Flashback 2006! If you fell into the bracket known as “middle to low income earners” and lived in the United States of America there is every likelihood that you will own not just a home but two or three. All you needed to do was to own one and then hope that the value of the property would rise. So for example, you bought the house at $50,000 and the value rose to $100,000.
You can approach your bank and ask to take out a part of the capital gains of $50,000 and then plough it into another property. It might seem like magic but it actually was a market worth trillions of dollars. This was all made possible because they had a mortgage industry that was mostly market driven. Interest rates, tenor of the loans, insurance etc. were all market driven. The abuse of this process did lead to the sub-prime mortgage crisis in 2008 and 2009 and then the great recession.
Fast-forward 2016 and Nigeria is still looking for the right model to get affordable housing to the same people we earlier referred to as Middle to Low Income earners. The government over the years have tried so many failed housing policies that has failed to deliver the type of affordable housing that is really affordable.
Super Minister Babatunde Fashola is now the latest to announce himself on the stage with a housing plan of his own. Here is what he said
“We are targeting to build for people within the income bracket of those in level 10 to 15/16 in the public service, and those in the private sector such as drivers, farmers, market men and women, artisans and so on, who earn this kind of income,”
“The models include a 47-square-metre two-bedroomed bungalow with external toilets to be shared with others at $5,000 in Haiti (N1.4m at the exchange rate of N280 to $1). Is this what we should do?
“The other example was to prescribe a mortgage of at least 10 to 15 years with single digit interest, and to ensure that the beneficiary must not spend more than 30 per cent of his income on housing, so that he or she can meet other needs of dependants. This makes more sense to me.
“It accords with global best practice; mortgages are the way to go in order to reduce corruption and encourage productivity. Our housing must be tied to our income, which must be tied to our jobs. It is the way to create credit that our housing industry desperately needs.”
The Ministers preference does make more sense as countries that have had a successful mortgage market did so with single digit interest rates. What they however did not do what to wish for those rates or impose it on the market like this Government loves to do. Interest rates on housing are a function of inflation rate, liquidity and risk assessments. In addition to this, the land laws need to be reviewed to support the easy transfer of ownership rights between buyers and sellers.
What determines whether a bank can issue a mortgage for over 10 years is a function of who takes up that long term risk of waiting to get their money back. In the US where this works quite well, Mortgages are bundled and sold to large pension funds around the world whose business models support steady income streams over a long period of time. This is also guaranteed by the Government or big insurance companies such as Fannie Mae or AIG.
The Government has something similar with the NMRC (Nigerian Mortgage Refinancing Company) but we doubt they have the financial capacity to provide all the funding required. The government should therefore focus its energy on economic polices that can usher long term funding for the mortgage market as well as bring down inflation rate to sub 7% levels. These are all achievable in the medium to short term, however it requires a well thought out plan and not random comments that anyone can simply utter. We need the Minister to tell Nigerians how he plans to introduce market driven interest rates and introduce mortgages with longer tenors. Till then…he can keep dreaming.