South Africa requires housing finance models that balance prudent risk management with the national imperative of expanding economic inclusion.
Risk-based pricing has an important place in responsible lending, but perhaps it should also recognise positive financial behaviour, not only historical financial setbacks, wrote the RB Property Group in their newsletter on Thursday.
The property investment company says if the local financial sector can help more South Africans become successful homeowners, it will grow more than the property market.
“We will grow the middle class. We will expand the tax base. We will stimulate investment. And ultimately, we will build a stronger and more inclusive South African economy,” it says.
The RB Property Group says this article titled “Reimagining Housing Finance in South Africa: Why Risk-Based Pricing Alone Cannot Build an Inclusive Economy” is not a criticism of South Africa’s banking sector.
It says local banks remain among the strongest and most respected globally. Rather, it is an invitation to innovate, the property investment company says.
The company says SA possesses one of the most sophisticated banking sectors in the developing world. It says these banks are globally respected for their prudent lending practices, sound regulation and strong capital adequacy.
Their commitment to responsible lending has helped create a resilient financial system, it adds.
The cornerstones of modern banking are risk-based pricing
The company says one of the cornerstones of modern banking is risk-based pricing-charging lower interest rates to customers with excellent credit records while charging higher rates to borrowers perceived to present greater credit risk.
From a financial risk perspective, this approach appears logical and fair, RB Property Group says.
However, it says that when viewed through the lens of economic development, financial inclusion and social mobility, an important question emerges: Does charging higher interest rates to financially vulnerable households actually reduce risk or does it unintentionally create more risk?
The property investment company says it is perhaps time to rethink whether the current model is producing the long-term outcomes SA desperately needs.
The risk-based pricing’s irony
Banks reward customers with excellent credit histories through preferential interest rates.
Conversely, customers with impaired or poor credit histories often pay substantially higher borrowing costs, RB Property Group says.
The rationale is straightforward:
- Higher perceived probability of default.
- Greater capital allocation by banks.
- Increased credit losses.
- Higher administrative costs.
From a banking perspective, this is understandable. Yet the irony is significant, the group says. It says the customer who is already struggling financially is required to pay higher monthly instalments, more interest over the life of the loan, and carries a significantly greater repayment burden than a financially stronger borrower.
Making recovery more difficult
Instead of helping people recover financially, the system often makes recovery more difficult, the company adds.
Financial exclusion:
- Considering two first-time home buyers purchasing identical homes.
- A borrower with a credit score that is excellent gets interest rate of cedit that is 10% lower in repayment.
- One with poor credit gets 14% significantly higher repayment.
The borrower with weaker finances now faces: larger monthly repayments; reduced disposable income; less capacity to absorb financial shocks; higher likelihood of arrears; increased probability of default.
Ironically, RB Property Group says the pricing mechanism is designed to compensate for risk, but it can itself contribute to creating additional repayment stress.
It adds this does not mean every borrower with a lower credit score will default. Rather, it suggests that significantly higher borrowing costs may increase repayment pressure for households that are already financially vulnerable.
The property investment company says a credit score is an important indicator. “But it is largely a reflection of the past.”
Many South Africans have experienced retrenchments, Covid-19 income losses, divorce, medical emergencies, business closures, and temporary unemployment.
Many are now rebuilding their financial lives, it adds.
“A customer who has spent two years responsibly repairing their credit profile should arguably be viewed differently from someone who continues to demonstrate poor repayment behaviour.
“Financial rehabilitation deserves recognition.”
SA’s bigger economic challenge
Housing finance is not simply about lending money, says RB Property Group. It says this is about building the middle class.
“Countries with large and growing middle classes generally experience stronger domestic demand because middle-income households spend across a wide range of sectors.”
Middle-class households typically invest in: housing, education, healthcare, motor vehicles, insurance, telecommunications, retail, financial services, and savings and investments.
Every new middle-class family stimulates multiple sectors of the economy, the group says.
It adds that housing is often the first major asset that begins this wealth-building journey.
Why expanding the middle class matters
The World Bank continues to describe South Africa as one of the world’s most unequal societies, despite some recent improvements, RB Property Group says.
It adds that economic growth over the past decade has been too weak to materially improve employment and living standards, while unemployment remains exceptionally high.
Research also shows that strengthening the middle class increases household consumption, investment and long-term economic resilience, it adds.
An expanding middle class contributes to: higher tax revenues, greater household wealth, stronger property markets, increased private investment, higher consumer confidence, and improved financial inclusion.
Conversely, the business says if economic growth consistently lags behind population growth, average living standards stagnate or decline, making it harder for households to accumulate wealth.
Housing boosts wealth creation
Home ownership remains one of the most effective mechanisms for intergenerational wealth creation, the company says.
A homeowner builds: equity, financial discipline, savings, security, and retirement assets. When banks finance first-time buyers successfully, they are not merely issuing mortgages.
They are financing future taxpayers. Future entrepreneurs. Future investors. Future consumers.
The company says perhaps the conversation should evolve beyond simply asking: What is the customer’s credit score today?”
Instead, lenders might also ask: How much has this customer improved?
Behavioural improvement may be just as important as historical performance.
Examples could include customers who have: reduced debt consistently, maintained twelve months of perfect repayments, completed recognised financial literacy programmes, demonstrated stable employment, increased savings, and shown improving affordability.
Such indicators may complement traditional credit scoring without replacing prudent underwriting, RB Property Group says.
It adds that possible solutions for South Africa include: graduated interest rates, financial rehabilitation mortgage programme, credit improvement incentives, government risk-sharing, expanded credit assessment models, financial literacy before mortgage approval and shared responsibility.
Rising cement prices continue to squeeze small construction businesses
Meanwhile, as rising cement prices continue to squeeze small construction businesses, a new circular cement entrepreneurship programme is said to be allowing young builders and brickmakers to reduce production costs, strengthen their businesses and adopt more sustainable building methods.
The nine-month Circular Cement Youth Entrepreneurship Programme aims to support 100 entrepreneurs to build stronger, more profitable businesses while helping South Africa transition towards a more circular construction economy.
Designed for B-BBEE candidates under the age of 35 who already operate building or brickmaking businesses, the programme combines practical technical training, business optimisation support and access to innovative construction methods developed through Stellenbosch University research.
Responds to several pressing challenges facing SA’s construction sector
Developed by Fix Forward and Impact Hub Cape Winelands in collaboration with Stellenbosch University, the programme is funded by the Presidential Youth Employment Intervention (PYEI), administered through the Industrial Development Corporation (IDC), and supported by the Department of Employment and Labour.
It is said to respond to several pressing challenges facing SA’s construction sector, including rising material costs, youth unemployment and the need for more sustainable building practices.
