The gap market is the middle 30% of consumers where the supply of housing stock is extremely low and even declining despite massive demand. Picture Courtney Africa/African News Agency(ANA)
A local alternative home financier has identified a critical market design flaw as the root cause of South Africa’s failure to meet the soaring demand for affordable housing, particularly in the so-called "gap market”.
This segment comprises households earning too much to qualify for government-subsidised Reconstruction and Development Programme (RDP) housing but too little to secure traditional bank-financed homes.
Renier Kriek, managing director at Sentinel Homes, explains that 40% of South African consumers fall into the RDP housing category, with household incomes below R3,500 per month.
Meanwhile, the wealthiest 30% of households are adequately served by the open housing market. However, the middle 30% - the gap market - faces a severe shortage of housing stock, with supply dwindling despite overwhelming demand.
Kriek attributes this crisis to a market design that discourages private investment in affordable housing.
He highlights the prohibitive costs and complexities associated with evictions and foreclosures, which make it financially unviable for investors to take risks on lower-income consumers.
“The cost of resetting a transaction - evicting or foreclosing - is exorbitant and misaligned with market realities," he says.
To address this, Kriek advocates for regulatory reforms to incentivise private sector investment and expand housing supply.
“We need to lower transaction costs for investors to take chances on consumers who are currently deemed too risky due to South Africa’s high tenure security environment. This way, more people can enter the formal housing market, even if they cycle in and out multiple times over their lifetimes. Over time, this process can help house everyone," he argues.
According to a recent study by the Centre for Affordable Housing Finance (CAHF), South Africa faces a housing backlog of at least 2.2 million units, with the gap market bearing the brunt of the shortage.
Kriek acknowledges that his proposed solution may sound harsh to some. "But the alternative - maintaining our restrictive policy environment - is even more callous. It denies people the opportunity to enter the formal housing market altogether. What good is being born free if you can never access your constitutional right to adequate housing?"
Another issue plaguing the gap market is the inefficiency of government subsidies. The Department of Human Settlements offers the First Home Finance (FHF) subsidy, aimed at households earning between R3,501 and R22,000 per month.
However, millions of rands allocated for this subsidy remain unclaimed, not due to lack of awareness or interest, but because of systemic barriers.
Kriek points out that the subsidy design inadvertently discourages market participants, such as estate agents, from selling to subsidy recipients.
"Overzealous fraud prevention measures and bureaucratic inefficiencies mean that subsidy payments are often delayed, making transactions involving subsidies overly complex and unattractive to stakeholders," he explains.
The administration of the FHF subsidy is further complicated by a fragmented system involving national and provincial authorities, each with its own rules and procedures. This creates a labyrinthine process that lower-income consumers struggle to navigate, especially when market intermediaries like estate agents and attorneys view subsidy recipients unfavorably.
Kriek warns that addressing these issues will require significant political will. "If we do nothing, the situation will only worsen. The current government may lack the ability to diagnose the problem accurately, let alone implement the necessary policy changes," he says.
However, he remains hopeful that solving the housing supply crisis could spur job creation, aligning with President Cyril Ramaphosa’s recent State of the Nation Address, which emphasized employment growth as a national priority.
The Department of Human Settlements has acknowledged the importance of public-private partnerships in addressing the housing crisis. Tsekiso Machike, spokesperson for Minister Thembi Simelane, stated that the department is focused on accelerating reforms and scaling up housing delivery through various interventions.
“The full implementation of these measures, alongside ongoing reforms, has the potential to transform the housing delivery paradigm," Machike said.
The department’s Medium Term Development Plan (MTDP) aims to create livable and sustainable human settlements through targeted spatial planning. However, citizens will have to wait for Minister Simelane’s 2025/2026 budget vote speech for detailed priorities.
Meanwhile, Nondumiso Ncapai, Managing Executive for Absa Home Loans, notes that high interest rates and rising living costs have strained many South Africans financially, leading to lower home loan application volumes in 2023.
However, she anticipates a gradual recovery in 2024 and 2025, driven by recent interest rate cuts and the potential for further reductions, which could improve affordability for new and repeat home buyers.
In conclusion, South Africa’s gap housing crisis is a complex issue rooted in flawed market design and bureaucratic inefficiencies. While solutions exist, their implementation will require bold political action and collaboration between the public and private sectors to ensure that millions of South Africans can access their constitutional right to adequate housing.