Almost universally, African economies are burdened by high interest rates: high borrowing costs reduce the continent’s overall growth potential. Particularly, they hinder borrowers wanting to enter into longer-term commitments, such as home-buying, often the largest investment any household will make.
Despite the durable value of housing and its suitability as collateral, most African households do not have access to affordable housing finance. As a result, they can only afford to build their homes incrementally in line with the savings they gradually manage to accumulate. The high cost of housing finance is detrimental not only to unleashing collateral value of existing properties, but also to realizing the considerable potential for productive employment in the housing sector.
What can be done to lower the interest cost of housing finance in Africa? There is no simple answer, and a multi-faceted approach requiring a concerted and dedicated effort is needed.
This working paper explores the causes of high interest rates in African countries in an attempt to establish recommendations for how they might be reduced. Fiscal dominance, weak regulatory frameworks that drive up credit-risk premiums, a lack of long term funding and limited use of collateral value all drive up the interest rate cost of housing in Africa. Author Michael Fuchs explores the ways in which policy makers and practitioners might begin to address these issues in order to reduce interest rate risk in housing markets across Africa.Download PDF