High mortgage interest rate impedes housing delivery

The impact of high mortgage interest on the nation’s housing delivery has continued to be a source of worry for operators. This is because of the importance of housing finance in improving coverage rate, which has unfortunately remained at a dismal 25 per cent.

Experts have insisted that housing finance is central to the nation’s economic development. Lack of proper attention by government, however, hampers access, reducing its contribution to the national Gross Domestic Product (GDP).

Currently, Nigeria’s mortgage banks charge between 19 and 24 per cent. And this could go higher, depending on the risk volume, which has affected the real estate’s potential as a goldmine for investors.

A visit to one of the mortgage banks at Adeyemo Alakija Street, Victoria Island, showed it offered an interest of 22 per cent to a younger subscriber with longer cash flow, and 24 per cent to an elderly person with lower cash flow, because he was closer to retirement. The interest rate at another on Broad Street, Lagos Island, depended on equity made available by prospective clients. For instance, a subscriber, who paid N5 million as equity for a mortgage facility of N10 million got a 20 per cent interest rate, while the one with N2 million equity for the same facility was charged 22 per cent.

At commercial banks, the rates are much higher, because real estate is categorised as a high-risk investment with interest rate at 22 to 23 per cent, depending on relationship with the bank.A major commercial bank at Adeola Odeku, Victoria Island, pegged its mortgage rate at 22 per cent. It based its offering on the high risk associated with recovery of real estate assets, which is always cumbersome because of delay in the nation’s justice system.

A senior official of the bank, who did not want to be named, said getting a single digit rate depends on several factors that include land cost and building and litigation cost, which could drag on for up to 10 years because of the right of appeal in court.

In developed economies, the mortgage industry makes significant contribution to economic development with a single digit interest rate. In Nigeria, however, this is not the case. The inflation rate and its attendant high mortgage rates impede demand for housing, and as a result, developers are not stimulated to build more.

This explains why mortgage’s percentage of GDP, till date, remains low at 0.5 per cent, leaving it several steps behind other emerging markets such as Mexico, Malaysia and South Africa, where mortgage contributions to GDP are as high as 10 per cent, 25 per cent and 29 per cent.

Should mortgages become cheaper to finance housing in Nigeria, supply would rise to meet the proclaimed 17 or 21 million housing deficits.Although the Federal Mortgage Bank of Nigeria (FMBN) is playing its role just like in developed countries, the large number of prospective subscribers overwhelms it. Right now, FMBN’s impact is about one per cent, because it is the only one offering single digit rate and does not have the fund to support everybody. Thus, its funding is limited to N15 million maximum. This, experts said, cannot buy a house at the prevailing market rate.

Our economy is the worst for it, as its contribution to the GDP is dismal, while countries like South Africa have an impressive record, said Debo Adejana, a real estate entrepreneur, who heads Realty Point Limited, one of Nigeria’s leading Mass Housing Development Company.

“An economy where people own property is usually very buoyant. If I am the owner of the property and paying mortgage, I will do my work well, because I don’t want to lose my job and affect my ability to pay my mortgage,” said Adejana.In a recent English Housing Survey (2017), 62.9 per cent of England’s nationals were owner-occupiers. This is in stark contrast to an estimate of less than five per cent for Nigeria. The high rate of ownership seen in England is for the most part attributable to a sound and efficient home mortgage system.

If government really wants to stimulate the economy, a reduction in the interest rate on mortgage loan would be a masterstroke. More people would embrace mortgage loan to buy houses, leading to increased activities in the construction sector.

According to Mr. Tayo Odunsi, Chief Executive Officer of Northcourt, a Lagos-based real estate investment solutions company, mortgages for 25 or 30 years are also available to citizens in England at less than five per cent interest rate, with a 10 per cent down payment. This figure (62.9 per cent), he said, is actually a 30-year low.

“Again, this is because a good number of English citizens are finding it harder to come up with the 10 per cent equity contributions to secure the mortgage. To aid this, the British government has stepped in with the Help to Buy scheme, which helps first-time buyers come up with 50 per cent of the equity contribution required. This action is expected to reverse the downward spiral of English home ownership,” said Odunsi.

Stressing that housing, like all other products, is ruled by demand and supply, he added: “World over, as demand increases, supply is encouraged and equally rises. In well-structured countries, housing, being a capital good, is ordinarily part-funded by mortgages. This makes demand and supply of housing both effective and progressive.”

The President of Mortgage Banking Association of Nigeria (MBAN), Mr. Adeniyi Akinlusi, believes prospects in the nation’s mortgage industry in the coming years are huge.Although he saw the prospect of single digit interest rate for mortgages as a tall order, considering the present economic realities, he said government is trying to stabilise the economy, which is seriously bringing down the inflation rate.Stressing that this cannot be done overnight, he said what is important is that the government is doing something and that results are seen in terms of growth in foreign reserves.

He added that with stability, investors’ confidence will return alongside more Foreign Direct Investments, and people would be able to make projections on what to invest in. This will definitely bring down the high mortgage interest rate.In a tacit acceptance of Akinlusi’s position, a mortgage banker, Mrs. Olusola Femi-Olukotun, said with mortgage rate staggering between 19 and 24 per cent, it is difficult for mortgage financing to play its expected role in housing delivery.

Blaming the high interest rate on economic factors and the rate at which banks lend money to mortgage bankers, she said when there is an inflation that is over a single digit, mortgage rate will not come down.She explained that private investors would first look at the inflation rate as a factor, and Nigeria may not get a single digit as obtained in other developed countries because it is still growing its economy, which is unripe for a single digit.“It is only the Federal Government that can support. But for individuals, they want to have returns on their investments and we can never have a single digit with the inflation rate now.”

She said there is the need for reduction in the interest rate, the inflation rate, and the Monetary Policy Rate (MPR) – an interest rate at which the Central Bank of Nigeria lends to commercial banks and other clients. “Right now, the MPR is put at 14 per cent, and mortgage rate cannot come down without government intervention.”

Adejana, on his part, noted: “Anywhere in the world, insurance companies are far bigger than banks. In Nigeria, banks are bigger, meaning that we are not yet tapping our insurance potential. On the pension fund, there are three million contributors and we have about N8 trillion, meaning that more money can be generated, if more people are made to contribute. That can be channeled to mortgages or secondary mortgage institutions to bring down the interest rate in the mortgage industry.”

Nigeria’s housing statistics
Although the actual figure of the nation’s housing deficit is debatable, the Federal Mortgage Bank of Nigeria (FMBN) puts the current number at 17 million units.A breakdown shows that in 1991, Nigeria had a 7 million housing deficit, which increased to 12 million in 2007 and 14 million in 2010.Today, the housing and construction sector accounts for only 3.1 per cent of the country’s rebased GDP, while the total current housing production is about 100,000 units per year – in a country of nearly 174 million.

Nigeria will, therefore, need at least about 700,000 additional units each year to bridge the huge gap. For a country just coming out of a recession, meeting that sum is a tall order without the assistance of mortgage institutions. Limited access to finance, a major challenge to housing in the country, could be attributed to underdevelopment in the mortgage industry, as it generated less than 100,000 transactions between 1960 and 2009.

According to a World Bank Report (2008), the contribution of mortgage finances to Nigeria’s GDP is near negligible, with real estate contributing less than 5 per cent and mortgage loans and advances standing at 0.5 per cent of the GDP.This contrasts with the size of the mortgage finance share of the GDP of various countries. For instance, in the U.K., mortgage finance to GDP ratio is about 80 per cent; in the United States it is 77 per cent; Hong Kong has 50 per cent. Across Europe, the average is about 50 per cent. Malaysia has 32 per cent and South Africa 31 per cent. Many African countries, like Botswana and Ghana, have 2 per cent mortgage ratio to GDP.

Bertram Nwannekanma

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