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How could we use retirement funds to leverage improved housing as an important part of the retirement package and financial wellness programme of low- to middle-income employees? We asked Shisaka Development Management Services (Pty) Ltd, a leading affordable housing consultancy, to share their insights. The first section of this chapter provides a background on low- to middle-income employees’ housing circumstances, the policy context within which they acquire housing, and why housing is an important aspect of their retirement planning. Section 2 focuses on how we can effectively support low- to middle-income employees to access home ownership. Section 3 sets out the role of pension-backed housing loans and why they are critical in supporting access to home ownership for these employees.
When we asked our retirement fund members about their preferences for longterm savings, providing for housing ranked ahead of education, medical expenses, risk benefi ts and retirement income – in that order. And it ranked fourth to providing for funeral coverage, a lump sum at retirement and emergency savings. Let’s investigate how we could use retirement funds to leverage improved housing as an important part of the retirement package and fi nancial wellness programme of low- to middle-income employees who earn between R7 500 and R25 000.
How well do employers really understand the housing circumstances of their employees? For many employers, this is not typically thought of as their primary concern. But when lack of housing becomes a destabilising factor in employees’ lives, employers might fi nd value in examining the problem more closely. The fact of the matter is that employers and pension fund trustees can do signifi cantly more to help their employees or members with this most fundamental problem. To do so, though, demands that we spend a bit more time understanding the dynamics of the problem more fully.
The Quarterly Labour Force Survey1 for Quarter 4 of 2015 indicates that there are 16 million individuals employed in South Africa. These individuals are employed in a range of sectors and by large, medium and small employers. Two-thirds are between 25 and 44 years of age. Approximately 40% are married and a further 40% are single. Of all employed individuals, 86% make contributions to a pension or provident fund. The survey doesn’t show salaries, but most are likely to be low- to middle-income employees. According to the Quarterly Employment Statistics for December 20152, employees in the formal non-agricultural sector are paid R17 517 a month on average.
Within all of these housing circumstances the quality of the housing is often very poor, with high levels of overcrowding and limited access to services.
Employees’ housing needs reflect their current housing conditions and their desire to improve these conditions. Whether they can participate in the housing market depends on how much they can afford and the extent to which there are opportunities available and accessible in the market.
One of the most significant constraints inhibiting a low- to middle-income employee’s ability to transact in the housing market is often a high level of consumer indebtedness and impaired credit records. As a result of the widespread use of unsecured credit, it’s estimated that in South Africa 9.22 million consumers have impaired records (47% of 19.6 million credit-active consumers)3. Statistics compiled by debt management firm Debt Rescue show that South African consumers owe the bulk of their monthly salaries to creditors, and more than 11 million of South Africa’s creditactive consumers were over-indebted4. They found that consumers owe as much as three-quarters (75%) of their monthly pay as instalments to creditors.
Low- to middle-income employees meet their accommodation needs as an integral part of their socio-economic development and survival strategy. The way they invest in housing is not necessarily a single large transaction that occurs once or twice in their lifetime, as is the case with higher earning employees, but is rather multiple or a series of incremental investments.
Moreover, low- to middle-income employees don’t invest in one place but rather in a number of places, as this enhances their access to social and economic opportunities. For example, a single household may:
Different members of the household will live in the different locations to access different education, health and economic opportunities and to meet social objectives.
Many employees lack knowledge and are inexperienced in operating in the housing market, making them vulnerable to high-risk transactions. Their low incomes exacerbate their vulnerability5. Research indicates that for the most part, these employees rely on friends and family for advice and support in accessing housing, and most of these advisers also lack experience6.
On the supply side, while there are professionals providing housing-related services, the houses available are either poor value for money (new developer housing) or constitute higher risk transactions because of the poor functioning of the lower end of the housing market, including unreliable or fraudulent service providers and poor information. It’s also highly difficult to access loans because financial institutions are reluctant to lend in certain areas and employees are unable to meet the financial institutions’ eligibility requirements for affordability and a deposit.
This is more significant for low-income employees, as the Income and Expenditure Survey (2010/11)7 indicates that the success rate of securing a home loan for households earning between R3 500 and R16 000 per month is roughly one home loan for every 32 households. For households earning above R16 000 the success rate is one home loan for every 12 households.
Recent work undertaken by the South African Housing Club – a newly formed organisation that provides housing wellness support to large employers – shows that demand far exceeds the availability of existing supply that is affordable to low- to middle-income employees across South Africa. Buying a stand and building a house in stages is often the most practical and costeffective way of becoming a home owner. A key problem in urban areas, however, is access to affordable stands and appropriate home loans.
All of the above results in many employees taking unnecessarily high risks when transacting in the housing market, often losing scarce savings and failing to effectively acquire or complete building a house.
Buying a stand and building a house in stages is often the most practical and cost-effective way of becoming a home owner.
The government’s key focus is on households earning below R3 500 living in informal settlements and backyard dwellings, as well as on meeting the needs of new families. However, government policy and subsidy also focus on the affordable housing sector – often termed ‘gap’ housing – which is formal housing for ownership for low- to middleincome employee households. This is likely to increase, given new policy frameworks including the National Development Plan.
The following figure shows an overview of this financial framework. Currently the government is providing extremely limited support to low- to middle-income employees. Some employees earning below R15 000 could access support from the government through the Finance Linked Individual Subsidy Programme (FLISP). The once-off FLISP subsidy ranges between R10 000 and R87 000, depending on the applicant’s monthly income. The sliding scale applied results in the subsidy making a more substantial difference to affordability for applicants at the lower end of the income scale. Funding availability varies from province to province as it depends on the amount of funds each province allocates to FLISP. Generally FLISP funding is limited and not always available8.
South Africa’s financing framework for housing
Generally low- to middle-income employees are expected to make their own investments in housing, as well as pay for rates and services. They
make these investments either through savings or loan finance raised from financial institutions. How easy it is for individuals to access loan finance
from financial institutions depends on income and levels of indebtedness, with individuals with higher incomes having better access. They can either
use secured loans (home loans or pension-backed housing loans) or unsecured loans.
Home ownership is good for the economy and for individual households because it encourages people to save.
The recent boom and bust in housing markets has made the concept of housing as an asset controversial. While previously home ownership was considered a keystone of opportunity, what became painfully clear in 2008 was that there’s a big difference between good and bad home loans.
During the sub-prime mortgage boom of 2003–2007 in the United States, home loan credit was extended under terms and conditions that were unsustainable and feeding a house price bubble that would inevitably burst, as occurred in 2008. In its wake, these lending excesses left a foreclosure crisis, a credit crunch, a global recession, double-digit job losses, and the loss of a staggering $7 trillion in housing wealth9.
Despite this, there’s still a strong argument in favour of home ownership as an asset. Finmark Trust10 asserts that housing as an asset provides three components of benefits for the household, in addition to providing shelter. According to this concept housing is a social asset, in that it offers a social safety net for family members, it contributes towards citizenship building and provides access to other social benefits, including networks and community support. It is also an intergenerational asset that gets passed on from one generation to another. It is a financial asset, in that it can be traded, or against which home loan finance can be accessed. When traded, the value of the transaction contributes towards a household’s actual wealth and can then be reinvested in better quality or more appropriate housing for the family.
It is also an economic or productive asset when it is used to generate income either through renting out a portion of the house or property or through using the house to sell services and goods or for manufacturing.
Since 2008 there has been extensive research into the benefits of home ownership as an asset generally and for enabling retirement. Despite there being arguments on both sides of this issue, the one overriding fact is that home ownership is good for the economy and for individual households because it encourages people to save. “Perhaps the most compelling argument for housing as a means of wealth accumulation,” argues Richard Green of the University of Southern California, “is that it gives households a default mechanism for savings11”. Because people have to pay off a home loan, they increase their home equity and save more than they otherwise would. This is indeed a strong argument. Social science research finds that people save more if they do so automatically rather than having to choose to set something aside every month.
Default on home loans in South Africa is relatively low. On the one hand, analysis by Ilana Melzer from Eighty20 indicates that for home loans originated between 2009 and 2014, the percentage of loans that are in arrears by 90 days or more is 5% or less. On the other hand, credit providers, including a range of non-bank players, indicate that over 40% of borrowers with a clothing or furniture account are 90 days or more in arrears on their worst performing account in the category12. Given the high levels of indebtedness in South Africa, we can’t underestimate the value of home ownership and its importance for retirement arrangements of low- to middle-income employees. We can’t ignore the strong link between home ownership and financial well-being.
At the same time, housing is only an asset when the financing is affordable and sustainable and holding it provides value in the context of an employee’s retirement plans. If investments are overly ambitious or focused on opportunities that don’t resolve the employee’s priorities, which may not be at a place of work, then the member risks becoming financially overstretched. The dilemma therefore for the employer is the extent to which they support investments of this nature.
The success of a business is directly linked to the performance, commitment and well-being of its employees. It stands to reason that there’s a negative effect on an employee’s performance and well-being when they live in inadequate accommodation or accommodation that does not suit their needs and lifestyle, or where the employee is under financial stress. While it is also not the employer’s obligation to care for an employee once they leave their employment, most employers’ reputations are affected when, on retirement, employees live in squalid conditions.
Given the housing circumstances and extent of indebtedness of low- to middle-income employees currently in South Africa, their low levels of understanding of housing markets and the extremely fraught market through which housing is provided, there’s a strong argument for employers to support employees to become home owners on condition that it’s effective and reduces associated risks. This is not only to address the shelter and asset creation aspects of home ownership, but is also a good motivation for financial well-being. Unless an employee addresses creditworthiness issues, levels of indebtedness and budget realignment, they can’t access finance for housing and transact in the market. At the same time, once they’ve invested well and become owners, housing enables them to improve their financial sustainability.
It’s important to recognise that accommodation is a personal decision and employees have the right to make decisions around accommodation in terms of their own lifestyle, values and priorities. Employers therefore need to balance the extent to which they make resources available to enhance the ability of employees to live in formal, well-located accommodation and own their home in a way that enhances wealth creation. We also have to consider the extent to which employers can support employees, given that housing is not the employer’s core business.
In South Africa at present, generally only large employers support employees in accessing home ownership. The type of support varies as follows (for more details on the financial products indicated, see Table 1 further beloww):
In providing support, employers have two objectives: to make sure their employees have good living conditions, and that the employee can access home ownership and asset creation. Sometimes these two objectives have no locational alignment. What this means is that employers’ support programmes need to balance both these requirements and should be flexible enough to accommodate both.
Accommodation is a personal decision and employees have the right to make decisions around accommodation in terms of their own lifestyle, values and priorities. Employers therefore need to balance the extent to which they make resources available to enhance the ability of employees to live in formal, well-located accommodation and own their home in a way that enhances wealth creation.
The best housing support for employees earning below R25 000 per month is likely to be that which responds directly and effectively to employees’ own personal housing and financial circumstances, and where employees are proactively responsible for their own housing decisions and transactions. At the same time, employees need advice to decide on practical and sustainable housing transactions, access to finance and housing opportunities, as well as support to resolve creditworthiness constraints and transact effectively in the housing market.
In structuring a programme, it’s necessary to understand that employees need to go through a complex decision-making process before they’re ready to transact. This process enables them to set their housing aspirations consistent with their financial reality so that they have a practical housing action plan that is affordable and achievable. They will also need sufficient affordability, creditworthiness, information, and social and emotional skills to transact. The South African Housing Club takes employees through such a decisionmaking process as shown on the right.
Once an employee has clarified their home ownership plan, they need support to implement it.
This support includes:
The financial support that low- to middleincome employees could access comes from three sources in addition to their own savings, namely from the employer, financial institutions and the government, as shown in Table 1 on below.
Regardless of the financial support provided, a key element to the success of enabling access to home ownership is information and coaching. This is not only about the importance of home ownership and how to go about becoming a home owner, but also on the best financial product for an employee, as well as how best to transact to meet realistic housing aspirations.
Table 1: Overview of financial support provided to employees
Pension-backed housing loans are key to any employee home ownership programme. It’s often the best option for an employee who doesn’t qualify for a home loan or enables employees to pursue a wider range of housing opportunities which are often more affordable and in preferred locations. These loans are important for the following reasons13:
Pension-backed housing loans are enabled through the Pension Funds Act, but can only be provided if they are explicitly indicated in the rules of the pension or provident fund. The key elements of a pension-backed housing loan are as follows:
When structuring pension-backed housing loans, take the following factors into consideration:
The table below sets out the key risks and mitigating factors.
Table 2: Key risk
Home ownership is a good motivation for financial well-being. Unless an employee addresses negative creditworthiness issues, levels of indebtedness and budget realignment, they can’t access finance for housing and transact in the market. At the same time, should they successfully transact and become home owners without overcommitting themselves financially, their financial sustainability and robustness will be substantially improved.
Owning a home, particularly where there’s no outstanding home loan, is also a critical retirement asset, as it provides employees with affordable accommodation, is a financial asset and can also be used to supplement postretirement income.
We believe that employees earning below R25 000 per month need housing support that responds directly and effectively to their personal housing and financial circumstances, and where they are proactively responsible for their own transactions. Employees need advice, access to finance and housing opportunities, as well as support to resolve creditworthiness constraints and effectively transact if they are to meet their own housing needs.
However, this must be done in a way which empowers these employees to use their own networks and control the process of becoming home owners. This generally results in more cost-effective outcomes and increases employees’ control over their housing outcomes and ongoing maintenance.
Pension-backed housing loans, particularly when linked to properly structured housing support, are critical in enabling low- to middle-income employees to become home owners, improve the quality of the houses they live in and strengthen their financial sustainability.
1 Statistics South Africa, Released March 2016
3 Rust, 2013
4 BusinessTech, 2015
5 Lipietz, 1999
6 Shisaka for FinMark Trust, 2006
7 Melzer, 2015
8 Smith, 2013
9 Manturuk, Riley & Ratcliffe, 2010
10 FinMark Trust, 2008
11 The Economist, 2009
12 Melzer, 2015
13 Sing, no date
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