Free State resident Maplatjie Ramokhoase was overjoyed earlier this year when her municipality gave her the title deed to her former council home. But she has since had no luck using it to secure a loan from banks.
Since April when she received the title deed, three banks have declined her bid to use her property, valued at R200,000, as collateral to secure a R60,000 loan to pay for building extensions to add a laundry, tuckshop and bathroom to the 12 rooms she already lets out.
The banks turned her down because her bank account didn’t have sufficient cash to demonstrate that she had the ability to pay off any loan — despite the regular rental income she draws.
Ramokhoase, from Ngwathe, Parys, is one of 1,100 home owners in several settlements who, since September 2013, have received title deeds through the Free Market Foundation’s (FMF) Khaya Lam project.
The project forms part of a call by the FMF for government to give all township residents the title deeds to their council homes.
The foundation believes this could help uplift millions of people by providing them with a valuable asset to start a business or become a landlord.
While in one case a beneficiary was able to sell a property and use the sale proceeds as a down payment on a property much closer to a new place of work, it’s less clear how many have been able to tap loans to start or expand a business or make renovations to their homes.
The foundation also wants government to scrap the eight-year sales restriction on state-subsidised or RDP homes, which it says forces poor home owners to choose between losing a valuable asset and getting a job in another city.
FMF executive manager Gail Day points to Peruvian economist Hernando de Soto’s claims that the legal status of being a property owner unleashes a spirit of enterprise and individual initiative more than any other policy measure.
Yet evidence from government’s RDP or subsidised housing scheme on the extent to which titled ownership has helped township residents to increase their wealth, remains patchy.
A 2011 report by the Centre for Affordable Housing in Africa found that most RDP housing beneficiaries had made some investment into their homes, most by using their own savings. Between 1994 and 2009 just 120,000 or about 8% of all subsidised properties had been used to leverage R20bn in mortgage finance. Only 6% of subsidy houses had been sold.
Some respondents, however, indicated that being a home owner with a fixed physical address had made it easier to access unsecured, micro finance.
Adelaide Steedley, a director at the centre, adds that when it comes to acquiring finance using a title deed, banks do not want to take the title to an RDP home because of the political risk of having to foreclose and own an RDP property.
The most significant impact title registrations have, she says, is to increase the assets of a neighbourhood, attracting the interest of developers and investors who monitor the growth of areas on a regular basis using a wide variety of measures and clues.
The centre, however, has embarked on a study to confirm what lending is being done on government-sponsored properties driven from deeds data — which, Steedley says, preliminarily indicates a much higher level of lending than expected.
Matthew Nell, a housing expert and director of development consultancy Shisaka, says that because the RDP housing market is fairly new it can be expected that the use of the house as collateral would be relatively low.
He says title holders of former council homes might fare better in getting finance, using their new homes, than those with titles to RDP homes, because the former market is a more mature one.
However, a 2008 report of township homeowners in Ekurhuleni, by Margot Rubin, a Wits University senior researcher at the School of Architecture & Planning, and UK academic Colin Marx, found that title deeds make little economic difference to household wealth.
In all, 45% with secure tenure had made improvements to their homes, against 33% who owned their homes informally.
None of the home owners the authors surveyed had used title deeds as a form of collateral to secure finance. Only 5% said they would sell their homes or the documents to their homes.
But Mark Napier, principal researcher at the CSIR’s built environment unit, believes the sample size (of 456 households in three settlements) was probably too small to draw too many conclusions beyond those settlements surveyed.
In addition, he says the presence of a title deed is not a guarantee that banks will finance homeowners, but is rather just one clear piece of proof necessary to get a loan.
Even so, it’s not without some challenges. For example, he says, some banks will provide building finance only for those who have property valued at more than R600,000. However, he adds that there are other options that homeowners can consider, such as the Rural Housing Loan Fund-backed intermediaries, which have a smaller product that is not necessarily secured against the property itself.
Added to this, he says, even with the exemption from transfer duty on property sales below R750,000, other transaction costs might act as a barrier to allowing home owners to officially transfer ownership through the Deeds Registry from one party to another.
These costs, and a lack of awareness of formal property transfer procedures, mean many sellers revert to the informal market at the point of second sale. This could wipe out many of the benefits of clearing the title deed backlog – currently at more than 800,000 since 1994.
Attending to this is a longer- term issue, says Napier. He says the Estate Agency Affairs Board is, however, looking at offering transactional support to the lower end of the market.
FNB Housing Finance chief executive Lee Mhlongo says the bank does not limit building loans by customer segment or by loan size. He says the bank treats RDP homes as regular property stock. But he says volumes of business remain low.
"There are numerous factors that influence the trade of RDP properties such as informal trading on such properties, affordability constraints, quality of property, to name a few," he says.
Ewald Kellerman, Absa retail and business bank’s chief risk officer of mortgages, says the bank’s lending criteria in the low-cost housing segment are more stringent for home loans, and it is more expensive to register the security than other types of unsecured credit.
"Therefore, unsecured credit is often used as opposed to mortgage finance for alterations, improvements and repairs," he says.
He adds that when using the property as collateral to fund business activities, the lending decision becomes more complex, as the bank must look at projected revenues and consider the feasibility of the business.
With these challenges, a pilot project by the Trust for Urban Housing Finance (TUHF) might help. Run in Masiphumelele in Cape Town and Bram Fischerville in Soweto, the project offers mortgage finance to those with title deeds who want to build or renovate backyard structures they intend renting out.
TUHF project manager Lusanda Netshifhefhe says many township residents rely on unsecured lending when building backyard homes.
However, she says TUHF’s lending, mortgaging the main property over 15 years, will offer homeowners — many with former RDP homes — more affordable finance.
One challenge, however, remains: how to determine the value of the main property, to use as lending security. As many home sales are done informally, Netshifhefhe and her team have had to rely on the average sale of other units in a neighbourhood. This won’t be easy. She says a recent TUHF survey of Cosmo City revealed that sale prices ranged between R50,000 and R350,000 for same-sized units.
The organisation plans to advise homeowners on how to build proper structures and set up rental agreements that can help their backyard units grow as assets.
Perhaps it suggests that the title deed alone might not be enough to give township residents an economic step up — innovative financing solutions are needed too.