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

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

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

*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

FSC Housing – Issues

The major issue:The major issue:

Housing units not available

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

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

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

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

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

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

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

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

FSC Housing - Issues H

The risk issues:The risk issues:

Affordability

Dysfunctional market

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

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

*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)

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

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

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