Cost of owning a house still too high for middle class families

Most middle income earners in Kenya cannot qualify for an average mortgage. Such home loans are worth more than Sh6.6 million that demands a monthly repayment of about Sh90,000 for 20 years. Photo/FILE
Most middle income earners in Kenya cannot qualify for an average mortgage. Such home loans are worth more than Sh6.6 million that demands a monthly repayment of about Sh90,000 for 20 years. Photo/FILE 

Even as financial institutions align their home-purchase packages for the middle income class, most people in this segment cannot afford or qualify for the average mortgage, raising the need for alternative financing models.

According to the Kenya National Bureau of Statistics, a middle income household in Nairobi is one whose monthly expenditure would fall between Sh23,671 and Sh119,999.

Monthly repayment

But a survey carried out by the Central Bank indicates that the average mortgage available in the market is worth Sh6.6 million which demands a monthly repayment of about Sh90,000 for 20 years at the prevailing interest rates.

This means even the highest income earner in the middle income class would hardly afford an average mortgage in the market as developers continue to inflate home prices following rising demand for ownership.

In response to the situation, the Kenyan mortgage industry has been urged to develop alternative financing models that could see the average person become a home owner, even as it emerges that only eight per cent of the working urban population qualify for a mortgage with the current rates.

After successful runs in South Africa and India, the World Bank has identified a micro-finance approach towards funding home loans that would involve more players than the contemporary mortgage financiers, including micro-finance institutions, pension funds, insurance companies and investment banks.

Mr Simon Walley, a senior housing finance specialist at the bank points out that a special institution termed a mortgage liquidity facility should be established to support mortgage lenders by raising funds from the capital markets, much like an infrastructure bond.

“A mortgage liquidity facility provides an investment outlet for pension funds and insurance companies,” said Mr Walley, who said added that it would also enable smaller investors to access the capital markets.

Under the arrangement, the mortgage providers are likely to access funding at relatively cheaper costs since they would not be borrowing from the capital markets on the strengths of their balance sheets but rather from an institution borrowing on the government’s backing.

Prof Njuguna Ndungú, the Central Bank of Kenya governor ,concurs with financing model as the only feasible means to deepen penetration in the mortgage industry that can only be accessed by the top income earners while it is the individuals in the lower income brackets who are in most need.

He said the bond market should be merged with the mortgage sector to raise long term funds, the biggest hurdle ,according to the mortgage providers ,in cutting lending rates.

“We need to marry the bond market and the mortgage industry to provide long term funds that would be used to unlock the housing problem,” said Prof Ndungú at the launch of the Housing Finance Report last week.

Though the two agree that funds are needed to unlock the housing stalemate, it is unclear if the governor intends to develop an MLF to eliminate the need for mortgage providers to float corporate bonds in the capital markets to draw funds.

Seeking Sh3 billion

Already, Housing Finance, the second-largest mortgage provider by market share has raised Sh7 billion from the capital markets last year and would be seeking an additional Sh3 billion before the end of this year.

But Mr Frank Ireri, the firm’s managing director, says that the cost of home loans remains the single largest limiting factor for mortgage providers to reach the lower income segments as the lenders need to make a return exceeding the initial cost to remain in business.

Among his proposals to deepen the mortgage market is to enact the Housing Bill which seeks to among other things establish the Kenya Housing Authority and the National Social Housing and Infrastructure Fund for the provision of housing.

When implemented, the statutory bodies would be mandated to coordinate the development of housing and mobilise resources which players in the housing supply chain can tap into to roll out bigger projects that could deflate the housing deficit that is estimated to have surpassed two million units.

Paul Samoei, an official from the Planning Ministry says the current housing prices have ensured that almost none of the 24 per cent households classified as middle income would afford a mortgage without supplementing their salaries with other sources of income.

In his view, the mortgage market is still restricted to the 3.97 per cent of all households in Kenya’s urban areas who have a monthly income of Sh120,000 and above, noting that the middle class can hardly afford to own a home.

“I have a friend who has committed his whole take-home salary of Sh100,000 to paying off his mortgage and it is really tough,” said Mr Samoei, who said he would not be seeking a mortgage any time soon due to the cost.

While most of the Kenyan middle class can only hope to own a home some-how, considering that the growth incomes have no correlation with the appreciation of property prices, the need to develop new financing models in more urgent that ever before.

Despite the low penetration of mortgage in home acquisition as indicated by the CBK and World Bank report, the unrelenting property prices would certainly drag down its growth.

Official estimates indicate that just about 16,000 mortgage accounts were in the market at the end of last year against a potential demand of 350,000 in the contemporary mortgage.

The number can only get bigger with time owing to the urbanisation rates in Kenya, with about half of the population expected to be living in urban centres in 2050.

Mr Trevor Thomson, the chief executive at Select Africa, a subsidiary company of African Alliance Investment Bank is seeking to get established mortgage providers to review their mortgage packages to include more people.

In his housing microfinance approach, he says that financial institutions should offer mortgages in several short term serial loans to enable individuals buy parcels of land and build their own homes incrementally.

Our approach is to provide industry participants with the tools required to unlock the opportunities associated with housing micro finance, he said adding, “People in sub-Saharan Africa have been building their homes on an incremental basis for hundreds of years.”

Contractual agreements

While firmly making a case for people to build their own homes, he cautions mortgage providers against offering blanket solutions while the specific housing needs require tailor-made solutions.

“The incremental approach to building has traditionally been embraced by communities and we should be careful of imposing mortgage finance ideals where they may not be suitable.”

The solutions that Select Africa hopes to provide include an information package that would give the prospective home owner building advice in regard to contractual agreements, building technologies and even incremental building plans.

The Monitor Group has embraced a different microfinance approach by the involvement of financial institutions, property developers, building professionals and the eventual buyers in setting up huge housing projects thereby minimising the pricing margins that are incurred along the supply chain.

All a buyer is required to do is to place a 20 per cent down payment on the cost of the house — usually low because latest technologies have been embraced, and commits 35 per cent of their salary to settling the mortgage until it is fully repaid.

Its target next year is to deliver 250,000 units in the Indian market, where housing micro-finance approach is widely expected to move low income earners from tenants to home owners.