The gap market represents a potential housing opportunity worth well over R2 trillion in property value alone.
This is even before one even considers rental income, home loan income, secondary market activity, insurance, municipal rates, furniture, renovations and all the other economic activity that follows housing, says alternative home financier Sentinel Homes.
South Africa has a severe housing shortage with President Cyril Ramaphosa recently putting the backlog at between 2.5 million and 3 million homes, says Renier Kriek, Managing Director (MD) at Sentinel Homes.
He says the pain is most acute in the so-called gap market, where households earn too much to qualify for fully subsidised housing, but too little to access the mainstream private market comfortably.
“So here is the question that should bother all of us: If there is obvious demand for affordable housing, and if housing is a business, why is capital not flooding into this market?”
The housing market is badly designed
The MD says the answer is not that businesspeople hate poor people or refuse to eat their lunch. He says the answer is not that banks are lazy. “The answer is not that developers have suddenly lost the ability to build. The answer is that the housing market is badly designed.”
According to Sentinel Homes, capital goes where risk is understandable, enforceable and capable of being priced. The company says if the rules make it slow, costly or uncertain to recover capital when a transaction fails, capital does what capital always does-it moves elsewhere.
“That is not a moral statement. It is plumbing.”
The alternative home financier says this is the part of the housing debate the country often avoids. “We speak about access, fairness and transformation, some speak against the ‘financialisation of housing’ but we often ignore the mechanics that determine whether anyone with capital is willing to take the risk.”
Gap market receives a far smaller share of home loan approvals
When considering the current shape of the market, Kriek says SA has about 18 million households, but the formal home loans market comprises only about 1.6 million accounts. He says recent National Credit Regulator (NCR) data also shows that the majority of mortgage grants continue to go to properties above R700,000, while the gap market receives a far smaller share of home loan approvals.
He says that in other words, the system is not financing the part of the market where the greatest unmet need sits. “Why?
Gap market housing carries higher perceived risk
“Because gap market housing carries higher perceived risk, thinner margins and more difficult enforcement. Developers face delays, red tape, corruption risk, planning bottlenecks and slow release of land. Lenders and landlords face long, uncertain and expensive recovery processes when borrowers or tenants default. That matters a great deal.”
According to Sentinel Homes, no one sensible wants unnecessary evictions or reckless foreclosures. It says people should be treated humanely and with dignity.
“But a system that makes remedies practically unavailable does not eliminate default. It merely causes lenders and landlords to price that risk into every transaction, or to avoid the market altogether. The result is the perverse housing market we currently have in South Africa.”
The company says a legal and policy system designed to protect vulnerable households ends up excluding many of them from housing in the first place. It says the relatively small minority of people who default receive an enormous amount of policy and procedural attention. The much larger group of people who never get housed, never get financed and never get a chance to build equity remain mostly invisible, it adds.
The deeper problem is market design.That is the real cruelty, Kriek says. He adds that the public debate also tends to search for convenient villains.
“Banks. Developers. Landlords. Airbnb. Short-term rentals. Foreign buyers. The villain changes depending on the season but the diagnosis remains too shallow. The deeper problem is market design.
“If we want capital to serve poorer and more vulnerable households, we have to make it less irrational for capital to do so. That means reducing friction, reducing uncertainty, speeding up approvals, improving enforcement and designing remedies that are fair but workable. Capital that cannot get out will be reluctant to go in.”
This is not an argument for abandoning consumer protection, Sentinel Homes says. It adds that it is an argument for understanding that consumer protection has to work at system level, not only at the level of the individual case. “Protecting one household in default can be justified. Designing a system that scares capital away from thousands of future households is not.”
The proposed amendments to the PIE Act, are therefore worth watching closely. If handled properly, Kriek says this could be one small step toward restoring balance, even though the current text of the amendment makes the situation worse. But if even if sanity prevails and the amendment achieves some rationalisation of eviction law, the broader point remains, he says.
Design a market in which capital can participate responsibly, profitably and at scale
He says that the government’s role is not to coerce capital into affordable housing by moral accusation. He adds that the government’s role is to design a market in which capital can participate responsibly, profitably and at scale.
“This is already happening with cars, with bread or with televisions. Why not also with housing?
“Investors should also be more vocal about this. There is a massive opportunity cost in sitting outside the gap market. Every year that the market remains broken, capital holders lose potential returns, consumers remain excluded and the housing backlog grows harder to solve.”
Alternative finance is useful but not enough
At Sentinel Homes, Kriek says they operate inside this flawed geometry by providing an alternative route into ownership for clients who do not always fit the traditional mortgage mould. He says that is useful, but it is not enough. He adds that alternative finance can help.
“Better underwriting can help. More flexible ownership structures can help. But durable change requires better market design.”
Faster housing delivery. Faster decision-making. Faster enforcement when transactions fail. Less ideological theatre. More practical plumbing, the alternative home financier says.
South Africa does not lack affordable housing, Kriek submits. Instead, he says the country lacks a system that makes it rational for enough capital to meet that demand.
“And until that system improves, the gap market will remain exactly what its name suggests: a gap where homes, capital and policy should meet, but too often do not.”
Gap market challenges drive the proliferation of informal settlements
In January last year, the Department of Human Settlements(DHS) told “Independent Media Property” that the sector faces challenges with the housing accessibility opportunities for the gap market. It said the gap market pressures are felt more strongly in metropolitan municipalities, intermediate cities, and small towns. DHS then called on all stakeholders in the value chain to find long lasting solutions to this challenge since the gap market challenges drive the proliferation of informal settlements.
In April, Rob Buthelezi, chairman of RB Property Group said affordable housing is not just a segment of the South African residential market, but it is the market.
Accounting for 70% of the residential sector, it holds the largest share and drives the local property landscape, he said.
However, the group emphasised that navigating this market is far from easy.
Independent Media Property
