Consumer indebtedness inhibits growth of affordable housing market

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This is according to Standard Bank's Nolwazi Nzama, Head of Affordable Housing, who indicates that although there are various options available to ease the purchasing process for people who qualify for home ownership, there are several 'disconnects' in the process that effectively prevent getting more South Africans into their own homes.

"Although the Finance Linked Subsidy Programme (FLISP) backed by government and supported by financial institutions to assist with access to affordable housing has recently been amended to remove the maximum purchase price value of R300,000 which has injected subsidies into a wider base of affordable housing customers as most property stock was sitting at amounts higher than R300,000, consumer indebtedness and a lack of financial literacy to inform effective personal financial planning are reducing uptake in the market."

External factors that also come to play include:

• An increasingly demanding regulatory environment driven by international conventions, such as Basel III, are placing demands on banks regarding levels of capital adequacy and increasing revenue pressure. These results in the reduction in the funds made available to lending and indirectly result in the tightening up of lending criteria.
  
• A shortage of available stock to support varying levels of income and consequent affordability issues in the market.
  
• High costs of transport and fuel. Added to this are additional charges such as rising rates and taxes, which reduce levels of disposable income.

"This is not to say that South African consumers have not contributed to this state of affairs," says Nzama. "Many are over-borrowed and have up to 80% or more of their monthly incomes dedicated to repaying debt. There is still a tendency for financial prudence to be tossed aside in the drive to acquire assets with declining values such as cars, ahead of assets such as houses that have the added benefit of appreciating in value and consequently directly contributing to future wealth creation."

Whilst the NCA allows for the use of household income in the determination of affordability, the use of household income does come with its risks which can jeopardize the sustainability of the servicing of the mortgage repayments.

"The trouble occurs in these households as affordability was based on the joint ability to contribute to the monthly repayments, says Nzama. "If one of the signing parties then wishes to leave the home for some reason, the remainder cannot make up the financial shortage. The person leaving also does not understand that as a party to the bond agreement, they simply cannot walk away and leave the payments to others."

South Africans in the affordable housing market are often ill equipped to unlock and benefit from the equity of their houses. Many purchasers tend to overlook the fact that over time the value of a home increases and, in so doing, creates a base for leveraging loans.

"The key to solve the dilemma at a consumer level is to intensify consumer education," Nzama says. "By creating a new pipeline of financially literate consumers drawn from the ranks of high school and young university graduates, the traditional traps of acquiring assets could be avoided.

"Standard Bank has made a substantial investment in educating consumers about personal finance. These cover various media, including television, and have been successful in creating understanding between the bank and its customers. However, there has to be a concerted effort, beginning within the schooling system, if consumers are to fully understand and fulfil their financial obligations."