News Column

Can Low Interest Rates Unlock Kenya's Housing Sector Crisis?

July 31, 2014

Karen Kandie

At independence, the founding President, Mzee Jomo Kenyatta's rallying call was to fight poverty, disease and ignorance.

Fifty years later, we are still fighting the same vices with a population that has increased almost six fold. Interestingly, the son has taken over the father's mantra. President Uhuru Kenyatta has the rare opportunity to realise the father's dream.

Our collective aspirations, under Vision 2030 are to win this war against poverty, disease and ignorance within the next 16 years. The question therefore is what should our generation or the Jubilee Government do differently in order to overcome?

In 1943, Abraham Maslow came up with the human hierarchy of needs which include food, shelter, security, self-esteem and self-actualisation in this order. Most developing countries, Kenya included, are still struggling with the first three basic needs.

Decent shelter for all citizens is one of the major aspirations under Vision 2030. Shelter has however been one of the major challenges, with mushrooming informal settlements in almost every town in order to cope with the rural urban migration.

It has been estimated that Nairobi alone requires additional 200,000 housing units per year, if the dream of a middle income economy by 2030 is to be realised. According to industry players, only a paltry 15,000 units was realised in 2013 (only 7.5 per cent).

The costs associated with housing are high and beyond the reach of most workers. Could access to affordable credit therefore be the solution?

The high interest rates have made it nearly impractical, even for those with decent incomes to contemplate taking a mortgage. Recent data indicates that there are only 20,000 mortgages in the whole country out of a population of 42million.

A decent three bedroom family house in Athi River will go for about Sh7.5 million. If a person takes a mortgage at a best rate of 15 per cent, to be repaid over a period of 10 years, the repayment is a staggering Sh121,000. Even downgrading the house to a Sh5 million house in the interior of Oloitikoshi, where there is no all-weather road and electricity will require a monthly repayment of Sh 80,667. This is still out of reach for an employee who earns Sh100,000 a month. Add very few Kenyans earn this amount.

Add the fact that the rates are often variable, meaning that the bank can change the interest rate any time. The risk obviously becomes too high.

With the high interest rates, the bank's target market is the salaried employees who have proof of regular income, with the informal sector remaining largely eliminated and hence unbanked. There are slightly over two million people in formal employment and over 12 million others in the informal sector.

Based on the figures of people in the formal sector and with 20,000 mortgages, only one per cent of the salaried people have mortgages! The only option for most of the working population both in the formal and informal sector is renting.

Developers also face similar challenges when it comes to obtaining development loans. This simply means the developer has to load in the cost of credit in his pricing of the house, thus making the cost of houses prohibitive. In fact considering the cost of credit, many landlords continue to "subsidise" tenants. In the above scenario, rent for a three bedroom house costing Sh5 million should ideally be not less than Sh80,000 per month to enable the landlord pay for the mortgage.

Unfortunately for instance in Nairobi which is the most hit by housing shortages, developers are facing unreceptive policy changes in the County Finance Act 2013 that continue to push the cost of housing out of reach. Levies for the constructions in form of building permit, licence fees, user permits etc. now amount to almost 1.5 per cent of cost of construction from 0.001 to 0.006 per cent previously.

As the urban population grows, unless some drastic measures are taken to remedy the whole housing sector, the proliferation of slums will continue.

More importantly, actualising house ownership dream for majority Kenyans will remain just that- a dream.

Now compare this with for instance a country such as United Kingdom. The Bank of England's base rate (BBR) is 0.5 per cent. Our equivalent rate is the newly introduced Kenya Banks Reference Rate (KBRR) currently at 9.13 per cent. Average mortgage rates in UK are 3.2 per cent, about 2.7 per cent above the BBR rate. No wonder while about 20 per cent of households in UK are renting, in Kenya over 85 per cent of urban households are renting.

The big question is, with this state of things, how will we achieve our dream of of providing decent housing as a basic need.

What we need is a holistic solution to home ownership. The government has a big role to play in putting in place infrastructure to open up new areas in the outskirts of the city. Tax incentives such as zero rating building materials and reducing construction levies in order to encourage and attract investors to the sector.

The Central Bank needs to come up with a benchmark rate that is targeted to long term borrowing with the sole purpose of having a rate that is not more than 10 per cent. The current KBBR is dependent on short term variables and does not address long term borrowing.

Additionally, possibly banks should be given incentives to commit a portion of their loan book to mortgage lending.

In the overall, the ministry responsible for housing needs to ask itself the crucial question: "What strategy do we have to house the Nation?".

Karen Kandie is a Financial and Risk Consultant with First Trident Capital and a PhD candidate in Finance at Catholic University of Eastern Africa.

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Source: AllAfrica

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