High interest rates frustrate delivery of affordable housing

High interest rates charged by banks on mortgage and real estate have continued to hamper the delivery of affordable housing in the country, further compounding the nation’s housing deficit, estimated to be about 17 million units.  Records show that interest rates charged by banks on real estate/construction, and mortgages range between 20 and 30 percent.  But in reality, property developers lament that they can hardly access any loan from banks for less than 28 percent. 

Housing

Lending rates for Real Estate and Construction obtainable in deposit money banks as published by the Central Bank of Nigeria, CBN, shows that Access Bank’s maximum lending rate to the sector was 25 per cent; CitiBank, 21 per cent; Diamond Bank 25 per cent; Ecobank, 28 per cent; FCMB, 25 per cent; Fidelity, 28 per cent; FBN 22 per cent; and Heritage Bank, 28 per cent. 

Vice President of Real Estate Developers Association of Nigeria, REDAN, Dr. Aliyu Oroji Wamako, said developers cannot deliver affordable housing on these kinds of rates. “ If you collect loans from the banks at these rates, you will end up working for the banks.  We cannot take loans from commercial banks at 28 per cent interest rate and provide affordable housing.  That is why we are seeking for government’s intervention on counter-funding so that we can move the position of building industry forward and reduce housing deficit.  The building industry is capital intensive and private initiative is not enough to bridge the housing deficit. 

“The way forward is for the federal government to relax some of the land acquisition procedures and make it accessible to developers.  If they want to give counterpart funding, they should give it to the existing institutions that provided the funds earlier at 10 per cent which is the FMBN.”  Wamako further noted that “Without government’s support, there will be hiccups within the industry in terms of government’s regulations towards taxation, land acquisition and funds.  A developer cannot obtain a loan from the bank with an interest rate of 28 per cent and expect to build a house and sell it for N5 million,” he added. 

In the same vein, Olisa Agbakoba, a former president of Nigeria Bar Association, decried the reluctance of banks to offer mortgage facilities to low-income earners. “ There is a shortage of housing for low-income earners and constantly growing housing demands that are not met.  Unfortunately, banks are reluctant to provide mortgage facilities to low-income earners.” 

He said that the establishment of the Nigerian Mortgage Refinance Company (NMRC) which was meant to promote home ownership and increase the availability and affordability of mortgage loans to Nigerians has not helped much. “ In spite of the incorporation of NMRC in June 24, 2013, not much has changed.  The apathy of banks towards mortgage transactions still lingers, understandably, because of the risk of default.  To buttress this, 66,402 Nigerians applied for mortgages during the recent Nigerian Housing Finance Programme but only 10,000 Nigerians were selected. 

However, the interest rates by primary mortgage institutions that participated in the programme were alarming, ranging from 14.5 to 19 percent.  It is suggested that a cue be taken from other countries where the cost of mortgage for first time home buyers are low, with small down payments and easy terms especially, a single digit interest rate,” he stated. 

Microfinancing approach

Mr. Godwin Ehigiamusoe, Managing Director, LAPO Microfinance Bank, said government needs to adopt the principles of microfinancing in its quest to provide affordable housing for low-income earners in the country.  Microfinance basically entails the provision of financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories. 

The two main mechanisms for the delivery of financial services to such clients are: relationship-based banking for individual entrepreneurs and small businesses; and group-based models, where several entrepreneurs come together to apply for loans and other services as a group.  Ehigiamusoe asserted that much like microfinance, affordable housing is about liberalising access to mortgage and also the possibility to use flexible structures and processes to achieve mass housing targets on a sustainable basis. “ Like microfinance, affordable housing is about liberalising access. 

Traditional mortgage practices leave out low-income people.  And like microfinance, it is possible to use flexible structures and processes to achieve mass housing targets on a sustainable basis.  Like microfinance, housing is required by poor for a number of reasons: It is a basic human need.  Among the poor, there is strong connection between the home as a place of shelter and/or house as a means for engaging in income generating activities.  Ownership is, irrespective of gender, a symbol of maturity and fulfillment for everybody.” 

He noted that the targets of affordable housing are ready clients, customers and members of Microfinance institutions (MfBs, Coops and NGOs).  These people organisations have developed flexible and responsive structures and procedures that could be useful for providing mass housing facility.  MFIs are already active in provision of houses to low-income people across developing nations such as Bangladesh, India, Kenya, Bolivia and Mexico

Challenges of housing microfinance

A major constraint is the regulatory definition of micro-loans in terms of volume and tenor.  Housing loans are usually of larger sizes and of longer tenor.  Another challenge is lack of funding, in two dimensions.  First, is that the volume of funds required for housing is not available to microfinance banks, that have limited options for deposit mobilisation.  Second, is the problem of asset-liability mismatch that will arise when housing microfinance is provided by MfBs. 

Inadequate capacity is yet another challenge – Lack of awareness on and technical skills required for providing housing microfinance.  Like microfinance, affordable housing for the poor will require flexible and responsive strategies which differ from the formal mortgage practices.  It takes time and resources to build the required competences.  In order to address the challenges, Ehigiamusoe called for a review of the microfinance supervisory guidelines – recognise roles that microfinance banks can play in provision of mass housing; and review size and tenor of micro-loans. 

On funding, he recommended the establishment of funding linkages between microfinance banks and cooperatives on the one hand, and commercial banks on the other; and the inclusion of mass housing loans into CBN’s micro and small enterprise development fund. 

On capacity building, he emphasised the need for technical support for microfinance banks and cooperatives. “ The soft technology of mass housing is reaching maturity in other countries and regulatory jurisdictions, and Nigerian microfinance banks can learn from the experiences.  Technical assistance focus should be on mobilisation of potential beneficiaries; -need assessment; and structuring of loans and repayment schedule

On his part, Isoken Omo, MD, ASO Investment and Development Company (AIDC), noted that, on the average, about 2,000 houses are being delivered annually nationwide using traditional methods, adding that new technologies are not getting the acceptability to encourage increased production. 

“Housing development without some form of subsidy in land acquisition and infrastructure provision in major cities will be expensive.  All stakeholders in the housing value chain must be engaged in order to start dealing with the Nigerian housing problem.  The average three-bedroom house built by a developer without subsidy or intervention from government or otherwise, will cost a home buyer about N8 million. 

Assuming availability of mortgage on NHF terms (15 percent down payment, 6 percent interest, 25 years), a buyer will require a monthly payment of N44,000 to cover interest and principal.  With only about 20 percent of Nigerian households earning a household income of N260,000 per annum and following the 33.33 percent rule for housing, it is clear to see that the vast majority cannot afford the average 3 bedroom built by a developer without special intervention,” he stated. 

Government intervention

Omo called on the Federal Government to spur financial innovation in housing through: establishing the right conditions to launch securitization; putting measures to provide consumer protection and enhance underwriting capabilities by primary mortgage originators; creating special housing grants, payable monthly, to public and civil servants allowing them to better afford houses; supporting innovative home ownership schemes like shared ownership, secure tenures, Right-to-Buy, Rent-to-Own; guaranteeing purchase of modular houses to encourage new technology and innovations; and encouraging the training of artisans on best practice by giving incentives to developers that use the certified artisans.