Court ruling evicts property rights

Private property rights were struck another deadly blow by a recent ruling of the Supreme Court of Appeals. The court ruled that tenants of rented housing or borrowers with bonds over their homes who default on their payments may not be evicted. In addition, the property owner or bondholder may have to find substitute housing for certain classes of tenants or borrowers.

In essence this ruling undermines the property rights of every single South African. It also sends a message to foreign investors that investment in South African rental property is not safe. What Mugabe did in one fell swoop South Africa is doing in incremental steps. But enough such steps lead to the same ends.

Already all water resources have been nationalised. And the government is now in the process of nationalising all mineral rights. Add this court ruling to the mixture and the message is clear: private property is not secure.

Consider just the issue of housing. The government is engaged in a scandal-ridden campaign to build millions of houses because of a perceived shortage of affordable housing. But the Supreme Court interpretation of the legislation on evictions has just made sure that private investment in housing will diminish and that it will be more difficult to rent housing or to secure a bond if you wish to purchase.

Investment in housing is now much riskier. This means investors will require higher returns on their investments to compensate them for the additional risk. The net result is that rental housing will become more expensive. Some property owners may simply increase their rent while others will demand high deposits. The legislation has guaranteed that the inevitable higher rentals will do most harm to the low cost end of the market.

Since low-income tenants are most likely to default on their rental payments, the rentals of low -income housing will increase the most. Thus the poorest tenants will now face an even greater risk of not being able to find housing they can afford.

Property owners are legally liable if their tenants refuse or fail to pay for electricity and water. And during any period when they are seeking eviction orders for non-payment of rentals they are receiving no rent. All those costs have to be paid and the people who will end up paying are the tenants who don’t default. In low-income areas this means a wealth transfer from the poor to the defaulters.

Of course there are other ways to cover the massive costs that the Court ruling has just imposed on all South Africans. Increased rent is just one of them. Large rental deposit requirements by landlords may effectively lock many low-income people out of the rental market altogether. Greater credit record scrutiny may be exercised so that only tenants with sterling records will be able to rent.

Nervous landlords will discriminate against new tenants or individuals without proven credit or renting records. Again they are most likely to be poor.

And when it comes to bond defaults the ruling will probably increase their numbers. Because it will be more difficult for bondholders to secure payment it will be “cheaper” for borrowers to default and the default rate will consequently escalate. The banks will have to adjust for this by raising the interest they charge borrowers, demanding higher deposits, or reducing their risks by declining to lend to high-risk borrowers. Once again the people most affected will be those first time homebuyers from lower income groups.

The legislation on which this ruling is based was meant to make it difficult for property owners to evict squatters illegally sitting on land. It was an open confiscation of property without compensation. And because a bad law was allowed to stand it is now having effects on all property owners in South Africa. Honest poor people who pay their rent or low-income people who make their bond payments will be the people most victimised by the ruling on the legislation.

Those are the short-term effects. Longer term the consequences will be even worse. By making housing investments riskier, the ruling pushes investors into alternative investments. Money that would have gone to increase the housing stock will instead go into off shore investments, unit trusts or other safer investments. This means that over time the stock of housing will be less than it otherwise would have been had the legislation not been adopted or the Court ruled differently. And a reduced stock of housing will push up rental costs even more. And for residential property, higher bond costs will mean fewer purchasers, thus reducing the value of all housing property in the country.

The only real winners from this ruling will be a group of people who intentionally default on contracts and drag the issue out so as to steal, temporarily, the property of others. Anywhere else in the world such a class of people would be considered criminal. But what is even more bizarre is that those most hurt by the measure will be honest but poor South Africans.

Legislation that is built on bad economics is always detrimental to a nation. And the law that gave rise to this case, and the Court’s interpretation of it, will have exceptionally bad repercussions, especially for the people it is purported to benefit. Added to the other anti-property-rights legislation adopted in recent years this event sends another signal to international investors to avoid South Africa. And to South African investors it sends a signal that they should seek safer investment havens elsewhere. Is that what the responsible parties really want?

Author: Jim Peron is a freelance researcher and writer. This article may be republished without prior consent but with acknowledgement. The patrons, council and members of the Free Market Foundation do not necessarily agree with the views expressed in the article.

FMF Article of the Week\10 September 2002