Home ownership, it can be argued, plays an important role in both social mobility and social protection as it allows for the acquisition of an important asset while still providing for an important social benefit.
In Benefits Barometer 2016: 'Benefits models fit for South Africa' we spoke about the challenge of meeting the objectives of social protection while still achieving those of social mobility. These objectives are often viewed as competing because of the limited funds available to meet them. In this edition we consider whether this view is always true.
Treasury’s December 2004 paper on retirement reform stated that “The Mouton Report suggested the incorporation of housing finance into retirement funds because the single most important influence on income adequacy in retirement is ownership of a home1.”
According to research by Statistics South Africa, South Africans spend approximately one-third of their income on housing. While this figure includes water, electricity, gas and other fuels, the bulk of this amount goes towards bond repayments or rentals. It therefore stands to reason that a retiree who owns their own home and no longer has any bond repayments will require considerably less income after retirement than one who continues to rent.
As importantly, paying off a home is in effect a contribution to personal savings. It is well researched that South Africans are poor savers. Gross savings as a percentage of gross domestic product (GDP) in South Africa was reported at 15.4% in 2015, according to the World Bank collection of development indicators2. Compare this to the Chinese, who save over 50% of their GDP, Indians 30% and Australians about 25%3. Home ownership encourages people to save. Because they have to pay off a home loan, they save more than they otherwise would. Research finds that people save more if they do so automatically rather than having to choose to set something aside every month.
The ideal position is therefore one in which a person is able to acquire a home prior to retirement while still saving sufficiently to meet the cost of living and the increased costs of healthcare after retirement.
Home ownership, it can be argued, plays an important role in both social mobility and social protection as it allows for the acquisition of an important asset while still providing for an important social benefit. Why, then, does this not enjoy priority over the funding of other objectives?
The General Household Survey 2016, conducted by Statistics South Africa, provides insight into the housing challenge. According to this survey, the majority of South Africans live in formal dwellings, as seen in Figure 1.
Further reading of the General Household Survey reveals the breakdown of the tenure (occupancy) of households in formal dwellings. Approximately 63% of households living in formal dwellings fully or partially own the homes they occupy, as shown in Figure 2.
While owning one’s home eases the requirement for retirement savings (and, we will show later, could be an asset for supplementing one’s retirement income), this is not always achievable – or easily achievable – for many South Africans.
For most young people, the question is whether to rent, buy or build. Each comes with its own challenges and pitfalls, which we don’t cover here. That said, acquiring a home is one of the biggest financial decisions a person can make and therefore deserves our attention. In addition to these considerations are decisions about when to move from renting to buying, or when to upscale or downscale, which further complicates matters.
Keeping up with loan repayments
For many, the process of becoming a home owner happens over a number of years and requires commitment and discipline. Households often need to address their creditworthiness issues or save for a deposit for a loan. For many, the only feasible route to home ownership is buying a stand and building a house over time using savings and small loans, or buying a small house and upgrading it over time. There is very little information on these processes and the options currently available. Further, while there are a number of private entities that offer support to address indebtedness and creditworthiness issues, they do not offer this within a context of enabling home ownership.
Becoming a home owner is only half of the problem. Staying a home owner is equally difficult. Many home owners find it difficult to make their monthly repayments and manage the costs of maintaining a home, especially in challenging economic times. Home owners need to be informed on how to responsibly manage home ownership, and what their options are should they be retrenched or run into economic difficulties.
While renting, buying and building all have a role to play in solving the South African housing problem, the current financial advisory framework does not cover any of these holistically. An alternative advisory solution is required if the problem is to be resolved adequately.
It would be easy to argue that the solution to the problem of home ownership would be for households to adjust their budgets to make more funds available for purchasing a house. While this may be so, affordability is but one of the criteria that affect the ability of a person to acquire financing for housing.
In line with the proposals of the Mouton Report4, retirement funds can provide a source of funding for housing. Very few funds still provide loans directly to members, with most having opted to provide a facility that allows members to use a portion of their fund credits as backing for loans granted by commercial banks. The advantages of these loans include:
These advantages make pension-backed lending an attractive source of funding for housing.
That said, it’s also important to note the limitations of pension-backed housing loans:
In practice, this is almost always done, resulting in retirement savings being depleted as people change jobs. Treasury has bemoaned leakage on withdrawal in various discussion papers and it is evident that the practice of calling up pension-backed housing loans by banks whenever someone changes jobs does not help the situation.
Home loans (mortgage loans)
The ordinary method for securing funding for housing is through a home loan – a loan backed by a mortgage bond. Commercial banks providing this lending have developed their own rules and guidelines for assessing potential borrowers to ensure the risk they take on is secure.
Unlike pension-backed loans, bank loans are secured against the properties that are purchased with these loans. Banks are selective about the areas in which they lend and set relatively high standards for the housing to be funded by home loans. This is because their ability to resell the property in the event of default is the real security for the loan.
Changing mindsets – access to critical information
There is a need for improved information and support to potential home owners on the importance of home ownership as part of a long-term retirement plan. Financial advisers and institutions should be encouraged to offer this as part of the service they provide their clients.
Further, there is a need for advice to potential home owners as they move through the process of deciding to acquire a house, become financially enabled to do so and then make the decision of where and how they will become home owners.
Increasing access to appropriate financial products
As highlighted earlier, owning one’s own home not only significantly reduces one’s income requirement after retirement but may also provide a source of income after retirement.
Reverse mortgages have been used in the US, Australia and the UK for many years and are also available in South Africa. A reverse mortgage allows you to borrow money against the value of your home. The loan required must be paid back on death or if the property is sold by the owner before death.
Reverse mortgages allow retired home owners to access the accumulated value in their property without moving. Depending on the nature of the product, this could enable them to supplement their retirement income throughout their retirement or for a defined period of time.
However, as the loan against the value of property attracts interest, the amount to be paid by the estate of the borrower may exceed the value of the property if the property loses value over the period of the loan.
Research in the US has revealed that reverse mortgage take-up is also affected by the bequest motive of consumers, which is one of the reasons limiting the take-up in that market. Home owners who would like to leave their homes to their children feel reluctant to borrow against their homes as this means the banks could ultimately own the homes if these loans aren’t paid back before they pass away.
In South Africa, the bequest motive has been suggested as one of the reasons for the high take-up of living annuities as opposed to life annuities. This may mitigate against the takeup of reverse mortgages in the South African market, a situation that might be overcome if the purchase of a home were made easier.
Renting out a portion of the house
Retirees could rent out a portion of the house and thereby earn rental income from their homes. There are different types of accommodation that can be provided, including renting out a separate flatlet on the property, separating a part of the house for rent or renting out a room in the house. Each of these has different advantages and disadvantages in terms of a retiree’s personal life and privacy.
Owning one’s own home not only significantly reduces one’s income requirement after retirement but may also provide a source of income after retirement.
Unfortunately, the current housing environment operates on the basis that advisers or agents are remunerated for securing a successful transaction. If someone seeking to acquire a house does not want the specific option being offered or does not financially qualify for that option, the agent or adviser ceases to engage with them. The reality is that people who can’t afford to purchase homes can’t turn to estate agents or banks for guidance on a housing solution.
In fact, most financial advisers are likely to be inadequately equipped to provide advice on housing solutions at all. With remuneration for financial advisers still based largely on product placement, which excludes rentals or housing purchases, housing is not likely to enjoy the same attention as other financial products.
Where do South Africans turn to for assistance if financial advisers are inadequately equipped?
Currently, there are only a few organisations providing such advice. They usually work with employers who wish to provide housing support to their employees. Often people will seek the opinions of friends and family, or do research on the Internet. Yet, to make this important decision, a number of factors have to be considered:
All of these elements need to be addressed for individuals to secure home ownership.
Having access to an advice framework that helps people weigh up all these factors when coming to a decision would greatly assist in making the right choices at different stages of our lives.
1 National Treasury, Republic of South Africa. 2004. Retirement fund reform: a discussion paper.
2 World Bank Data. Gross domestic savings (%) of GDP. World Bank national accounts data, and OECD National Accounts data fi les.
3 Erasmus, S. 2015. South Africans among the world’s worst savers. Agility, July 2015.
4 Mouton Committee. 1992. Report of the Committee of Investigation into a retirement provision system for South Africa.