Understanding the Housing Asset

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CAHF’s interest began with a review of the secondary (resale) property markets in the former black townships in South Africa – The Township Residential Property Markets (TRPM) study.  The TRPM study identified that property markets in the former black townships were dysfunctional, with limited churn (about a fifth of what would be expected in a ‘normal’ market) and depressed prices (with households suffering a 44% reduction on the sale price of their homes from what they expected).  In this context, bank reticence to lend was justifiable – the asset by which a mortgage loan would be secured was unrealisable, essentially worthless, and no security against default at all.

From these findings, a new study was initiated into the activities of “housing entrepreneurs” – people who earn money from their housing – and how housing finance might assist them maximise their returns.  The rationale behind this study was simple: if people were unable to realise value from their housing asset in its sale, or in leveraging it as collateral to access a mortgage, then maybe they could realise value in some other

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CAHF’s interest began with a review of the secondary (resale) property markets in the former black townships in South Africa – The Township Residential Property Markets (TRPM) study.  The TRPM study identified that property markets in the former black townships were dysfunctional, with limited churn (about a fifth of what would be expected in a ‘normal’ market) and depressed prices (with households suffering a 44% reduction on the sale price of their homes from what they expected).  In this context, bank reticence to lend was justifiable – the asset by which a mortgage loan would be secured was unrealisable, essentially worthless, and no security against default at all.

From these findings, a new study was initiated into the activities of “housing entrepreneurs” – people who earn money from their housing – and how housing finance might assist them maximise their returns.  The rationale behind this study was simple: if people were unable to realise value from their housing asset in its sale, or in leveraging it as collateral to access a mortgage, then maybe they could realise value in some other way.  The activities of home based enterprises (HBEs) and small scale landlords were explored.

CAHF then developed the notion of the housing asset triangle as a way to better understand housing as an asset. The housing asset triangle illustrates three different ways to think about the value of housing:

Housing is a social asset, in that it provides a social safety net for family members, it contributes towards citizenship building by offering the resident household an address and linking them in with the local governance system, and around housing units, neighborhoods consolidate, providing access to all sorts of other social benefits including networks, community support, and so on.

Hernando de Soto has popularized the notion of housing as a financial asset, as something which can be traded or against which mortgage finance can be accessed.  When traded, the value of the transaction contributes towards a household’s actual wealth and can then be re-invested in better quality or more appropriate housing for the family’s individual circumstances.  De Soto emphasized the potential of using housing as security against a loan for business purposes, and suggested that this was an important strategy for low income households to improve their overall wealth.

The financial asset is not realizable, however, until it is either sold, or leveraged to access finance.  When the market is thin and households, or when households are reticent to take on mortgage finance and risk losing their homes, financial asset is little more than a virtual concept.

How, then, can low income households maximize the value of their housing asset?  How does housing address poverty alleviation if the financial asset is not realizable?  It is in this context that the third corner of the triangle is so important.  Housing can be an economically productive asset when it is used to generate income.  For example, research into the activities of small scale landlords and home based enterprises in South Africa using the FinScope Small Business Survey; found that the home is commonly used as a base from which economic activity is undertaken.

Though the three corners of the housing asset triangle relate to how the house performs as a household, or private asset. The impact of the housing asset is also felt wider, as it performs within the context of the national economy and contributes towards the sustainability of human settlements. In this way, housing is also a public asset, and can be illustrated also with the housing asset triangle.

The role of housing in economic growth is significant.  Housing sits at the centre of a chain of backward and forward linkages – backwards to raw materials (wood, cement, iron), land, infrastructure, and financial services; forwards to so-called ‘white goods’ (fridges, TVs, ovens), furniture, construction materials for home improvement, and so on. Chiquier and Lea report that “residential investment is a major component of GDP, typically amounting to 4-8% of GDP and 20-30% of total investment.”

Also, job creation is a fundamental output of a healthy housing sector – at all skill levels.  Housing construction is a labour-intensive exercise and an increase in housing delivery can lead to substantial job creation, both skilled and unskilled.  The potential for SMME development in the home improvements industry is also significant. This in turn contributes back to economic growth as working individuals become consumers with their additional income, creating greater demand for goods and services, and so on.

Finally, it has long been understood that housing plays a critical role in the production and maintenance of sustainable human settlements. When housing is well integrated with the services and functioning of municipalities (or local government) it serves both to integrate individuals into the community (social inclusion) and as a point of engagement with governance structures (citizenship).  Residents in sustainable neighborhoods pay rates and taxes and contribute to their municipality’s capacity to deliver more services.

Of course, these various ways of understanding the housing asset apply differently over time, and variously from one household or one government to the next: households may start with an expectation that their housing fulfill their social and economic goals, and only develop an expectation that the house also perform as a financial asset over time.  A government may wish to support the development of sustainable human settlements in the first instance, and see job creation or economic growth in relation to their housing policy as secondary.  When policy makers understand the housing asset in this multi-dimensional way, both as a private and a public asset, they can better formulate their interventions to relate to the specific deficits that exist in their system.  Failure to acknowledge any one facet of the housing asset may mean that its potential is squandered, or worse, undermined.