The danger of what we don't know
I wrote this article for the current issue of ACCESSHousing (No. 5, January 2007) which is available on the FinMark Trust’s website. I thought it might be a useful way to get back to a regular posting…
By now we should all know that the old saying “what you don’t know can’t hurt you” can’t be right. To know whether a snake is poisonous is useful information when faced with a hissing serpent that is advancing on your ankle. Information makes one better equipped to deal with the situation at hand, to respond appropriately, strategically, and competitively.
An ongoing mission of the FinMark Trust has been explicitly this: to provide critical information into the sector in support of evidence-based policy making, transformation and innovation towards making financial markets work for the poor. In the process of doing this, FinMark hopes that other players will see the benefit of this approach and integrate it into their systems and processes. The information that we generate, through the FinScope[1] survey, as well as through other targeted research initiatives, is not an end in itself, but a tool that promotes effective policy change and stimulates competition and innovation on the part of providers.
While there is increasing recognition that those people outside formal financial services provision collectively represent a substantial untapped market into which services can be provided on a sustainable basis (“the fortune at the bottom of the pyramid”[2]), there is a lack of credible information on what this market looks like, how it operates, what it wants. This is also true in housing.
Key studies in the past few years[3] have addressed some of this gap, but in the process have raised far many more questions. In an environment of (quite understandable) delivery impatience (last year was the worst year on record in subsidised housing delivery, and the delivery of ‘affordable’ stock is meeting only 14% of the estimated demand annually), there is a danger that we will be complacent with what we know and overlook what is inexplicable. And whether such ignorance obscures market opportunities or market realities, the outcome is something that today’s financial sector can ill afford.
These are some of the questions which need to be answered:
What does the ‘affordable market’ look like? It is remarkable that this is something we don’t know. With instruments and periodicals such as the ABSA House Price Index and Residential Property Perspective, the Standard Bank Residential Property Gauge, and the FNB Property Barometer, one would think that information on the supply, churn, and appreciation of the affordable housing market would be in abundance. ABSA’s analysis[4] does have a category for “affordable housing” and defines this as houses between 40-79m² and costing less than R226 000. However, while property prices in the higher income segment are analysed by province and by metro, ‘affordable housing’ statistics are only provided in national averages and no differentiation between ‘new’ and ‘existing’ is offered. FNB’s Property Barometer[5] is a useful addition, basing its analysis on surveys with estate agents. However, while it has recently included township-based estate agents in Gauteng, Cape Town and Durban, their comments are also generalised and neighbourhood specific dynamics are not reported. Standard Bank’s December edition[6] has an excellent section on Soweto, suggesting that there is indeed data to analyse – but what about the rest of the country? Without this critical information, banks cannot know the risks of lending into the ‘affordable’ market – they will be unsure as to whether there is a sufficient secondary (resale) market to support their collateral risk – and this will dampen their enthusiasm. As it is, FSC housing finance attention is on new build. Perhaps with more information, secondary market churn could also be stimulated.
How do people turn money into house? Current housing finance debates are dominated by a concern with three product categories: mortgage, pension-backed, and unsecured or micro loans. There is a growing recognition of incremental housing as a delivery process, but how households actually do this, what makes it easier and what makes it more difficult, remains a mystery. As a result of the mystery, a bias in favour of large scale developer-driven projects on open tracts of land persists, when opportunities for urban infill that is owner-driven might be more sustainable.[7] The Financial Diaries data, explored briefly in this edition of ACCESShousing, shows that most households in the sample were perfectly capable of their own project management on their homes, with or without a programme to help those efforts. This would seem to strengthen the case for housing micro loans, but how widespread are such skills? And critically, from a finance perspective, how can lenders support the process so that the finished product is mortgageable?
How do people turn house into money? Current information systems count the number of subsidised houses complete or under construction, and the number of subsidised beneficiaries (i.e. households with a title deed). With the advent of government’s Breaking New Ground policy, the delivery of sustainable human settlements becomes an area of inquiry. But sustainability is a long term prospect which arises as a result of a confluence of factors. What a subsidy beneficiary does with their house is a critical indicator in this equation. We need to know if people are upgrading their homes, and if so, with what sorts of finance. This will give us a sense of the level of investment in housing and whether households see their homes as an asset – be it social, financial or productive. It will also respond to the R2479 debate that says people must contribute to government’s investment – could investment be happening after the subsidy is allocated? We need to know if subsidised houses are being sold – how, why and at what price. If we don’t understand this we’ll never understand the role housing plays in the economic lives of low income people and whether through its housing subsidy, government is investing in economic growth as well as shelter.
What is actually happening in the FSC space? The FSC update later in this edition tells of the frustration of the Financial Sector Charter Council with the data provided by lenders in respect of the housing loans that have been originated. Clearly these are teething problems which the FSC process will iron out – the information requirements necessitate systems changes (i.e. to capture the relevant data) which are complicated all the more by additional requirements for compliance with Basel 2 and the National Credit Act. The critical need for the information, however, does not go away. Quite simply, we need to understand how low lenders can go[8] in extending housing finance into the target market. An important segment of the target market to watch is those households earning just outside subsidy eligibility: if they can access neither subsidy nor loan, this becomes a critical issue of concern for government seeking to meet its Constitutional obligations in ensuring that all residents in South Africa have access to housing.
Are lending patterns changing in South Africa? On the 24th of November last year, the draft regulations for the Home Loan and Mortgage Disclosure Act (HLMDA) of 2000 were released for public comment.[9] In the six years since it was promulgated, the HLMDA has been effectively dormant without the regulations. The issuing of draft regulations for comment was therefore a significant event. Once approved, the regulations will provide the sector with much needed information on the nature, scale and scope of lending for housing purposes and this will assist in determining where the blockages are in the housing finance value chain. While the Department of Housing considers the various comments it has received, it is hoped that it will also consider how the regulations, once accepted as final and implemented, support the development of a publicly available (and accessible) database. Ideally, all information should be made publicly available to enable researchers to identify trends and to provide incumbent and potential lenders (and other financial service providers) with critical industry information. While such information may currently be regarded as proprietary and confidential, greater disclosure can materially improve competition in the industry and enhance market functioning particularly in under-served market segments.
For policy makers as well as product providers, the lack of information regarding the low income housing sector is a major barrier to effective engagement. Without adequate market information, product providers find it difficult to devise innovative new products for the low income market, or to justify broad based roll-out. For their part, policy makers struggle to define the problem of access with sufficient granularity to develop a targeted response. And access to housing finance and the property market by the poor suffers as a result. The danger of what we don’t know is not only that we’ll overlook a potentially big and vibrant market, but also that we’ll undermine the opportunity for the majority of our population to build their housing wealth.
[1] FinScope is now conducted in nine African countries and Pakistan. For more information go to www.finscope.co.za
[2] See Prahalad (2005) The Fortune at the Bottom of the Pyramid: Eradicating poverty through profits. Wharton School Publishing.
[3] See, for example, research sponsored by the Banking Association in to housing supply and functioning markets, available on their website, www.banking.org.za. The FinMark Trust has also commissioned substantial research, including an analysis of the workings of township residential property markets (2004), the activities of small scale landlords and home based entrepreneurs (2005/06), the causes of default among clients of housing non-bank lenders (2006), and the access frontier of mortgage finance (2006). See the housing finance theme page on www.finmark.org.za
[4]http://www.absa.co.za/absacoza/generated/files/d81b1ae612a7e010VgnVCM1000003511060aRCRD/PropertyPerspective.pdf?F_C_ID=03b8ac45985bc010VgnVCM1000003511060aRCRD
[5] https://www.fnb.co.za/personal/borrow/homeloans/quarterlyReview.html
[6] http://www.ed.standardbank.co.za/research/SAGE_RPRP_011206.PDF
[7] This argument is developed by the Kuyasa Fund in its Delft Housing Needs Analysis. See http://www.finmarktrust.org.za/documents/2005/AUGUST/Delft_report.pdf
[8] A 2006 edition of the housing finance access frontier is currently being developed. For the 2005 edition, entitled “How low can you go?”, see http://www.finmarktrust.org.za/documents/2006/MAY/AccessHF_report.pdf
[9] The draft regulations were published for comment in Government Gazette No 1734, dated 24 November 2006. Comments were received by 29 December 2006 and the Department of Housing is now considering these towards the development of a new draft.
By now we should all know that the old saying “what you don’t know can’t hurt you” can’t be right. To know whether a snake is poisonous is useful information when faced with a hissing serpent that is advancing on your ankle. Information makes one better equipped to deal with the situation at hand, to respond appropriately, strategically, and competitively.
An ongoing mission of the FinMark Trust has been explicitly this: to provide critical information into the sector in support of evidence-based policy making, transformation and innovation towards making financial markets work for the poor. In the process of doing this, FinMark hopes that other players will see the benefit of this approach and integrate it into their systems and processes. The information that we generate, through the FinScope[1] survey, as well as through other targeted research initiatives, is not an end in itself, but a tool that promotes effective policy change and stimulates competition and innovation on the part of providers.
While there is increasing recognition that those people outside formal financial services provision collectively represent a substantial untapped market into which services can be provided on a sustainable basis (“the fortune at the bottom of the pyramid”[2]), there is a lack of credible information on what this market looks like, how it operates, what it wants. This is also true in housing.
Key studies in the past few years[3] have addressed some of this gap, but in the process have raised far many more questions. In an environment of (quite understandable) delivery impatience (last year was the worst year on record in subsidised housing delivery, and the delivery of ‘affordable’ stock is meeting only 14% of the estimated demand annually), there is a danger that we will be complacent with what we know and overlook what is inexplicable. And whether such ignorance obscures market opportunities or market realities, the outcome is something that today’s financial sector can ill afford.
These are some of the questions which need to be answered:
What does the ‘affordable market’ look like? It is remarkable that this is something we don’t know. With instruments and periodicals such as the ABSA House Price Index and Residential Property Perspective, the Standard Bank Residential Property Gauge, and the FNB Property Barometer, one would think that information on the supply, churn, and appreciation of the affordable housing market would be in abundance. ABSA’s analysis[4] does have a category for “affordable housing” and defines this as houses between 40-79m² and costing less than R226 000. However, while property prices in the higher income segment are analysed by province and by metro, ‘affordable housing’ statistics are only provided in national averages and no differentiation between ‘new’ and ‘existing’ is offered. FNB’s Property Barometer[5] is a useful addition, basing its analysis on surveys with estate agents. However, while it has recently included township-based estate agents in Gauteng, Cape Town and Durban, their comments are also generalised and neighbourhood specific dynamics are not reported. Standard Bank’s December edition[6] has an excellent section on Soweto, suggesting that there is indeed data to analyse – but what about the rest of the country? Without this critical information, banks cannot know the risks of lending into the ‘affordable’ market – they will be unsure as to whether there is a sufficient secondary (resale) market to support their collateral risk – and this will dampen their enthusiasm. As it is, FSC housing finance attention is on new build. Perhaps with more information, secondary market churn could also be stimulated.
How do people turn money into house? Current housing finance debates are dominated by a concern with three product categories: mortgage, pension-backed, and unsecured or micro loans. There is a growing recognition of incremental housing as a delivery process, but how households actually do this, what makes it easier and what makes it more difficult, remains a mystery. As a result of the mystery, a bias in favour of large scale developer-driven projects on open tracts of land persists, when opportunities for urban infill that is owner-driven might be more sustainable.[7] The Financial Diaries data, explored briefly in this edition of ACCESShousing, shows that most households in the sample were perfectly capable of their own project management on their homes, with or without a programme to help those efforts. This would seem to strengthen the case for housing micro loans, but how widespread are such skills? And critically, from a finance perspective, how can lenders support the process so that the finished product is mortgageable?
How do people turn house into money? Current information systems count the number of subsidised houses complete or under construction, and the number of subsidised beneficiaries (i.e. households with a title deed). With the advent of government’s Breaking New Ground policy, the delivery of sustainable human settlements becomes an area of inquiry. But sustainability is a long term prospect which arises as a result of a confluence of factors. What a subsidy beneficiary does with their house is a critical indicator in this equation. We need to know if people are upgrading their homes, and if so, with what sorts of finance. This will give us a sense of the level of investment in housing and whether households see their homes as an asset – be it social, financial or productive. It will also respond to the R2479 debate that says people must contribute to government’s investment – could investment be happening after the subsidy is allocated? We need to know if subsidised houses are being sold – how, why and at what price. If we don’t understand this we’ll never understand the role housing plays in the economic lives of low income people and whether through its housing subsidy, government is investing in economic growth as well as shelter.
What is actually happening in the FSC space? The FSC update later in this edition tells of the frustration of the Financial Sector Charter Council with the data provided by lenders in respect of the housing loans that have been originated. Clearly these are teething problems which the FSC process will iron out – the information requirements necessitate systems changes (i.e. to capture the relevant data) which are complicated all the more by additional requirements for compliance with Basel 2 and the National Credit Act. The critical need for the information, however, does not go away. Quite simply, we need to understand how low lenders can go[8] in extending housing finance into the target market. An important segment of the target market to watch is those households earning just outside subsidy eligibility: if they can access neither subsidy nor loan, this becomes a critical issue of concern for government seeking to meet its Constitutional obligations in ensuring that all residents in South Africa have access to housing.
Are lending patterns changing in South Africa? On the 24th of November last year, the draft regulations for the Home Loan and Mortgage Disclosure Act (HLMDA) of 2000 were released for public comment.[9] In the six years since it was promulgated, the HLMDA has been effectively dormant without the regulations. The issuing of draft regulations for comment was therefore a significant event. Once approved, the regulations will provide the sector with much needed information on the nature, scale and scope of lending for housing purposes and this will assist in determining where the blockages are in the housing finance value chain. While the Department of Housing considers the various comments it has received, it is hoped that it will also consider how the regulations, once accepted as final and implemented, support the development of a publicly available (and accessible) database. Ideally, all information should be made publicly available to enable researchers to identify trends and to provide incumbent and potential lenders (and other financial service providers) with critical industry information. While such information may currently be regarded as proprietary and confidential, greater disclosure can materially improve competition in the industry and enhance market functioning particularly in under-served market segments.
For policy makers as well as product providers, the lack of information regarding the low income housing sector is a major barrier to effective engagement. Without adequate market information, product providers find it difficult to devise innovative new products for the low income market, or to justify broad based roll-out. For their part, policy makers struggle to define the problem of access with sufficient granularity to develop a targeted response. And access to housing finance and the property market by the poor suffers as a result. The danger of what we don’t know is not only that we’ll overlook a potentially big and vibrant market, but also that we’ll undermine the opportunity for the majority of our population to build their housing wealth.
[1] FinScope is now conducted in nine African countries and Pakistan. For more information go to www.finscope.co.za
[2] See Prahalad (2005) The Fortune at the Bottom of the Pyramid: Eradicating poverty through profits. Wharton School Publishing.
[3] See, for example, research sponsored by the Banking Association in to housing supply and functioning markets, available on their website, www.banking.org.za. The FinMark Trust has also commissioned substantial research, including an analysis of the workings of township residential property markets (2004), the activities of small scale landlords and home based entrepreneurs (2005/06), the causes of default among clients of housing non-bank lenders (2006), and the access frontier of mortgage finance (2006). See the housing finance theme page on www.finmark.org.za
[4]http://www.absa.co.za/absacoza/generated/files/d81b1ae612a7e010VgnVCM1000003511060aRCRD/PropertyPerspective.pdf?F_C_ID=03b8ac45985bc010VgnVCM1000003511060aRCRD
[5] https://www.fnb.co.za/personal/borrow/homeloans/quarterlyReview.html
[6] http://www.ed.standardbank.co.za/research/SAGE_RPRP_011206.PDF
[7] This argument is developed by the Kuyasa Fund in its Delft Housing Needs Analysis. See http://www.finmarktrust.org.za/documents/2005/AUGUST/Delft_report.pdf
[8] A 2006 edition of the housing finance access frontier is currently being developed. For the 2005 edition, entitled “How low can you go?”, see http://www.finmarktrust.org.za/documents/2006/MAY/AccessHF_report.pdf
[9] The draft regulations were published for comment in Government Gazette No 1734, dated 24 November 2006. Comments were received by 29 December 2006 and the Department of Housing is now considering these towards the development of a new draft.
