continue to grow and current levels of delivery will prevail. Our understanding of housing policy is that there has been an informal shift towards greater levels of:

• Inclusionary housing
• The provision of basic services within informal settlements
• Incremental housing
• Rental housing

There has been limited interest in leveraging private sector capital to enhance these goals; municipalities instead preferring to source funding from National Treasury. We are keen on exploring the participation of the banking sector in these products.