Low-Income Housing Finance Proposal: Banking Association briefing

Meeting report

HOUSING PORTFOLIO COMMITTEE
24 August 2005
LOW-INCOME HOUSING FINANCE PROPOSAL: BANKING ASSOCIATION BRIEFING

Chairperson: Mr Z Kota (ANC)

Documents handed out:
Banking Association briefing: A Long-Term Partnership for Low-Income Housing Finance

SUMMARY
The Banking Association briefed the Committee on their proposals for low-income housing finance. The Association requested government support for their new initiative that sought to address the inadequate housing market for low-income earners. The proposal included market research to precede the initiative, oversight of the current housing context, an action plan with clear guidelines for the relevant stakeholders, and an outline of the implications for borrowers and government.

The Committee asked how much the proposal would cost government, what role the banks would play in streamlining the subsidy application process, what interaction there was between the banks and private housing developers, how the fixed interest rate proposal would work in practice and how the consumer education and training would be accomplished.

MINUTES

Banking Association briefing
The Banking Association briefed the Committee on their proposal to address the financing problems faced by low-income earners. The target market for the proposal was identified as earners with household incomes of between R1 500 and R7 500 per month. The goals of the proposal included facilitating increased housing finance for this low-income group, ensuring the development of a fully functioning housing market for the target 2 million households by 2008 and increasing the overall housing stock. The proposal’s primary milestone was to have a R42 billion investment in low-income housing finance by 2008.

The Banking Association suggested a partnership between government and the financial sector to achieve their goals. The critical components of the action plan included the co-ordination of consumer/borrower education, implementation of efficient housing subsidy programmes to improve housing affordability, creation of a centralised conduit to facilitate access to capital at fixed rates, formation of a Central Loss Insurance Fund to be financed in part by government that could underwrite the plan, and joint government-financial sector co-ordination in the creation of a functioning low-end housing market. The briefing also focused on the need to offer a fixed interest option to low-income borrowers as this would mean that households could consistently budget for mortgage payments.

Discussion
Mr G Schneeman (ANC) asked about the costs and risks of the proposal for government.

Mr J van Honschooten (Consultant: Banking Association) replied that the costs were split into three components: housing subsidies (no additional costs), formation of the Capital Conduit (R2.5 billion by 2008) and the Loss Insurance Fund (R3.8 billion by 2008) for a total fiscal engagement of R6.3 billion by 2008.

Mr Schneeman asked which regions would be the focus of the proposal and how the proposal would encompass private property developers given recent policy indications that require developers to focus 20% of their resources on creating affordable housing.

Mr C Coovadia (Managing Director: Banking Association) replied that government should prioritise regions. Ms S Proxenos (Consultant: Banking Association) added that developers should be informed that there are ‘take out’ mortgages on offer. Mr van Honshcooten suggested that private developers should be encouraged to undertake their own risk analysis and buy into the scheme. He outlined reasons as to why developers would find the proposal attractive. By 2008, substantial amounts of money would be injected into the housing market and this would increase housing demand. Lower fixed interest rates would increase the pool of potential borrowers that in turn would also increase housing demand.

Mr A Steyn (DA) asked what direct role banks would play in increasing the housing stock.

Ms Proxenos replied that banks would focus on creating a secondary housing market. There was a latent housing stock that could not be traded in a secondary market and that the facilitation of market transactions was critical.

Mr Steyn asked what role the banks could play in speeding up the subsidy application process.

Mr van Honschooten replied that the issue was a concern and that there needed to be a tight service level agreement with government.

Mr T Dodovu (ANC) said that it would be useful to make an assessment of the first Memorandum of Understanding (MOU). He asked how the proposal for fixed interest rates would work in practice and if the idea was practical.

Ms Proxenos replied that there was a small premium on fixed rates but that this was lower than in other countries. She said that market research had indicated that borrowers would be prepared to pay this premium to ensure that their mortgage payments were fixed.

Mr Dodovu asked what plans were in place to correct the housing bottlenecks at the municipal level.

Mr Coovadia replied that there was currently interaction with the Department and that short term legal and regulation issues had been identified.

Mr Schneeman said that the 20% quota for private developers to engage with disadvantaged communities was necessary. He asked the implications of the suggested R42 billion investments for the developers and the communities alike.

Mr van Honschooten replied that there were no clear answers to the implications but that the Banking Association supported the 20% quota initiative.

Mr Schneeman said that most housing loans have 20-year repayment schedules. He asked how this time period could be reduced as it would increase the housing stock.

Mr Coovadia replied that the 20-year periods were necessary to keep mortgage payments affordable.

Mr B Dhlamini (IFP) asked what processes were in place to solve the Municipal preferential claims situation.

Mr van Hanschooten replied that legislative changes were necessary and that there should be a limit on the arrears that municipalities could claim. A best practice should be identified and spread to other municipalities and that debts owed should be paid by the actual debtor and not the asset owner if the debtor were unavailable.

Ms Z Kota (ANC) asked for clarification on the action plans to carry out the consumer education and training.

Ms Proxenos replied that a base curriculum would need to be approved before any other actions could be carried out.

Ms B Dambuza (ANC) asked how Non-governmental Organisations (NGOs) would be included in the proposal.

Ms Proxenos replied that NGOs might be in a better position to deliver outputs and that relationships with NGOs were needed.

Mr Coovadia stated that bank financing should be in the hands of disadvantaged individuals and not private property developers. The 20% development quota should be demand-driven rather than supply-driven.

The meeting was adjourned.