Impact of macroeconomic indicators on incremental housing finance in South Africa

Abstract

This research seeks to answer a question that borders on the affordability of housing finance, relative to the overall direction of the South African economy. Therefore, the study explores insight into the informal housing and spending patterns of low/middle-income groups in South Africa. Accordingly, the macroeconomic data was used to evaluate the incremental housing finance, and build a framework based on the National Housing Finance Corporation (NHFC) model in South Africa as a major contribution to a sub-Saharan African study. To achieve the overall goal, the study employs a mixed method (qualitative and quantitative data) to assess housing finance affordability and the performance of incremental housing finance in South Africa. Specifically, data for 17 years (2003-2020) from Stat SA, NHFC, Department of Human Settlement, and Rural Housing Loan Fund were used in this analysis. Additionally, stakeholders from NHFC and HIPHousing who are knowledgeable with the workings of incremental housing finance and interface between the home finance providers and the beneficiaries were interviewed. The study found that incremental housing finance directly addresses a housing affordability gap for low to middle-income earners in South Africa. Furthermore, it is demonstrated to be more resilient in improving access to financing for categories of homeowners who have typically not been able to afford improved housing conditions. The proposed framework captures the current financing model that has recorded over 90% repayment rate from low-or middle-income earners. This further proves that risk classification from the formal mortgage options might have significantly excluded the poor from affordable housing finance. The study also reports three (3) major components of an ideal incremental financing structure which are (1) institutional financing (2) funding from both private and public entities, and (3) regulation. Consequently, results show that inflation and the lending rate demonstrate significant impacts on incremental housing investment, while unemployment demonstrates the least impact on the incremental housing investment. Additionally, results of the interview with NHFC executives revealed a significant impact of the rate of unemployment; and other related macroeconomic indicators in mitigating risks of default. Thus, it is recommended that the transition of government from housing provider to enabler should inform the establishment of apex incremental financing bodies like the NHFC funded or subsidized by the state for on-lending to retail intermediaries. Furthermore, the institution is to mitigate risk by adopting regulations and providing oversight to incremental housing finance niche lenders. It is also recommended that incremental financing should be disbursed through reliable building merchants to ensure that funding is used for qualitative homeownership. Furthermore, macroeconomic data should be collected regularly to monitor the performance of incremental housing finance funds as a risk mitigation measure.