Mortgages play a critical role. Aside from supporting housing affordability and enabling the performance of housing markets, they facilitate leveraged asset ownership, offering a pathway to wealth building for those who have limited capital.While SA’s residential mortgages by value account for over half the value of credit extended to households, there are relatively few mortgage loans outstanding. According to the National Credit Regulator (NCR), there are 1.72-million open mortgage accounts in the country. In contrast, deeds office data indicates there are roughly 6.2-million formally registered, or potentially mortgageable residential properties that offer scope for growth.

The mortgage book has shown no growth in real terms since 2008, and the number of accounts has declined marginally since 2007.

The mortgage activity that does occur is limited to a narrow market that is, on its own, unlikely to grow significantly. In total, lenders granted 153,467 mortgages across the whole country in 2017, and 96% of these loans were taken up by borrowers who earned more than R15,000 a month.

Beyond the impact on household wealth, mortgages can have a significant impact on transforming South African cities

This is despite the finance-linked individual subsidy programme, or FLISP, a capital subsidy for first-time homeowners who earn below this income threshold. Clearly there is a mismatch between stated policy, which intends to stimulate more mortgage-supported housing activity in lower income segments, and reality.

Limited mortgage lending and poor housing market performance go hand in hand. Both have significant implications for the economy and society. The deeds registry reflects almost 2-million properties built by government and given directly to low-income beneficiary households for free, overwhelmingly in the less than R300,000 value segment. These properties represent a significant transfer of wealth directly from government to households.

Unrealised potential

However, in the absence of mortgage finance, the realised value of these properties is below potential. By implication this dampens the magnitude of wealth transfer to households, entrenching patterns of inequality rather than disrupting them.

Beyond the impact on household wealth, mortgages in particular can have a significant impact on transforming South African cities. Of course, unsecured credit and pension-backed loans support housing investment. But because mortgage lenders have a material interest in the underlying property, mortgages co-opt the interests of households and the financial sector in support of better urban governance.

Households who intend to sell to buyers who need mortgage finance have an interest in paying municipal accounts and complying with by-laws and building codes. Likewise, cities that want to attract widespread mortgage lending to support housing markets (and by extension city budgets) have to govern effectively.

That mortgage lending is not taking place in many areas — despite the existence of mortgageable, titled properties, the availability of subsidies and the stated willingness of lenders — is of great concern.

Analysis prepared for the Centre for Affordable Housing Finance highlights a range of interconnected problems, spanning borrowers, properties, lenders, governing entities and administrative processes.

With regard to borrowers, lenders commonly cite poor credit histories and limited affordability as the primary reasons for loan declines. At the same time, NCR data on origination highlights significant flows of nonmortgage credit into FLISP-eligible segments of the market. It appears that borrowers overwhelmingly use available credit to support non-housing consumption expenditure, despite the availability (on paper at least) of capital subsidies.

Housing stock is not the problem

Lenders note that there is little new affordable housing development, while the stock that is delivered is unaffordable in the FLISP market.

However, this focus on new build ignores the sizeable resale market. According to the Centre for Affordable Housing Finance, more than a third of all registered residential properties, corresponding to more than 2-million properties, are valued below R300,000. These properties should, in theory, provide a pool of mortgageable stock.

However, the number of formally registered repeat transactions in this market is low, at roughly 12,000 units a year. While some might point to this low level of activity as a cause of limited mortgage lending, that would ignore the possibility that it is rather a consequence of limited mortgage lending.

While some might point to this low level of activity as a cause of limited mortgage lending, that would ignore the possibility that it is rather a consequence of limited mortgage lending

Mortgage activity is virtually absent in this segment of the market; fewer than 2,000 of the 12,000 repeat sales were mortgaged. That buyers and sellers transact largely in cash will significantly affect both sales volumes and prices. Clearly, mortgage lending and housing market performance go hand in glove.

At the same time, an analysis of mortgage performance prepared for the Centre for Affordable Housing Finance indicates that loans granted to lower income borrowers are more likely to fall into arrears. However, there is significant variance across sub-segments of the affordable market; pockets of good performance clearly exist. In addition, lenders can and do price for risk.

In affordable market segments, higher interest margins together with the lower incidence of early repayment compensate for higher default risk. Given that prevailing rates are way below the regulatory maximum, it would seem the market has scope for responsible and sustainable growth.

Reputations at stake

While lenders can manage the financial impact of default, foreclosure may impose reputational costs that lenders are unwilling to bear, particularly in the prevailing political climate.

Lenders may also be concerned about the lack of effective governance in areas where there is affordable housing stock. Not only does lack of governance compromise the mortgageability of properties (properties that have been materially altered without planning approval can be demolished), it limits lenders’ ability to obtain vacant possession.

To the extent that lack of governance, poor service delivery and social instability go together, areas in which these occur are likely to see compromised willingness to service loans as well as depreciating values as buyers look elsewhere for housing.

Beyond this, mechanisms that support formal property market transactions, bond registrations and subsidy applications are unfamiliar, lengthy and expensive.

To encourage households to prioritise housing investment, they need to believe that the journey to home ownership does not start on a waiting list, but that there is a viable pathway to owning a house supported by mortgage finance. For this belief to be supported by lived experience, and for mortgages to reach the mainstream, it is critical that households can buy and sell property via trusted, time-efficient and cost-effective formal mechanisms.

With regard to mortgage product development, there is clearly a need for innovation. Evidence from lending experience to date in affordable markets, together with growing interest in the use of alternative data, may well enable lenders to develop more sophisticated risk assessment and pricing models. In addition, with further analysis on default triggers, better mechanisms can be developed to protect borrowers from the risk of repossession.

To date there has been an almost exclusive focus on the delivery of new stock, all the while ignoring the opportunity offered by resale markets. Of course, more stock is required. But by overlooking affordable resale the sector has missed an opportunity. Instead of vibrant housing markets growing in new government-funded developments, many affordable areas experience entropic decline, characterised by informal trade, poor compliance with by-laws and limited mortgage investment.

Rather than looking for a catalytic, market-changing intervention to fix mortgage markets at scale, a better approach might be to focus on local initiatives to bring properties back into the mortgage market, one neighbourhood at a time.