The new housing subsidy schemes form a long-awaited bridge that at last is under construction to carry buyers across the ‘gap’.
Ever since the introduction of RDP housing in the 1990s, there has been a growing gap in SA’s residential property market occupied by those who earn too much to qualify for a home provided by the state and too little to qualify for a mortgage loan that would enable them to buy a home themselves.
Currently, this gap market is reckoned to consist of people earning between R3 500 and R15 000 – and, says Pierre Venter, GM Banking and Financial Services for the Banking association, “It is estimated to contain more than 20% of SA’s workforce.”
In other words, the gap has become a chasm, and the consensus of opinion is that it must now be bridged for a number of reasons, not least among them the need to give the still-fragile property market recovery some added impetus by substantially increasing the number of new entrants.
It seems a sturdy overpass is at last really taking shape as government and banks work together to put its three main pillars in place by the end of 2012. These pillars are the new gap-market housing subsidy plan, a new tax incentive for developers of affordable housing and the long-awaited Mortgage Default Insurance plan. Property Junction searches out the details of how each of these initiatives is likely to affect prospective home buyers.
Pillar of strength
The first, the new housing subsidy scheme, is currently being intensively workshopped and, says Venter, should be ready to pilot sometime in Airpril. Announced by President Jacob Zuma in his State of the Nation address earlier this year, the subsidy will be available on a sliding scale to prospective home buyers in the gap market, with those households earning R3 501 a month qualifying for the maximum of around R84 000 and those earning R15 000 a month receiving about R10 000.
The money for the subsidies will come out of the provincial housing budgets, but in all likelihood, applications and allocations will be managed by the National Housing Finance Corporation (NHFC).
It is also expected that, at least to begin with, the subsidies will be available only to those seeking to purchase homes in projects that have been ‘approved’ by the provinces, with the maximum allowable purchase price being R300 000. Whatever subsidy is obtained, it will be applied to the purchase price of the property in place of a deposit and thus reduce the size of the home loan required – and the amount of interest payable over the life of the loan.
In the case of a family that qualifies for a R40 000 subsidy, for example, the bond size required would be reduced to a maximum of R260 000, which at the current standard mortgage interest rate of 9% would mean a monthly repayment of just R2 340, and a saving of more than R126 000 in interest on a 20-year loan.
There is no time-limit on the subsidy plan and, as it gains momentum over the next few years, it stands to have an enormous influence on the property market, as indicated by the results of a survey recently conducted by mortgage originator ooba.
This poll found that 58,83% of respondents considered that the availability of a deposit or not would be the biggest influence on their property purchasing decisions in 2012. (Low interest rates were rated as the second biggest deciding factor at 17,09%, followed by stagnant and declining property prices at 13,68%.) Craig Deats, ooba executive Director of Sales and Distribution, notes: “Not having a deposit available in order to apply for a home loan is a very common concern, especially among first-time home buyers. And in the current economic environment, most consumers are finding it very difficult to save towards a deposit.”
However, as Pam Golding Properties CE Dr Andrew Golding recently pointed out, the subsidy scheme will be of little import if there are no suitably priced homes for consumers in the gap market to buy. “There needs to be a sustained focus on incentivizing and providing much-needed housing for lower-income earners,” he says. “To this end, the proposed tax relief for housing developers and employers who provide housing priced at below R300 000 a unit was welcome news in the recent National Budget.”
It is expected that this tax incentive, the second pillar of the gap-market bridge, will be available to developers and employers who build at least five units of new housing stock for sale at below R300 000 each and, according to accounting firm KPMG, it will probably will take the form of a tax credit or a deduction at a fixed rand amount per unit or as a percentage of the value of the dwelling.
The treasury document proposing the tax incentive makes it clear that the objective is specifically to target those who earn “more than the income thresholds for RDP housing but are unable to afford high mortgage finance”, and that its implementation will go hand-in-hand with attempts to unblock regulatory bottlenecks in the provision of such housing.
The proposal is to be refined after public consultation, but the incentive is expected to be in place before the next budget. Meanwhile, the existing Urban Development Zone tax incentive is expected to be extended, making it attractive for developers to clean up inner-city blocks of flats and offices and provide affordable housing units in these areas, which are increasingly sought-after by first-time buyers because of their proximity to workplaces, shops and entertainment facilities.
As it is now, most low-income households spend a disproportionately large part of their income on transport, and this is set to grow as fuel prices continue to rise. But having more affordable housing units available in inner cities should help them cut these costs substantially – and put them in a much better position to afford the monthly repayments on a home loan.
Bank on support
The lack of access to home loans, however, remains a major stumbling block for gap- market buyers, as the banks – with past experience in mind – are extremely cautious about lending into this sector of the market, which they regard as especially risky.
And this is where the third pillar of the bridge, the proposed Mortgage Default Insurance (MDI) scheme, will come into play. First mooted two years ago, this scheme will also be administered by the NHFC and is expected to go into operation in about October this year with a R1 billion guarantee provided by National Treasury to support lending into the gap market.
Banking sources say there are still many technical details to be worked out, but that essentially the scheme will subsidise the premium or fee payable by the borrower for an insurance policy that protects a bank against loss if the borrower defaults on a home loan. This, says Rudi Botha, CEO of mortgage originator Betterbond, will give banks a greater level of comfort when lending into riskier lower income and first-time buyer markets. “And, properly leveraged, it has the potential to unlock the whole housing market by enabling buyers in these categories to access home loans more easily.”
Venter explains further: ‘”What the scheme will do is lower the cost of risk that is priced into all home loans, enabling the banks to strip that cost out of the interest that borrowers are charged on home loans and replace it – or some of it – with the subsidised insurance fee. The biggest question now is what that fee will be, as there would obviously be no advantage to consumers, or the banks, unless it were to result in monthly mortgage-instalment savings. On the other hand, it would be of great benefit to a home buyer if the interest rate of, say, 9% on a home loan could be lowered by one or two percentage points by stripping out the risk, and then raised only by a half a point or so when the insurance fee is added back.”
Indeed, an interest rate reduction of even 0,5% would be of great benefit to gap-market buyers, especially if combined with a subsidy, by making it easier to qualify for a home loans and at the same time lowering the monthly instalment.
What is more, the difference between the cost of risk and the insurance fee is likely to be different from bank to bank, because while the fee will probably be fixed, the cost of risk varies depending on what each bank believes the probability of default is and the loss severity given default. This will become part of the competitive landscape in the home loans market, along with the cost of funds, average loan size, origination and servicing costs, and will no doubt give rise to further benefits for prospective home buyers in every sector of the market.