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PARLIAMENT OF THE REPUBLIC OF SOUTH AFRICA PORTFOLIO COMMITTEE FOR FINANCE Presentation by The...
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Transcript of PARLIAMENT OF THE REPUBLIC OF SOUTH AFRICA PORTFOLIO COMMITTEE FOR FINANCE Presentation by The...
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PARLIAMENT OFPARLIAMENT OF THE REPUBLIC OF SOUTH AFRICA THE REPUBLIC OF SOUTH AFRICA
PORTFOLIO COMMITTEE FOR FINANCEPORTFOLIO COMMITTEE FOR FINANCE
Presentation by The Banking Association South
Africa19 September 2006
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FSC Foundation Principles
Voluntary commitment
Broad-based black economic empowerment
Consistent with sound business practice
January 2004 to December 2014 timeframe
Mid-term review – 31 December 2008
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FSC Empowerment Financing
• Reallocate SA national savings on a more equitable basisUnderlying principle
What national savings
Banks (36%)•Housing• Infra.•SME•Agric
Other savings (64%)
•Housing• Infra
Implied target level
R774bn
R730bn
R456bn
R136bn
R34bn
R2 130bn
Banks
Retirement funds
Life Offices
Collective investments
Short term insurers
Total
R26bnR0-20bnR0-20bnR5bn*R1bn*
R47bn
R22-42bnR5-25bn
* Only banks are likely to accommodate SME and agriculture finance (cannot pass on to Life and/or Retirement funds)
Allocated to whatHousing
Infrastructure
SMEs
Agriculture
Targeted investmentBEE TxnsTotal
R42bn
R25bn
R5bn
R1bn
R73bn
R50bnR123bn (5.75%)
• Other (non bank) savings institutions must buy MBS and invest in infrastructure to achieve targeted investment targets
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*Sub-standard infrastructure and services, poor community governance, and an undesirable social environment are currently barriers to lending
Housing in South Africa
Dependant on Government for 'social' housing (7m hseholds)
Underserved * 'commercially-viable'
market (2-4m hseholds)
Functioning market (3-4m hseholds)
Total = 12-14m hseholds (45m people)
Financial Sector Charter target market• 2-4m households earning
between R1 500 and R7 500 (+CPIX) monthly household income
• 2008 FSC targetsWithout Govt
supportWith Govt support
Origination
Targetedinvestment• Banks• Other F/S
40
24
50
31
Rbn
8 11
FSC Target Market
Focus of Government/PrivateSector partnership
Doorway to successof BNG philosophy
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FSC Housing – Issues
The major issue:The major issue:
Housing units not available
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Shortage of Housing Units in SA*
Houses Existing Shortage Gauteng KZN E/Cape W/Cape Othersneeded houses ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000 ‘000
2,5k – 7,5k income bracket 2 630 1 969 661 191 128 77 73 192
New units neededeach year for 5 yrs*¹ 132 38 26 15 15 38
Current p.a. supply 19 9 1,4 1,3 2,7 4,6
The challenge is daunting – especially when considering other development/construction priorities
* Research into Housing Supply & Functioning Markets: Matthew Nell &Associates/The Settlement Dynamics Project Shop – December 2005*¹ To reduce shortage by 60% in 5 years
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Shortage of Housing Units – over 40% in 7 Metros*
National Shortage
‘000
Metros Shortage
‘000
Jhburg
‘000
Ekurhuleni
‘000
C/Town
‘000
Ethekwini
‘000
Tshwane
‘000
Rustenburg
‘000
Nelson Mandela
‘000
2,5k – 7-5
Income bracket
661 275 63 51 51 47 36 16 11
New Units needed each year for 5 years*
132 55 13 10 10 10 7 3 2
Current p.a. supply
19 6,7 1,9 1,7 1,1 0,5 1,2 0,3 <0,1>
Given resource constraints, focused interventions needed to achieve an impact * Research into Housing Supply & Functioning Markets: Matthew Nell &Associates/The Settlement Dynamics
Project Shop – December 2005
*¹ To reduce shortage by 60% in 5 years
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Supply Constraint #1
Lack of access to well located/reasonably priced landLack of access to well located/reasonably priced land
Public sector land not being assembled• procurement regulations written for a commodity (evaluates price), not integrated development (evaluates product suitability)• procurement process is such that it is a barrier to entry for developers• transfer to a centralised entity unlikely to provide the solution
Private sector land too expensive
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Supply Constraint #2
Serious delays in land proclamation and servicing processSerious delays in land proclamation and servicing process
Land to stands - was 12/18 months; now 30/59 months
Stands to houses - was 5 months; now 19 months
• lack of capacity (especially in Municipalities and Provinces)
• lack of bulk service capacity
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Supply Constraint #3
Ever increasing cost inputs (render product unaffordableEver increasing cost inputs (render product unaffordableand thus not provided)and thus not provided)
Land, material & unit labour costs will not drop
House cost beyond affordability reach of target market
Subsidy (unintended) consequence – market distortion
No complementary commitments in other relevant charters mirroring the FSC housing commitment
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StandBuilding cost (top structure)2nd hand affordable housePrime interest rate
Contributors93 000102 600
151 500
11%
80 00099 000
140 900
10.5%
57 00093 100
122 600
11.0%
46 00086 500
102 500
11.5%
June ‘06Dec ‘05Dec ‘04Dec ‘03
Estimated salary to buy a second hand
house*
Monthly househo
ld income level
0
2,500
5,000
7,500
10,000
Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06
Lower FSC market (CPIX
adjusted)
Upper FSC market (CPIX
adjusted)
Estimated salary to buy a new house*
*Based on calculated average house prices, 20-year loan at prime plus 2; 25% instalment to incomeSource:ABSA affordable house price index; The Rode report 2004 & 2006; The Building Cost Report 2006
Housing is rapidly becoming too expensive for the Finance Sector Charter Target Market
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Subsidy Distortion Effect - IllustrativeAbove R3 500 income must “self finance” (between R28 400 & R48 600)Above R3 500 income must “self finance” (between R28 400 & R48 600)to get same value as below R3 501 incometo get same value as below R3 501 income
Subsidy
52000 48 000 46 800
36 000
23 600
3 400
“Self finance”
0 1 500 3 500 7 000
Bulk infrastructure
Land
Top-up
Income
Top structure
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Subsidy Distortion ProposalReduce “self finance” for lower incomes – to R12 400 at R3 501Reduce “self finance” for lower incomes – to R12 400 at R3 501(still R48 600 at R7 000)(still R48 600 at R7 000)
Subsidy
52 000 48 800 46 800
36 000
23 600
3 400
Reduced“Self finance”
0 1 500 3 500 7 000
Bulk infrastructure
Land
Top-up
Income
Top structure
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FSC Housing - Issues H
The risk issues:The risk issues:
Affordability
Dysfunctional market
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Fixed Rate needed as Target Market has
no “Cushion” to absorb Rate Increase
Monthly income 3 50025% to repay loan < 880> 80 000 @ 12%
2 620Minimum Living Standard 2 500Cushion 120
1% rate increase 57
2% rate increase 115
3% rate increase 173
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What a borrower pays for when buying a house (repaid at R2 960 pm over 10 years)
*For a loan at prime plus 1.5, repaid over 10 years. Source: Banking Association analysis
Rand* % of total cost
Serviced stand and bulk infrastructureTop structure (house)
Transfer and registration
Up front cost
Cost of money: investors/depositors funds @ 8% (repo rate)
Cost of risk: credit losses absorbed @ 4.5% default and 46% LGD (PIC report)
Bank operating cost: R3 400 origination cost and R600 annual servicing cost (Banking Association report)
Capital cost plus margin (after taxROE = 19% for 5% regulatorycapital))
Total cost to borrower
90 000
100 000
8 100
198 100
90 300
41 000
9 400
16 100
354 900
25%
28%
2%
55%
25%
12%
3%
5%
100%
Any attempt to improve homeowner affordability must target these big contributors to cost
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*For a loan at prime plus 1.5 repaid over 15 years. Source:Banking Association analysis
Any attempt to improve homeowner affordability must target these big contributors to cost
90 000
100 000
8 100
198 100142 700
61 500
12 400
36 500
451 200
Rand*20%
22%
2%
44%31%
14%
3%
8%
100%
% of total costServiced stand and bulk infrastructureTop structure (house)
Transfer and registration
Up front costCost of money: investors/depositors funds @ 8% (repo rate)
Cost of risk: credit losses absorbed @ 4.5% default and 46% LGD (PIC report)
Bank operating cost: R3 400 origination cost and R600 annual servicing cost (Banking Association report)
Capital cost plus margin (after tax ROE = 26.5% for 5% regulatorycapital)
Total cost to borrower
What a borrower pays for when buying a house
(repaid at R2 500 pm over 15 years)
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Housing Options Needed to Normalise Dysfunctional Market
Social housing
Rent-to-buy
Pension backed & unsecured finance
A 'staircase' to homeownership
Government Financial Sector
A housing “social safety net”
Mortgage withGovt subsidy
Mortgage with no subsidy
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Loss Limit Insurance (after bank takes first loss) needed to Loss Limit Insurance (after bank takes first loss) needed to normalise dysfunctional marketnormalise dysfunctional market
Individual cover to “reach” <R5 000 monthly income market• dysfunctional market - high propensity to default and loss given default – resulting in unaffordable risk premium
Pool cover to access funds from financial sector• without performance data - required for AAA rating - funding cost unaffordable
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Way Forward
Prioritise Supply IssuesPrioritise Supply Issues• Procurement regulations • Process inefficiencies
Risk sharing arrangements through partneringRisk sharing arrangements through partnering• Fixed rates• Loss limit insurance• Housing ladder