Remove institutional constraints on township property markets

Is there, or is there not, a township property market? The answer is: of course there is! Unless you assume that the law of supply and demand has, for some mysterious reason, been suspended when it comes to housing in South Africa (and there’s no good reason to think this), prices for township housing should be rising.

With a continuing housing backlog of well over 800,000 units, existing homes should command a premium. Indeed, a recent FNB study found that there were 7 potential buyers for every township home on the market. This is good news for the thousands of South Africans who now have legal title to their homes. Their equity is increasing.

The problem with the township real estate market isn’t that it doesn’t exist. The problem is that a series of institutional constraints keep this market from operating as efficiently as it might. As researchers at the FinMark Trust have demonstrated, the township housing market remains dysfunctional. One of the key reasons why the market doesn’t work as well as it could is that too few homes are transferred formally through the Deeds Registry – a great many are still transferred informally.

What explains all those informal transfers? The problem is transaction costs. Township residents have incentives to transfer their property informally because it is costly to use the formal process. Transfers are costly for a number of reasons: residents have to prove they’ve paid their rates for the past three years before a property may be transferred legally (whether they received any service or not) and they must pay transfer and stamp duties as well.

But the most glaring constraint on formal transfers is the unconscionable monopoly currently held by South African conveyancing lawyers. The conveyancers are the only people with the legal right to register titles at the Deeds Office. Because they have a government-granted monopoly to perform this service, conveyancers are able to reap monopoly profits. They charge more for their services than would be the case if the market for registering titles was competitive. And, there’s no reason, whatsoever, why this market cannot, and should not, be competitive.

Contrary to what conveyancers will say, you do not need a specialised attorney to transfer a title deed. It is certainly true that the person transferring the title must be properly trained and capable of identifying any possible problems that exist in a given property record, but any general attorney, non-legal specialist, or even a certified paralegal assistant should be free to do this work.

Consider what has happened in New Zealand: the country recently removed the special privilege that attorneys once held to formally transfer property. Today, specialist non-lawyers (know in New Zealand as conveyancers) have the legal right to transfer property. The effect of this law is that consumers now have more choice about who to use when they want to buy and sell a home. The New Zealand market is more competitive and consumers benefit-especially poor consumers.

The requirement that property be transferred by a monopolistic conveyancing attorney means that South African consumers pay more than is necessary to buy and sell a home. This legal requirement imposes disproportionate burdens on the poor, who are less able to afford the costs of this monopolistic privilege. And, we point out in our just-released study The Effects of Property Titling in Langa Township, South Africa, people transferring property with a lower value pay a higher percentage in conveyancing fees than do wealthier people who transfer higher value property.

So, it is not surprising that many township residents choose not to use the pricey conveyancers. They opt out of the formal transfer process and by doing this, the information contained in the Deeds Registry becomes increasingly irrelevant and inaccurate.

The township real estate market does face a number of serious challenges ranging from high crime rates to poor service delivery to limited access to credit. These are difficult problems that will require systemic institutional change before they are resolved.

However, our work suggests that one straight-forward policy initiative that would make township real estate markets more efficient and fairer is to end the conveyancer’s monopoly. South Africa should follow New Zealand’s lead and provide housing consumers with more choice. Opening this market to competition will help address the problems that continue to plague township real estate markets and, it will make consumers better off.

Author: Karol Boudreaux is a Senior Fellow at the Mercatus Center at George Mason University and author of The Effects of Property Titling in Langa Township, South Africa the second study in the Enterprise Africa! series, funded by the John Templeton Foundation, and carried out in partnership with the Free Market Foundation and the Institute of Economic Affairs. 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 Feature Article/ 30 May 2006