Title+deeds+not+a+magic+wand,+Tomlinson,+B+Day

Business Day, Johannesburg, 10 August 2005
=Title deeds not a magic wand=


 * Mary R Tomlinson**

At a recent conference organised by Investec Asset Management, Peruvian economist Hernando de Soto observed that SA appeared to be like other developing countries in that despite “lots of migration towards cities like Johannesburg … most of the people are excluded from the legal system”. They do not enjoy property rights.

De Soto met Housing Minister Lindiwe Sisulu and his views have received considerable attention in government and in the private sector.

His argument is that if low-income people are given access to title deeds, they will be able to use them as collateral for obtaining formal credit from financial institutions; and the possession of collateral enables people with the means to economically empower themselves by being able to use their property assets to, for example, finance a small business.

A second benefit, he argues, is that the possession of title creates an enabling environment for property transactions to occur, which in turn stimulates the functioning of a property market. Possession of a title deed encourages the formal buying and selling of housing in markets where the poor reside, which is not occurring in SA’s former townships and government-subsidised housing projects.

The importance of property rights, or, as it is more recently being characterised in SA, “making property markets work” — and as government now states, “realising asset value” — is an idea that has taken hold without having gone through much, if any, real debate.

The 2004 FinMark township property market study found that nearly R68,3 bn in township property was unrealisable in value because of a lack of title deeds; and argued for a role for the state in ensuring that this situation be rectified.

Approaching the problem of economic empowerment based on the lack of a title deed is simplistic at best. It does not take into account the history of extending housing finance to low-income black South Africans over the past decade.

During 1992 and 1993, when SA’s current housing policy was being formulated, there were vigorous debates on, for example, how to attract financial institutions back into the embryonic black housing market that they fled during the early 1990s. The flight was due mainly to a fluctuating economy, which resulted from interest-rate spikes that were simply unmanageable for first-time, newly mortgaged black home buyers, throwing many of them into default.

In addition, the threat of politically inspired bond boycotts, which had become a “weapon of the struggle” against apartheid, was making it difficult for banks to repossess houses where the mortgage loan had gone into default — a situation that has still not been entirely resolved. Where banks were able to repossess houses, a large number of first-time, home-buying black families, who had overborrowed, were evicted.

As the banks withdrew from this market, a new, “alternative” form of lender sprang up to provide a different form of credit, known today as pension/provident-backed microlenders and unsecured microlenders.

Rather than offering mortgage bonds backed by traditional brick and mortar, these lenders have provided much smaller loans that borrowers are able to repay over relatively short periods, which can then be used to incrementally improve their housing circumstances.

The experience of these types of credit is that if a loan goes into default the household is exposed only for the amount of its pension/provident fund benefit. In the case of unsecured microloans, households bear the cost of the loan through the repayment amount. In either case, the house is no longer at risk.

But now we are back to wanting to provide a loan, backed by a title deed, as a means of establishing a small business, to households that have had difficulty in the past managing credit. This thinking arises at a time when unemployment has leapt from 16% in 1995 to 30% in 2002, placing severe pressure on household incomes and making low-income people even more vulnerable.

The reason households qualify for a government-subsidised house is because their incomes fall below R3500 a month — they are generally either unemployed or informally employed, making them unlikely to have sufficient income to service a mortgage bond.

The FinMark study revealed that pensioners with no formal income owned the vast majority of township houses, making them also unlikely to be able to service a bond.

Should households with very little income use title deeds as collateral for loans to establish small businesses? Based on the lessons of lending in this market, using a title deed as collateral clearly exposes a low-income household to losing its house if the business goes bankrupt. There are other more appropriate forms of credit to consider, from overdrafts, to small business loans, to greater use of secured and unsecured small loans.

How then can SA stimulate a secondary market in former black townships and reconstruction and development programme housing projects? The FinMark research revealed that of the 2000 households surveyed across a range of submarkets, the vast majority of homeowners were not interested in selling their township house. Reasons included having incomes too low to allow them to move up the housing ladder, and their viewing the house as a family asset rather than an economic asset.

The overemphasis of the need for title deeds ignores the fact that it is affordability constraints and the limited availability of housing stock that keep low-income homeowners from moving houses, rather than the lack of a title deed.

Another argument often put forward is that in less formal situations, a lack of title deeds adds to the sense of insecurity of new homeowners. The FinMark research revealed that 92% of respondents felt secure in their circumstances, even where government had not yet managed to provide them with title deeds.

It appears that residents place less emphasis on their legal status and more on their perceptions of whether they are going to be evicted. They obviously feel that their security is no longer under threat. Moreover, when it comes to buying and selling reconstruction and development programme houses, considerable anecdotal evidence reveals an active informal market in operation.

So, without being able to test it empirically, it is arguable that even if every low-income household were given a title deed tomorrow, the number of purchases and sales in the lower end of the market would not significantly alter.

By all means, let us push forward with government’s proclaimed policy of providing increased home ownership to the poor, and let us ensure that these households receive their title deeds in a timely manner. Let us also try to develop a low-cost title system so that formal transactions are affordable for the poor, if they want to move. Let us also revisit the increasing rhetoric about the ability of title deeds to economically empower low-income households.


 * Tomlinson is the former director of the Housing Finance Resource Programme.


 * From: http://www.businessday.co.za/articles/opinion.aspx?ID=BD4A78103**