Housing, saving & the bridge in between

Second Economy StrategySecond Economy StrategyAddressing Inequality & Economic MarginalizationAddressing Inequality & Economic Marginalization

R b R i 30 S b 2008Rob Rusconi 30 September 2008

Background:Background: Housing finance policy in SAg p y

Background: 1994 housing challenge

Low levels of income(1994 Housing White paper estimates)

Socio-political and environmental issues( g p p ) issues

High expectationsLack of consumer protectionIncome category Percentage Number

householdsPoor consumer educationLow levels of household expenditure dedicated to housing (est. 9% - Mayo)

> R3,500 R2,500 – R3,500R1,500 – R2,500

13,9%5,6%

11,8%

1,15m0,46m0,98m

Limited perceptions of housing: especially as an investmentNon-paymentC i d i l

R 800 – R1,500R 0– R 800

29,0%39,7%

2,42m3,30m

8,30m

Duplicated and poorly targeted subsidiesLack of end-user finance

Crime and violenceOther issues, such as traditional tenure

Lack of end-user financeLack of appropriate retail lending capacityReluctance of formal financial institutions to lend in certain areas and to certain groups

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Players and products:Players and products:Different kinds of lending for housingg g

Players & ProductsPlayers & ProductsEnd user finance Wholesale financeEnd user finance

Mortgage loansPension-backed loans

Wholesale financeLoans to micro lenders and other retail intermediaries

Micro loans Loans to rental / social housing companies

Development loansBridging finance or workingBanks

Life offices Bridging finance or working

capital loans to developersBanks offices

G arantorsSpecialist non-bank Investors

FundsGuarantors

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Standard Bank Dream Start Home loanMortgagesHome loan for housing

Home loanB i d Can be used if for buying/building a new home

Minimum age: 18Proof of ID

Basic product description

Sound credit historyProof of income: 6 months bank statement and latest salary slip if applicableMonthly income: R1 500 – R 6 000 joint incomeProof of residency

Client requirements

Proof of residencyExpenditure statement

Dependent on affordability as determined by the bankLoan size

Minimum: 5 yearsMaximum: 30 yearsLoan term

Cash or cheque at Standard Bank branchDebit orderEFT

Collection method

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EFT

Proof of property: title deedProperty / loan use requirements

Pension backed loans FNB Smart Housing Plan

Pension backed loan

Flexible housing financePension fund savings used as security for loan

Basic product description Pension fund savings used as security for loan

Agreement with bank, employer, and pension fund

Clients:Minimum age of 21

description

u age oEmployed and contributing to pension fund for at least one yearApplicant must be able to afford the loan instalment as per the NCA

Company:Workforce of at least 50 employees

Client/Company requirements

Workforce of at least 50 employeesAgreement of pension fund trustees to provide loans or guarantees

Minimum loan size: R5 000Maximum loan size: Up to 80% of the after-tax benefits in the fund, but depends onLoan size Maximum loan size: Up to 80% of the after tax benefits in the fund, but depends on rules of the fund

Minimum term: 12 monthsMaximum term: 20 years subject to the loan being repaid in full prior to retirement

Loan termMaximum term: 20 years subject to the loan being repaid in full prior to retirement

Minimum monthly instalment: R100 Collected via payroll deduction

Installment and collection method

7Some type of proof of ownership although a title deed is not necessary. In the case of tribal land a letter from the chief would sufficeHousing can be informal

Property/ loan use requirements

Home improvement loan Blue Home Improvement Loan

Personal loan for home improvement

Unsecured personal loanBasic product U secu ed pe so a oaUsed to purchase building material or for the payment of construction related costs

Minimum age: 18

Basic product description

Clientg

Proof of IDProof of income: 3 months bank statement, most recent payslipPermanent employment for at least 1 year

Client requirements

Minimum: R 1 000Maximum: R 15 000

Minimum: 24 months

Loan size

Loan termMaximum: 36 months

Debit orderPayroll deduction

Loan term

Collection method y

Credit is loaded onto the clients Blue Card which the client uses at a Cashbuild store to pay for products purchasedSuppliers other than Cashbuild: valid quotation from the supplier is required.

Property / loan use requirements

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pp q pp qBlue pays supplier directlyProperty requirements – none

Unsecured loanUnsecured personal loan for housing

Unsecured personal loanBasic productCan be used for housing purposes

Minimum age: 21Proof of ID

Basic product description

Proof of IDSound credit historyIncome source: wages or state pensionsProof of income: payslip of letter of employment for those who are formally employed bank statements for at least 3 months for those who are employed in

Client requirements

employed, bank statements for at least 3 months for those who are employed in the informal sectorMinimum personal income (employed): Minimum monthly income of R1 000

Employed: R1 000 – R10 000Loan size Employed: R1 000 R10 000Pensioner: R400 – R900

Employed: 6 – 24 monthsPensioner: 6 – 12 months

Loan size

Loan term

Cash or cheque at selected retailersDebit orderCollection method

9NoneProperty / loan use requirements

Players & Products: Market focus

Bond house: R350 000+

Bank focus:Moderate incomeR7500 Bond house: R350 000

Bond house: R200 000 – R265 000Payroll deductiblePreferred debit orderPension provident securedR3500

R7500

Pension-provident securedMortgageNew housing & secondary (PIPs)Bond house: +-R100 000

Social housing via housing institutions

Home Improvements or Housing loan (not bonded) : R10 000 – R65 000

Social housing

Housing lender focus:

Bond house: R100 000

Home Improvements or incremental

(not bonded) : R10 000 R65 000 gLow-moderate incomePayroll deductible / pensionDebit order (not preferred)

R1500

Home Improvements or incremental housing: R2 000 – R10 000

Debit order (not preferred)Some mortgage / PPUnsecured

10Incremental housingNew housing & secondary (PIPs)

Access frontier:Access frontier: How far is housing finance extending?g g

Access frontier: FSC lending has been good

But success has not been widespread

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The analysis of access to mortgages is restricted to households in the target market with an income of at least R2 500 per month

MarketHousehold is too

poor

Market redistribution

zone579 000

households16% of the

marketCurrently has /

uses the productC ’t ff d 896 000

Does not have access to the

product

marketp

7% of the market258 000 households

Household income

Can’t afford a house (R120 000)

693 000

896 000 households

Total market 81% of the market2.9 m households

3.6 million

p

Household head is

Household income is irregular

Market development

zone

693 000 households

670 000households with an income

between R2 500 and R7 999 where

h h h ld

Does not have / use the product

too old and earns at least R1 000

zone62% of the

market2.3 m

households

670 000 households

Household head / d d b 37 000the household

head is 21 or more

Does not want the 74 000

93% of the market3.4 million households

householdswas/is under debt administration

37 000 households

Has access to the product but does

not use it

product

Potential users

Market enablement 473 000

74 000 households

13Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David PorteousNote: Totals may not add up because of rounding. Source data: FinScope 2006

Potential users zone15% of the market547 000 households

households

It is estimated that around 27% of the market cannot access any housing finance products. Quantified constraints relate primarily to household well-beingg

Estimated level of access to housing finance products in the FSC target markettarget market

(Households with an income of R1 500 – R7 999: 6.7 million households)

Use or have

access to a

Use or have

access to a micro loan:

No access to any

housing financeaccess to a

PBL: 31% micro loan: 71%

finance product:

27%

Use or have

access to 20-year

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20 year mortgage

(R120000): 12%

Access constraints appear to impact on higher income households as well, although the reliability of the estimates may be limited

E i d l l f h i fi d i h FSCEstimated level of access to housing finance products in the FSC target market

(By income sub-segment)

Household income of R1 500 – R2 499

(3 million households)

Household income of R2 500 – R4 999

(2.3 million households)

Household income of R5 000 – R7 999

(1.4 million households)

Use of or19%

61%

41%

79%

Use of or

access t PBL

Use of or access to 20-year

mortgage (R120k):

56%

39%

79%

No access: 21%

to PBL: 41%

Use of or access to

micro loan: 81% No access:

56%

21% 81% No access: 19%

Use of or accessUse of or access to 20

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Use of or access to PBL Use of or access to micro loan No accessUse of or access to 20-

year mortgage (R120k)

Market dynamics:Market dynamics:At the heart of the problemp

Success?

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Success?

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Success?

19

Success?

GG

A

PP20

Success?

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Success?

22

Success?

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Three key problems

Insufficient attention to the finance affordability of low income households

Those below the threshold can contribute to housing costs

This would reduce the number of units required, and hence the backlog

Need to support incremental housingpp gMay be regarded as ‘politically incomplete’

But would have addressed the backlog much more quicklyBut would have addressed the backlog much more quickly

And introduced less distortion to market dynamics

Opportunity for the development of housing microfinanceOpportunity for the development of housing microfinancePrivate efforts have delivered excellent results

f SC f24

The success of the FSC has shown willingness of the supply side

Long term saving by the poor:Long-term saving by the poor:Six rational hurdles to savingg

#1 Short-sightednessMembers of LSM 1-5 find it hard to save for the long termC t ll b t d b h t i lifCommon to all, but worsened by shortening life expectancy

G i (2008 17)G i (2008 17)

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Genesis (2008:17)Genesis (2008:17)

#2 Affordability constraintsIt is simply difficult to put aside any money

27Genesis (2008:20)Genesis (2008:20)

#3 Community motivationReciprocal giving often takes up excess income

Income Average per month % of income

Expenditure Average per month % of income

Food R 186 28% g p

Regular wages R 343 48%

Remittances received R 201 28%

Child grant R 162 23%

Rent R 137 20%

Crèche R 56 8%

Total credit payment R 52 8%

Casual work R 4 1%

Total income received R 710 100%

Remittances given R 51 8%

Transport to work R 43 6%

Clothing R 41 6%

H h ld d t R 40 6%

Table 4 & 5. Rebecca’s monthly income & expenditureSource: Financial Diaries (2005)

Household products R 40 6%

Shoes R 18 3%

Other energy forms R 15 2%

Entertainment (cinema, etc.) R 13 2%

Genesis (2008:21 & 22, modified)Genesis (2008:21 & 22, modified)

( , ) %

Domestic workers R 8 1%

Transport to shopping R 7 1%

Cell phone (rental, airtime) R 2 -

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Outside phone R 1 -

Total expenditure R 670 100%

#4 Automatic & means-tested incomeSocial Old Age Grant may make it difficult to overcome opportunity costs & means test disincentivizes savingopportunity costs & means test disincentivizes saving

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#5 Unattractive vehiclesProducts seen as inflexible, expensive and unwieldy

T tiTransactions

Death cover

Revolving saving

Long-term saving

30Genesis (2008:13)Genesis (2008:13)

#6 Opportunity costSpecific alternatives are regarded as more important

Housing Education

“You have financial security if you own a house”“You have financial security if you own a house”

“My kids are going to make sure that I am taken care of.”“My kids are going to make sure that I am taken care of.”“It is a lifetime investment”“It is a lifetime investment”

h d hh d h

y g g fy g g f

“[Education.] is an investment “[Education.] is an investment because this child will improve thebecause this child will improve the

“I can have a tenant and they can pay rent “I can have a tenant and they can pay rent to me. I can buy food with the money”to me. I can buy food with the money”

because this child will improve the because this child will improve the status of the family, and be of help.”status of the family, and be of help.”

“You can get buried in your “You can get buried in your own house when you die.”own house when you die.”

“God will give me one to look after me.”“God will give me one to look after me.”

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Saving study: policy implicationsA number of lessons have been learned:

The disincentives of the means test are severe

Compulsion may not always be appropriate

Saving should be defined more broadly than has been hitherto accepted

The consequences of policy must be considered more thoroughly and q p y g yholistically

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