The single-family housing construction industry is unique for an industry of its size because it is highly fragmented and dispersed. The typical home is built by a contractor who produces fewer than 25 houses each year, while about half of all industry employees work at firms with less than 20 workers. While some larger contractors maintain building operations in a number of sectors, about 75 percent of establishments engage only in single-family housing construction. These firms also account for 55 percent of industry employees.
Nonetheless, in alignment with most industries in the 1990s, single-family construction was rapidly consolidating. The top construction firms on Builder magazine’s “Builder 100” list have continued to expand their market share throughout the decade, particularly toward the late 1990s. The top five single-family contractors have accelerated their market share the fastest, achieving 30 percent of the top 100’s share in 1997, compared with 21 percent two years earlier. Altogether, the five largest contractors generated revenues of R14.9 billion in 1998, up from R11.3 billion in 1997.
The relative, though diminishing, lack of concentration in the industry reflects the labor intensity and logistical complexity characteristic of on-site homebuilding. Regulation and building codes, trade unions, demo-graphics, and environmental regulations combine to make the competitive structure of each local market unique. Many workers from various trades must be coordinated to complete a home. Moreover, many construction materials are less expensive when purchased regionally. Finally, the localised nature of housing markets prohibits many national economies of scale.
Residential construction (i.e. free-standing houses, townhouses and flats) is most expensive in KwaZulu-Natal, while commercial construction (i.e. office space and shopping space) is most expensive in Gauteng.
With the exception of townhouses (where Northern Cape holds the number three position) the provinces of Gauteng, Western Cape and KwaZulu-Natal hold the top three cost positions for all the other building types. These are the three largest provincial economies: Gauteng contributed 34% to South Africa’s economy in 2014, followed by KwaZulu-Natal (16%) and Western Cape (14%), according to gross domestic product (GDP) data1. No plans were passed for flats in Northern Cape.
Large contracting companies that do compete nationally are often relatively decentralised—consisting of generally autonomous regional operating companies. The various units of the corporation benefit from financial strength, as well as geographic and market diversification. The few contractors that compete overseas usually do so through foreign-owned subsidiaries.
General contractors in the industry operate in a variety of ways. Some contractors actually purchase property and perform all construction work themselves. In other cases, a general contractor may be hired by a developer or landowner to provide construction services. General contractors commonly subcontract some or a majority of building activities to other firms. In any case, the general contractor is ultimately responsible for the finished product.
The single-family home construction industry is extremely susceptible to changes in economic factors and financial markets. There is a significant and direct negative correlation, for example, between central bank controlled interest rates and the volume of new homes under construction. When the interest rate attainable on mortgage loans is low, housing starts are relatively high because of increased affordability. For example, a R1 500,000, 15-year home loan requires a buyer to make monthly payments of R13 500 per month, when the interest rate is fixed at 7 percent. When the interest rate rises to 12 percent, however, that monthly payment jumps to R18 750. In such an environment, builders will have to offer incentives to increase sales. As a result, the housing industry, like mortgage rates, is highly cyclical.
In addition to interest rates, contractors are also affected by consumers’ access to capital. For this reason, several government sponsored enterprises, as well as private companies, make up the secondary mortgage market. This market consists of investors who buy mortgages from primary lenders, such as banks and thrifts, so that the lenders can use that money to make new loans. By backing mortgage loans, as well as mortgage securities created from pools of loans, the government helps to insure a steady supply of capital to build, maintain, and improve housing.
During the nineteenth and early twentieth centuries, when a large majority of South Africans lived in rural areas, people who could afford to build a home often acted as the general contractors in the construction of their own home. They hired local builders and tradesmen with money that they had saved or borrowed from family members. Few regulations existed to insure structural soundness or safety of new homes, and little long-term financing existed for prospective homeowners. Indeed, by the time the Great Depression hit, less than half of all South African families owned a home.
In South Africa, property ownership rates high in the national consciousness. Many of the early battles in the country, involving the Dutch and British settlers, the Voortrekkers and the various tribes with whom they came into contact, were over land ownership. Through the 1900s, one of the biggest debates in national politics was about land tenure.
Numerous pieces of legislation regulated the ownership of land, particularly on a racial basis. One of the major tenets of apartheid was the segregation and separation of land ownership. The so-called Group Areas Act allocated separate residential areas in urban areas to the black, coloured, Indian, and white communities.
In an effort to increase home ownership, regulation made it possible for banks to make relatively low interest loans to home buyers. By the early 1940s, South Africans were building about 100,000 new homes each year. Outdated and often lacking basics, such as indoor plumbing and electricity, however, nearly half of the homes in the nation were considered substandard. Furthermore, most families still could not afford to buy a home, choosing instead to rent housing or live with family members. In 1942 South Africa home ownership rate stood at approximately 46 percent.
The housing environment began a radical transformation in the mid-1940s for several reasons. Most important, much of the demand that had existed for new housing during World War II had gone unmet, as the country poured its resources into fighting a war. When soldiers returned home and started families, housing demand ballooned even further by population growth.
In addition to the rise in the number of South African homes in the 1950s and 1960s, housing quality improved. Besides new regulations that mandated structural integrity and uniform infrastructure, new construction techniques increased home quality and affordability. Component construction, for instance, let builders efficiently erect large numbers of units. Plywood replaced expensive boards, and drywall was introduced as an improvement to lath and plaster construction. Portable generators, power trowels, backhoes, and other heavy equipment allowed contractors to realize massive productivity gains. Although less than 2 percent of homes in 1960 had air-conditioning, almost all new homes sported indoor plumbing, central heat, electricity, and gas. Furthermore, most newer homes in the 1960s had more than one bathroom.
Despite cyclical downturns caused by interest rates and energy prices, the housing industry remained healthy throughout the 1960s and 1970s. While the number of Americans owning their own home had steadily risen during the 1970s, housing quality and construction productivity also advanced.
Legislation pertaining to building societies was frequently changed and augmented over the years, with major acts passed in 1934 and 1965. Nonetheless, certain privileges afforded to and restrictions imposed on the building societies remained. For instance, special tax treatment meant that building societies could offer mortgage loans below market rates, which placed the commercial banks at a competitive disadvantage in this regard.
As part of a comprehensive inquiry into the monetary system and monetary policy in South Africa during 1982 to 1985 (the so-called De Kock Commission), it was recommended that the playing field between banks and building societies be levelled.
The restrictions placed on the way in which building societies could capitalise themselves were especially crucial. These restrictions meant that the societies could only exist as “mutual” institutions. Changes to the legislation caused these restrictions to be removed, and most of the larger building societies opted for a listing on the Johannesburg Stock Exchange – a process which meant that they lost their “mutual society” status.
The listing process started in 1986 and the United Building Society became the first publicly listed building society. Members’ accounts (which were held as so-called subscription shares) were converted into ordinary listed shares. As the boundaries between building societies and banks started to fade and more of the building
societies converted into banks or merged with existing banks, mortgage financing became an important component of banks’ balance sheets. By the mid-1990s, there were no building societies in existence, although 11 had been in operation in 1984.
Currently, banks are by far the most important providers of mortgage finance for housing loans in South Africa. By June 2003, mortgage loans comprised 32% of the total loans and advances on the banks’ balance sheets, and amounted to R289bn
