Kecia Rust

MUCH has been made of dramatic increases in the prices of houses countrywide. The rapid increase in house prices has been described by some as the "normalising" of the South African property market against its international comparators. But the majority of South Africans have become increasingly disadvantaged.

Absa house price index figures from 1999 to 2005 show increases both at the top end (houses of 80m²-400m²) and in the "affordable market" (houses of 40m²-79m²). However, the split between the two the — missing middle — has become more pronounced.

At the bottom of the property pyramid are Reconstruction and Development Programme (RDP) subsidy beneficiaries. While there is little research on the tradable value of subsidised housing, it is widely understood that there has been substantial depreciation in formal sales. Thus, as the upper end of the market creeps away from the "affordable" market, so too does the "affordable" market creep away from the subsidised housing market. There are, in fact, two "missing middles".

The consequences of this are vast. Families living in RDP houses are unlikely ever to climb the housing ladder into better housing because they won’t be able to afford to make the jump.

For instance, in Johannesburg’s Cosmo City, where RDP houses sit alongside bonded houses, the cheapest house you can buy with a bond is R210000. Even if a family in an RDP house could sell their house for R35000, they would still need a monthly income of at least R7000 to pay the R1747,16 instalment on their R175000 bond (over 20 years at current interest rates of 10,5%). But to be eligible for a housing subsidy they will have had to earn less than R3500 a month. For the 75% of South African households that earn less than R3500 a month, the next rung of the housing ladder is too far away.

Meanwhile, households who don’t qualify for a subsidy, and who are first-time homebuyers, must earn at least R8000 a month to afford the average "affordable" house price of R193000. This means households earning R3500-R8000 a month (about 11% of SA’s population) are possibly worse off than those who are poorer — they can’t get a subsidised house for free, and they can’t afford the houses that are on the market.

The gap between those who can afford the "affordable" house and those who can afford the "average" house is also significant — about 11% of households earn R8000-R26000 (a R662447 bond implies a R6614 instalment, which implies an income of at least R26456).

At the same time, the housing construction sector is increasingly focusing on high-end housing. A study done last year for the City of Johannesburg found that low- and middle-income housing delivery has almost disappeared in Johannesburg, decreasing from 5081 units (63% of total supply) in 2000 to 1434 (19%) in 2003.

In contrast, larger houses (80m² or bigger) have increased in number over this period, up from 1198 in 2000 to 2197 in 2003. The most significant growth area has been in townhouses, which in 2003 accounted for 46% of Johannesburg’s total formal supply. And yet, only 2% of South African households can afford the "average" R662447 house that developers are building.

This situation has at least three consequences:

Downward raiding and informal settlement growth: when the supply of housing is not matched to the affordability of the market, aspirant homeowners find the next best house they can buy. Thus, a household earning R4000 might under-report on income to access the RDP house. While waiting for a subsidy, this household will probably live in sub-optimal housing conditions, overcrowding existing housing (which affects the sustainability of local services), or in an informal settlement. The Financial Diaries study published last year found even households earning upwards of R7000 (who should be able to afford a product of about R175000) living in informal settlements.

Residential immobility and dead capital: when a household is unable to afford housing that is better than where it currently lives, it is less likely to move. The market loses out on a potential buyer and seller, and this reduces its overall thickness. The 2004 Township Residential Property Market Research found that the "affordable" market and below is extremely thin, largely as a result of this factor. Households are unable to realise the asset value of their housing, which undermines housing as a potential investment class for low-income households, at a time when it is realising astonishing returns for high-income households.

Limited take-up of Financial Sector Charter-targeted housing loans. The Financial Sector Charter commitment, to extend up to R42bn of housing loans for borrowers earning R1500 to R7500 by 2008, is unlikely to be realised, given that there is so little to buy for those households who earn in the target range. At the same time, the limited supply will increase prices, possibly beyond the Financial Sector Charter target of mortgages of R180000 or below, and certainly beyond the affordability of the majority of home seekers.

Clearly this is an issue of great concern not only for home seekers but also for the housing minister and the financial sector.

But what can be done? Critically, the gaps in the housing ladder need to be filled, and housing construction valued between R35000 and R193000 must increase substantially. To make this happen, however, government must shift its focus to include policy that seeks to promote the development of affordable, nonsubsidised housing.

A key area for policy focus must also be the home improvement market, and specifically for RDP homeowners. If RDP homeowners improve the value of their R35000 homes, they will create something that is desirable for Financial Sector Charter target market borrowers. Banks can help them by offering home improvement loans as part of their Financial Sector Charter portfolio. And when this happens, subsidised housing will become the financial asset that government expects.

Attention needs to be given to the whole housing market. This means broadening the focus beyond subsidised housing, and beyond new construction. The problem of the missing middle is about more than just housing. It is about the equitable distribution of SA’s economic success.

Rust is a housing policy consultant and the Housing Finance Theme Champion of the FinMark Trust. She writes in her personal capacity.