Post on 23-May-2020
It is useful to clarify what we mean by housing finance. Is housing finance for housing, or secured by housing? Do we care what kind of housing?
Housing finance products in South Africa
Mortgage financeFully secured or pension backed
loansSavings
Unsecured housing loans
Can be finance for housing or finance secured by housing (and used for another purpose)
The value of the residential mortgage book at June 2011 was R773.37 billion (63% of all consumer credit)
There are 1.81 million residential mortgages
Between10-14% of households have a mortgage
Of the 25.449 billion mortgage credit extended in Q2 2011, 93% by value (83% of accounts) went to borrowers who earn more than R15,000 a month
Housing loans guaranteed by pension fund
No accurate estimates of the size of the market
Various studies indicate the value of the book could be between R5-17 billion
No accurate estimates of the size of the market
Researchers estimate that between 10% and 30% of unsecured loans are used for housing
According to the NCR as at June 2011 the total value of the unsecured loans book was R87.98 billion (between R8.7-R26.3 billion for housing?).
Of the R18.954 billion granted in Q2 2011, 35% by value (20% of accounts) went to borrowers who earn more than R15,000 per month
No supply-side data on extent of savings for housing
Can be critical for access to mortgages or to finance incremental housing investment
Facilitate incremental housing investment
Increase / improve stock of housing units
Mortgages account for 63% of all consumer credit by value, but only 5% of the number of active accounts
Mortgages773,371
63%
Secured credit
228,97419%
Credit facilities, 135,752,
11%
Unsecured credit87,978
7%
Short-term credit7470%
4
Consumer credit: Gross debtors book Q2 2011
(R Millions)
Consumer credit: Gross debtors book Q2 2011
(Number of accounts, 000’s)
Short term credit5481%
Mortgages1,8105%
Secured credit4,33512%
Unsecured credit6,29218%
Credit facilities*22,82964%
Source: NCR Consumer Credit Market report*Note: Credit facility includes all credit cards, store cards and overdraft accounts
83% of mortgage accounts went to borrowers who earn more than R15 000 per month. Secured and unsecured loans are more popular with lower income individuals
5
2,090
205,343 739,115
4,523
39,463
184,476
31,574
110,535
224,862
0%
20%
40%
60%
80%
100%
Mortgaes Secured Unsecured
< R10k R10k-R15k R15K +
Number of credit agreements 2011 Q2 (Loans granted, R Million)
Source: NCR Consumer Credit Market report
(5%)(12%)
(83%)
(31%)
(58%)
(11%)
(20%)
(64%)
(16%)
74%
49%
34%
16%
7%
0% 20% 40% 60% 80%
<R3,500
R3,500-
R7,000
R7,000-
R10,500
R10,500-
R15,000
R15,000+
26%
51%
63%
66%
77%
0% 20% 40% 60% 80%
1%
3%
11%
22%
48%
0% 20% 40% 60% 80%
We can use survey data to explore various household characteristics
Source: IES 2005/6*Inadequate housing includes: Informal dwellings/shacks and Traditional dwelling/hut/structure made of traditional material, as well as formal dwellings which are over crowded (over 2 people per room) and formal dwellings with inadequate sanitation (no flush toilet in dwelling or on site)**Formal credit includes: Vehicle finance, credit from retail stores, bank overdraft, other bank loans, and other loans
% of Households
Households in inadequate accommodation*
Households with a mortgage
Households with other formal credit**
6
Households with no wage income
49%
18%
10%
11%
8%
0% 20% 40% 60% 80%
<R3,500
R3,500-
R7,000
R7,000-
R10,500
R10,500-
R15,000
R15,000+
Pension Backed loans
8
Section 19 (5) of the Pension Funds Act (No. 24 of 1956), permits a retirement fund to
grant a direct loan to its members or to furnish a guarantee for a member’s loan from a
third party (e.g. from a bank or another home loan provider).
Poorer households make less use of mortgage finance. This can be attributed to the fact that lower income
households generally cannot afford repayments on the larger mortgage loan but can afford to take up the
smaller pension-secured loan (or unsecured loan) to finance their housing requirements
The loan must be used for housing
related purposes
• To purchase a house
• To buy land and to build a dwelling on it
• To make additions or alterations to, or to
maintain or repair an existing dwelling
• To repay a third-party loan which is secured
by mortgage bond over a property
Financial assistance is conditional on
• The property actually belonging to the
member of the pension fund (or to his or
her spouse)
• The house must be occupied by the
member (or dependants of the member)
• The retirement fund cannot grant (or
secure) a loan for more than one property
Basic product overview
Target market
Core product features
Marketing and
educationDistribution Servicing
Active retirement fund members
Retirement benefits as collateral for a housing loan to purchase, build or upgrade a home Retirement funds will either grant loans directly to borrowers or issue guarantees to third party lenders
?? Depends on the
provider, but likely to focus on the workplace
Instalments typically collected directly off payroll
Who? What? How and where?
Value proposition
9
Through employer/ retirement fund
It is possible to accumulate a meaningfully large amount against which to borrow
10
1 2 3 4 5 6 7 8 9 10
R1 500 R1,832 R3,682 R5,548 R7,433 R9,335 R11,255 R13,194 R15,150 R17,125 R19,119
R3 500 R4,275 R8,590 R12,946 R17,344 R21,782 R26,263 R30,785 R35,351 R39,959 R44,611
R5 000 R6,107 R12,272 R18,495 R24,776 R31,117 R37,518 R43,979 R50,501 R57,085 R63,730
R7 500 R9,161 R18,408 R27,742 R37,165 R46,676 R56,277 R65,969 R75,752 R85,627 R95,596
R9 000 R10,993 R22,089 R33,291 R44,598 R56,011 R67,532 R79,162 R90,902 R102,753 R114,715
R0
R20,000
R40,000
R60,000
R80,000
R100,000
R120,000
R140,000
Potential value of pension-backed loan(By current income and number of years contributing to fund)
Based on the following assumptions: pension fund grows at 7% pa, personal monthly income grows at 6% pa, tax on withdrawal benefit is 18%, and borrower can borrow 80% of after-tax withdrawal benefit, employer and employee contribute 7.5% each into employees pension fund
Va
lue
at
en
d o
f ye
ar
Number of years contributing
PBL’s are cheaper than mortgages
11
Mortgage PBL
R50 000 10 years
R50 000 10 years
Interest rate: 10% (prime +1) Interest rate: 8% (prime -1)
Initiation fee: R1 000 Bond registration cost: R1 568 Transfer costs: R3 506
R250 initiation fee No bond costs
R48 monthly admin fee R5 debit order fee (charged to
client by bank)
R12 monthly admin fee No transaction cost charged to client
(salary deduction)
Instalment: R741.02 Other costs: R53.00 Total costs: R794.02
Instalment: R609.67 Other costs: R12 Total costs: R621.67
Loan amount and term
Interest rate
Monthly fees
Cost to client
Comparison between Mortgage and PBLTotal cost to client
Initial costs
Source: telephonic conversation with Standard bank
PBL’s are cheaper than micro loans
12
PBL (Standard Bank) Micro loan
R10 000 36 months
R10 000 36 months
Prime less 1 (8% p.a.) 32.1% (repo rate X 2.2) + 20%
R250 initiation fee R100 initiation fee
R12 monthly admin fee No transaction cost charged to
client (salary deduction)
R? monthly fee R5.00 debit order cost charged on
bank account
Instalment: R321.20 Other costs: R12.00 Total costs: R333.20
Instalment: R440.46 Other costs: R5.00 Total costs: R445.46
Loan amount and term
Initial costs
Monthly fees
Total cost to client
Comparison between a PBL and unsecured micro loanTotal cost to client
Interest rate
Access is not the same as usage – there may be more people who have access to a product than the number who choose to use the product. Conceptually access is the point of intersection between supply and demand
Target market
Core product features
Marketing and
educationDistribution Servicing
Active retirement fund members
Retirement benefits as collateral for a housing loan to purchase, build or upgrade a home Retirement funds will either grant loans directly to borrowers or issue guarantees to third party lenders
?? Depends on
the provider, but likely to focus on the workplace
Instalments typically collected directly off payrol
Who? What? How and where?
Su
pp
lyD
em
an
d
Access
Must be over the age of 21 and under 64
Must have a retirement fund that allows PBL’s
Must use the loan for housing purposes
How is this verified?
There is evidence of low levels of awareness in the target market around credit in general
Value proposition
13
Through employer/ retirement fund
Employers and fund administrators must agree to facilitate payroll deduction
Given supply and demand-side data the Access Frontier Methodology developed by David Porteous enables an identification and quantification of access barriers. It segments those who do not yet use a product into various market zones
Total market
Currently has / uses the product
Does not have / use the product
Does not have access to the
product
Too poor
Excluded by default
Excluded by design
Has access to the product but does
not use it
Does not want the product
Potential users
Market enablement zone
Source: Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous
Market redistribution zone
Market development zone
14
Given supply and demand-side data the Access Frontier Methodology developed by David Porteous enables an identification and quantification of access barriers. It segments those who do not yet use a product into various market zones
Total market
Currently has / uses the product
Does not have / use the product
Does not have access to the
product
Too poor
Excluded by default
Excluded by design
Has access to the product but does
not use it
Does not want the product
Potential users
Market enablement zone
Source: Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous
Market redistribution zone
Market development zone
15
BASA published some data for pension-backed loans granted to the FSC target market by the big four banks between 2004 and 2008. The impact of the NCA is clearly visible
16
FSC PBL Origination: 2004 – 2008
Nu
mb
er
of
loa
ns
Source: Banking Association of South Africa
R M
illi
on
s
Rand value Number of loans Average value
Ra
nd
s
1,013
1,083
1,181
795764
0
200
400
600
800
1,000
1,200
1,400
2004 2005 2006 2007 2008
56,10658,787 59,635
38,212
44,605
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2004 2005 2006 2007 2008
18,055 18,422
19,80420,805
17,128
0
5,000
10,000
15,000
20,000
25,000
2004 2005 2006 2007 2008
There is no good data on the size of the PBL book. The NCR publishes origination data for the large lenders (primary banks). In 2010, just under 1.7bn was originated
17
895
1,575
1,685
718
0
500
1,000
1,500
2,000
2008 Q3-Q4 2009 2010 2011 Q1-Q2
Value of loans secured through retirement benefits(R Milliona)
R M
illi
on
s
Source: National Credit Regulator
According to the NCR, just 1% of secured lending is secured by retirement benefits. Note however that NCR data does not cover all lenders
18
Vehicle48,30789%
Other security2,6815%
Furniture & other durables,
2,645, 5%
Retirement benefits
7181%
Insurance policy
580%
Breakdown of secured loans 2011 Q1-Q2(Loans granted, R Million)
Source: National Credit Regulator
Given supply and demand-side data the Access Frontier Methodology developed by David Porteous enables an identification and quantification of access barriers. It segments those who do not yet use a product into various market zones
Total market
Currently has / uses the product
Does not have / use the product
Does not have access to the
product
Too poor
Excluded by default
Excluded by design
Has access to the product but does
not use it
Does not want the product
Potential users
Market enablement zone
Source: Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous
Market redistribution zone
Market development zone
19
20
9.8 m 1 m 2.3 m
FORMAL
DOMESTIC
INFORMAL
UNEMPLOYED
DISCOURAGED
4.4 m 2.2 m 19.8M
Source: LFS 2010 Q3
3.5 million unemployed under the age of 30
2.4 million unemployed under the age of 30
The labour force comprises almost 20 million people including those who have lost hope of finding a job
21
9.8 m 1 m 2.3 m
FORMAL
DOMESTIC
INFORMAL
Source: LFS 2010 Q3
Around 5 million employed individuals say their employer contributes to their pension fund
UNEMPLOYED
DISCOURAGED
4.4 m 2.2 m
4.9 mEmployer contributes to pension
9.8 m 36 000
Privately administered and underwritten funds have the most members
1,17560%
713%
725, 37%
Privately administered and underwritten funds Transnet, Telkom and Post Office Government Employees Pension Fund
22
Total Net Assets(R Billions)
7,570 86%
80 1%
1,160 13%
Source: Financial Services Board, Registrar of Pension Funds annual report 2007/08*Note that there will be some double counting as some individuals belong to more than one retirement fund
South African retirement fund industry
Total active members(000’s)
Total assets = R2 trillion Total active members* = 8.8 million
23
864
408 425
1,088
0
500
1,000
1,500
2,000
2,500
R1-R
3500
R3500-R
5500
R5500-R
7500
R7500-R
10000
10000+
Private Enterprise
Source: LFS 2010 Q 3
474
246 192 220
650
0
500
1,000
1,500
2,000
2,500
R1-R
3500
R3500-R
5500
R5500-R
7500
R7500-R
10000
10000+
69 26 28 24 84
0
500
1,000
1,500
2,000
2,500
R1-R
3500
R3500-R
5500
R5500-R
7500
R7500-R
10000
10000+
Number of employees by employment sector(Formally employed individuals)
National/ provincial and local government
Government controlled business% employer
contributes to pension: 39% 62% 69% 70% 70% 61% 85% 91% 96% 96% 71% 88% 93% 97% 96%
Relatively few lower income workers would be able to access this product. In addition, the fund needs to allow access –Government’s pension fund does not
00
0’s
of
em
plo
ye
es
3 3213 500
Total with pension:3.2 m
Total with pension:1.5 m
Total with pension:203 000
24
Currently have/use product
Source data: LFS 2010 Q 3
Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous
Has access to the product but does
not use it
28.2 million
?
28.2 million
15.3 million
4.2 million
7.9 million
4.0 million
217 000
Market redistribution
zone
Market development
zone
Market enablement
zone
9.5 m34% of the
market
54% of the market
24.8 million
3.4 million12% of the market
Total marketAdults 21+
Currently do not have/use product
Informal employment
Does not have access to the
product
Unemployed/ not economically
active
Government employee
Employer does not contribute to pension fund
Earns less than R1500
Too old (64 or more)
1.8 million
25
Market redistribution
zone
Market enablement
zone
Current market
Market development
zone
Number of adults
≈ 12% ≈ 34% ≈ 54%
Current market Has access Does not want Does not have access Too poor
?
3.4 million 9.5 million 15.3 million
?
Based on a paper entitled “The Access Frontier as an Approach and Tool in Making Markets Work for the Poor” by David Porteous
Source data: LFS 2010 Q 3
26
Meso layerSupport
infrastructure
Micro layerOrganisational infrastructure
(diversity, capacity, innovation, competition)
Macro layerInstitutional infrastructure
(policies, laws, regulations)
The consumer
Pension fund administrators / lenders and payroll administrators need to work together
Difficult to monitor use of funds
Captive markets (typically lender is the fund or is associated with the fund administrator)
No requirement in terms of asset protection No requirements relating to housing as a financial
asset Weak verification required for loan purpose
Moral hazard - PBLs are significantly cheaper than mortgages or unsecured housing loans. Borrowers have an incentive to misstate the purpose of the loan
Consequences of default cushioned by means-tested state old age pension
Some hypotheses: Access problems and PBLs
(Service providers, information, macro environment)