South Africa faces 2,2 million housing shortage: Property expert urges urgent policy overhaul to tackle the ‘Gap Market’ crisis

• South Africa faces a 2.2 million home shortage, with a significant gap in affordable housing for middle-income households.
• Market design flaws and high transaction costs discourage investment in affordable housing, worsening the gap market's supply shortage.
• Government housing subsidies remain largely unclaimed due to complex processes, adverse incentives, and bureaucratic inefficiencies.

The Big Issue

South Africa is currently grappling with a severe housing crisis, with a backlog of over 2.2 million homes. The problem is especially acute in the “gap market,” which comprises households that earn too much to qualify for government-subsidized housing but too little to afford homes in the open market. This gap is where the supply of affordable housing is desperately lacking, leaving millions of South Africans without a viable path to homeownership.

Renier Kriek, MD of Sentinel Homes, points to serious flaws in the current housing market and policy environment that exacerbate the situation. He believes that without swift action and policy reforms, the problem will only get worse. In this article, we delve into the key challenges facing South Africa’s housing market and explore potential solutions to this pressing crisis.

1. The 2.2 Million Home Shortage

According to a recent study by the Centre for Affordable Housing Finance (CAHF), South Africa faces a massive housing backlog of at least 2.2 million units. The shortage is most acute in the affordable housing or "gap market," which serves the middle-income population. This market includes households earning too much to qualify for government-subsidised housing (Reconstruction and Development Programme or RDP housing) but not enough to access traditional bank-financed homes. As a result, the demand for affordable housing remains extremely high, but supply is extremely limited, exacerbating the crisis.

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Renier Kriek highlights that about 40% of South Africans fall into the RDP housing category, where household incomes are below R3,500 per month, while the wealthiest 30% are well-served by the formal housing market. The issue lies with the middle 30% of households, who are squeezed out of both markets. The result is a critical shortage of affordable homes, with few options available for this vast group of consumers.

2. Market design flaws and the high cost of Housing

Kriek argues that the primary reason for the failure to meet housing demand is a flawed market design. In particular, the high costs and bureaucratic hurdles associated with property transactions disincentivize investment in affordable housing.

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One of the most significant challenges, according to Kriek, is the prohibitive costs of eviction and foreclosure processes. “The costs of resetting a transaction—whether it’s evicting a tenant or foreclosing a property—are extremely high in South Africa,” Kriek explains. “These costs don’t align with the realities of the market.”

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Kriek advocates for a change in the regulatory environment to make it more favourable for private sector investment. Reducing the transaction costs for property developers and landlords could increase the supply of affordable homes. He suggests that the housing market needs to be more flexible, allowing people to enter and exit the formal housing market multiple times during their lives. Kriek believes that if the market is designed to accommodate these cycles, eventually everyone will have access to adequate housing.

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He acknowledges that his proposed solution might seem callous to some. “It may sound counterintuitive, but keeping our current restrictive policy environment is even more harmful,” Kriek argues. “It bars people from ever entering the formal housing market. What use is being born free if you will never realize your constitutional right to access adequate housing?”

3. Government Subsidies: Good Intentions, Poor Execution

A significant component of South Africa’s strategy to address the housing shortage has been government subsidies. Programs like the First Home Finance (FHF) subsidy, which provides financial assistance to low- and middle-income households, are meant to help first-time homeowners in the gap market.

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The subsidy targets households with incomes between R3,501 and R22,000 per month and is an inverse means-tested subsidy, meaning the grant amount decreases as household income increases.

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However, despite the millions of rands earmarked for these subsidies, Kriek points out that they have largely gone unclaimed. The root of the problem is not a lack of desire or awareness among consumers but rather the scarcity of gap housing stock and the structural flaws in the subsidy process. “The problem isn’t that people don’t know about the subsidies or don’t want to use them. The real issue is that there’s too little affordable housing available,” Kriek says.

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The subsidy process itself is riddled with complications. For instance, to release the subsidy, the government requires that the registered title deed include the name of the subsidy recipient, which often leads to significant delays. “In property transactions involving subsidies, the subsidy is usually paid months after the transfer,” Kriek explains. “This makes the process overly complex and discourages estate agents from dealing with subsidy recipients.”

4. Bureaucracy and Fragmented Administration

In addition to the issues with the subsidy process, Kriek notes the fragmented administration of the housing subsidies across different levels of government. There is a national subsidy authority as well as separate authorities for each of the provinces, each with its own set of rules and procedures. This makes the process extremely difficult to navigate, especially for lower-income consumers who already face negative perceptions from market intermediaries like estate agents and transferring attorneys.

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“The complexity of the system, combined with poor demand due to adverse incentives, results in many potential homebuyers being excluded from the market,” Kriek explains. He calls for a more streamlined and integrated subsidy process that is easier for consumers to navigate and more efficient in delivering support.

5. The need for political will and reform

Kriek believes that solving South Africa’s housing crisis will require significant political will and policy reforms. He warns that if the government continues to avoid addressing the root causes of the housing shortage, the situation will only worsen. However, he is optimistic that reform could lead to significant job creation and economic growth.

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“Addressing the housing supply crisis could drive job creation, helping to achieve the broader economic goals outlined in the President’s State of the Nation address,” Kriek notes. “But without the political capital to drive these changes, we risk perpetuating the current situation, which benefits no one.”

The end Game

South Africa’s housing crisis is a complex issue that requires urgent attention and comprehensive reform. With a shortage of 2.2 million homes, particularly in the gap market, the need for policy changes and market design improvements is clear.

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Renier Kriek’s call for reducing transaction costs, reforming the subsidy system, and fostering private sector investment offers a potential path forward. If the government acts now, it could not only address the housing shortage but also create much-needed jobs and economic opportunities. However, without decisive action, the housing crisis is likely to continue, leaving millions of South Africans without the opportunity to own a home.