Banks say Innovative Solutions are Needed to Finance Buyers in the Affordable Housing Sector

• 100% bonds are granted to credit-worthy buyers with stable jobs
• First Home Finance assists those earning between R3 501 – R22 000
• The big four banks, Absa, FNB, Nedbank and Standard are big on lending to first-time buyers

30 July 2024: Johannesburg – South Africa’s affordable housing sector faces challenges including access to finance which hinder its growth.

According to the Banking Association of South Africa, affordable properties are priced between R600 000 and R914 000. South Africans with lower incomes struggle to access formal housing due to limited financing options.

Yedhvir Ramdhani, Senior Manager: Home Loans Strategy and Analytics at Nedbank commented: “The key challenge that stands out as critical in crafting an appropriate solution to ensure consistent and sustainable growth of the sector is limited access to financing.”

“For low-income households, balancing affordability while managing credit indebtedness remains a challenge. Elevated levels of income inequality, poverty and job insecurity exacerbate this issue.”

Speaking at the recent Residential Investment & Development (Reside) Summit, Ramdhani said the challenge of inclusive growth is made worse by rapid and unmanaged urbanisation that has led to millions living in substandard housing.

He said given a high interest rate environment, rising cost of living and high inflation – it is not business as usual. The residential and banking sectors as well as other stakeholders need to find sustainable solutions to finance the affordable sector and meet the growing demands for urban housing.

“Policy makers need to apply a more expansive approach to governing framework, financing banks need to present more innovative and inclusive product offerings to specifically cater for affordable housing customer pain points,” said Ramdhani.

Prof Simphiwe Madikizela, Growth Head for Personal Segment at FNB said partnering with the Department of Human Settlements to effectively utilise the First Home Finance (FHF) which has been rebranded from First Linked Individual Subsidy Programme (FLISP) as a funding instrument to address affordability is an innovative way to assist potential buyers who are overly indebted.

“This funding mechanism blends the subsidy as a deposit to reduce the loan amount, and potentially, the interest rate could be lower as a result,” said Prof Madikizela.

He believes partnering with stakeholders like the National Housing Development Agency whose mandate is to identify well-located land for housing development purposes will assist the affordable housing sector.

Additionally, he said another innovative approach would be the facilitation of bulk infrastructure funding from local municipalities through Municipal Infrastructure Grant, as well as developers to create the much-needed housing stock with a view of addressing the backlog.

Ramdhani said addressing this challenge will be critical for the future growth of South Africa’s affordable housing market. “Policy interventions, innovative financing models and collaboration between stakeholders are essential to enable ownership at required levels in affordable housing in appropriate locations and densities.”

JSE-listed property developer Calgro M3 CEO Wikus Lategan said while financing is crucial, it is also important to highlight the broader impact of home ownership.

“Owning a home is a significant step towards wealth building, especially in the gap and affordable housing segments. Unlike renting, where costs typically increase annually, owning a home can become more affordable over time as interest rates should decrease and the homeowner pays down their mortgage, thereby building equity.”

Lategan said Calgro M3 develops homes that foster better living conditions, promote social stability, and contribute to economic development.

Calgro M3 considers affordable properties priced up to about R900 000. The company also offers properties priced below R600 000 for two-bedroom family apartments.

Buyers in the affordable sector include families and individuals, and are often employed in sectors including education, healthcare, public service, industrial workers, and retail. Their combined household income should be capable of supporting monthly home loan payments.

For a home priced at R600,000, a gross monthly household income of about R18 000 is required to qualify for a 100% bond. First Home Finance assists those earning between R 3 501 – R22 000 per month by subsiding their home purchases.

Lategan said banks are supportive of the affordable sector, and they provide 100% home loans to buyers with stable jobs, healthy credit records and sufficient household income to manage monthly bond repayments.

The big four banks – Absa, FNB, Nedbank and Standard Bank as well as SA Home Loans and alternative funding sources like Chartwell, are big on financing first-time home buyers, often with favourable terms like rate concessions and flexible repayment options.

He said high interest rates are translating to reduced sale volumes within their portfolio as buyers have impaired credit records. Still, he said 95% of their property sales get 100% home loans which means typically, their buyers do not have to put down a deposit.

According to Barry Chapman, Chief Executive Officer of Alley Roads, a leading affordable housing developer, high interest rates mean more people turn to renting since they cannot qualify for home finance.

“High rates don’t generally directly affect rentals. However, high rates indirectly affect tenants since they cause price inflation on lots of other items that tenants require,” he said.

Alley Roads’ portfolio comprises over 7 500 affordable apartments and student accommodation. Rental prices range from R4 000 to R6 500 per month, catering to lower-to-middle income households with an average annual salary of about R238 000.

Chapman said they remain positive about the affordable housing sector, despite the cost-of-living squeeze. “There is still massive pent-up demand for quality, affordable residential accommodation in the right areas. As people downsize to save costs, more tenants will enter the affordable housing sector.”

Lategan said the development of affordable housing projects creates job opportunities in construction, maintenance, and other related sectors. It also attracts businesses and services to the area, creating additional employment opportunities for residents, and can have a multiplier effect on the local economy, leading to increased economic activity and prosperity.

“We believe that affordable housing is a cornerstone of community development and social upliftment. By providing quality, affordable homes, we are not only helping families achieve stability and security but also contributing to the broader goal of building sustainable and thriving communities in South Africa,” added Lategan.