OECD-style housing subsidies not a solution for SA

21 December 2011
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A friend of mine felt very unhappy after he read an article in The Independent earlier this month. The article covered the recently released report by the Organisation for Economic Co-operation and Development concerning the Johannesburg metropolitan area. http://www.iol.co.za/news/south-africa/gauteng/living-in-gauteng-has-hefty-price-tag-1.1190254?ot=inmsa.ArticlePrintPageLayout.ot
My friend felt stung by the opening paragraph of the article: “Gauteng cities and townships are among the most expensive places in the world to live in, in terms of housing and transport costs”. What my friend was seeing was not the whole picture. The real facts of the matter are actually much better than he thought, but then they are also much worse.
If my friend had continued reading, he would have registered an important fact not included in the lead. Three paragraphs on it stated that this ranking was based on costs “relative to their income”.
For my friend, and his Facebook friends, this would be good news. By virtue of the fact that they are on Facebook implies they have computers, and would indicate that their incomes are relatively higher than the average in South Africa. In point of fact, any individual reading this in The Independent are likely to be relatively well off compared to the bulk of South Africans.

Huge differences exist in income levels among South Africans. The large majority are very poor and only a small minority, from all races, are relatively well off. For the latter, the cost of living in Gauteng, relative to income, is significantly lower. For them the story is not as bad as it first appears.

But conversely, for the vast majority, this means that the story is worse than it appears. For those at the bottom of the economic ladder the cost of living is much higher, relative to income.

The Independent says that one of the solutions recommended by the OECD is that of subsidies and quotes the OECD as saying: “No subsidies are given to low-income residents to rent in moderate-income neighbourhoods, as is common throughout the OECD member nations”.

Such a solution, I fear, would only exacerbate the problem. The fact that OECD countries tend to have large numbers of wealthy people with significantly smaller numbers of people requiring the subsidies is being ignored. To introduce such a practice in South Africa, would mean that a tiny number of the population would have to pay a considerable amount to subsidise a very large number of people.

To complicate matters more, a huge percentage of the poorest of the poor live in rural areas. Poverty rates in Limpopo are somewhere between twice or three times as high as in Gauteng. In OECD rural areas, while poverty rates tend to be higher than in urban areas, the disparity is nowhere near as great. To hand out vouchers in rural areas would counter what the OECD is trying to achieve: make it affordable for poor people to live where jobs are present. But were Gauteng or the South African government to announce housing vouchers for the metro area alone, it would only draw in tens, if not hundreds of thousands more poor people into the area.

Such a development would result in an even greater demand for housing and drive up the cost even further. And it is extremely unlikely that it would create more jobs since the costs of the subsidies would have to come out of the productive sectors of the economy. It would probably reduce the ability to create jobs and thus reduce the total demand for labour. This would simultaneously put upward pressure on housing prices and downward pressure on wages.

And the people it would hurt the most, are those that it was meant to help.

The problem in Gauteng is not one of consumption but of production. Demand does not need stimulation. The disparity exists because demand is so high while supply is so low. Overall, there needs to be more housing and, more importantly, more production, and thus more jobs.
Instead of focusing on vouchers or subsidising poor people to move to wealthier areas, the total amount of production, and the total amount of jobs, has to be increased. The voucher/subsidy solution will not bring about such a change.

It would be better to stimulate job creation where poverty is at its worst. Solutions like creating enterprise zones in the areas where the poor already live are more likely to lessen the country’s problems.
Instead of trying to figure out how to bring millions of poor people to a very small number of jobs, the goal should be to bring more and more jobs to millions of people. The ultimate aim of any solution has to be to reduce South Africa’s debilitating rate of unemployment and give the poorest of the poor a chance to earn a wage. To greatly increase the number of wage earners in the country would make it possible for South Africa to achieve a greater rate of productivity so that, instead of only for the few, but for the vast majority the average cost of living will no longer be so high and housing and transport will become more affordable.

AUTHOR: James Peron is the President of the Moorfield Storey Institute. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Policy Bulletin / 14 December 2011

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