In a broad framework of making markets work for the poor, some might wonder why a special focus on housing finance is warranted – and then, what such a focus means in practice.
If the house is not used as collateral for a loan, what makes a housing loan different from a personal loan? The answer lies in the role that housing plays in the broader asset profile of the low income household, and then, the way in which households develop this asset for themselves.
In the past two years, the FinMark Trust has been exploring the concept of housing assets. Originally, this interest began with a review of the secondary (resale) property markets in the former black townships. The TRPM study identified that property markets in the former black townships were dysfunctional, with limited churn (about a fifth of what would be expected in a ‘normal’ market) and depressed prices (with households suffering a 44% reduction on the sale price of their homes from what they expected). In this context, bank reticence to lend was justifiable – the asset by which a mortgage loan would be secured was unrealisable, essentially worthless, and no security against default at all.
From these findings, a new study was initiated into the activities of “housing entrepreneurs” – people who earn money from their housing – and how housing finance might assist them maximise their returns. The rationale behind this study was simple: if people were unable to realise value from their housing asset in its sale, or in leveraging it as collateral to access a mortgage, then maybe they could realise value in some other way. The activities of home based enterprises (HBEs) were explored and the first half of the study, focusing on the activities of small scale landlords, was launched in Johannesburg at the end of May. A summary of that study’s findings is provided in this edition of ACCESS housing.
In studying housing assets in this way, an idea began to emerge about what is special about the “house” in the housing finance equation. Traditionally, lenders – that is, mortgage lenders – have understood the house as security for their loan. The concept of property as collateral is that it can be traded to realise financial value which a borrower can use to repay his debt if he goes into arrears. Whether or not the loan is actually used for housing purposes is irrelevant
Indeed many middle income households draw on their access bonds to pay non-housing-related costs, such as school fees or funeral expenses. In this context, the house plays little other role than a promissory note. This view of housing and housing finance has created tension among housing activists and households themselves who do not view housing as a tradable commodity. In their view, the house is shelter, and more importantly, it is a home. How can a household ever think of putting their home up as collateral, when should they lose it, they would have no where else to go, no asset base on which to fall? This is the situation, arguably, for the majority of households in South Africa. It explains why our mortgage penetration rate is so small, notwithstanding our sophisticated banking infrastructure and the opportunities provided by the Financial Sector Charter.
And yet, people still do invest in and value their housing. While some invest their savings, others do take on credit, and build and improve their homes incrementally. FinScope® 2004 found that almost a quarter of households across all income categories considered improving their home to be a good investment – and 56% of households across all income categories said that they would spend a cash windfall on buying a house (the most popular category).
See Attachment for more information
Source: Finmark
