Access to Housing Finance - Considering the Next Phase of the FSC Targets 2009

This paper is the fourth in a series charting the access frontier for housing finance in South Africa. It traces an exceptional journey over an exceptional time period. The journey begins with banks grappling with the challenges of expanding market access for housing finance products. Targets stipulated as part of the Financial Sector Charter (“FSC”) process coupled with the credible threat of legislated lending targets galvanised action. The banks launched new entry-level products, created affordable housing divisions and changed some credit granting practices in order to enhance access. They also became directly involved in housing supply in order to alleviate blockages that jeopardised their ability to meet FSC targets. They were aided by a favourable economic environment with interest rates at historic lows and strong growth in formal sector employment. These efforts enabled the banks to meet their origination targets. Just in time too – the last year of the target time period witnessed higher interest rates accompanying a significant change in credit regulation. More recently the global credit crisis has had a direct impact on the availability of funding.

A key question is what origination target would be realistic for the next five years. Perhaps more importantly, it is critical to reflect on what the past can teach us and what these lessons mean for the future of lending targets in the low income market.

This paper attempts to assess these issues by exploring the extent to which the banks are able to provide housing finance of various types and the capacity of the FSC target market to absorb housing finance given higher interest rates and relatively high house prices. The paper also explores the implications of this analysis for the future of the FSC targets, or, in the event the FSC is not revived, general targets that will no doubt be explored by the National Department of Housing and the Banking Association of South Africa to expand access to housing finance for lower income households. These may include sustainable market mechanisms, subsidies or a combination of both.

The scope of the analysis covers mortgages, pension-backed or fully guaranteed loans and unsecured loans. The analysis relies on various data sources, principally the annual FinScope™ survey (the focus this year is on the 2007 survey) and the 2005/2006 Income and Expenditure Survey  (“IES”) to characterise the market and explore and quantify access constraints. While FinScope™ is a survey of individuals, the IES is a household survey enabling a fairly rich assessment of access at a household level, subject of course to a range of disclaimers relating to the accuracy of the underlying data provided by households. This survey provides rich (albeit sometimes inaccurate ) data on household expenditure patterns, income levels and sources and contains some indicators on credit and savings product usage, which with further assumptions, provide some insight into household indebtedness and wealth levels. It therefore enables an exceptionally rich analysis of affordability and capacity to absorb credit, both of which are critical constraints in the FSC target market made more binding by rising house prices, increasing interest rates and new credit legislation in the form of the National Credit Act (“NCA”). These changes, more than changes in the income and expenditure profile of households over the period since the data was collected, are likely to be the primary forces behind market shifts. Other data sources include the General Household Survey (“GHS”) from various years as well as the 2001 Census and the 2007 Community Survey.

Of course the analysis is only as robust as the underlying data and assumptions. Limitations in this regard can be overcome with additional data, much of which exists within the individual lending institutions and which, no doubt has been carefully scrutinised by these institutions as they evaluate the past five years and ponder the implications for the future.