Meeting the Challenge of the Housing Affordability Gap in Africa

According to UN-HABITAT, all African countries are severely encumbered with the challenge of providing land and affordable housing. Nevertheless, I suggest that inventive solutions to the affordability challenge can easily be formulated by simply making a critical review of the concept of the “affordability gap” and the factors that drive this gap. We normally assume that in perfect markets rental prices are likely to drive house prices up or down. This is an example of an equilibrium relationship in that the rent paid by renters does not significantly exceed the cost of providing such housing services by house owners (this cost is called homeowner’s user cost). Homeowners’ user cost is the extra cost incurred by a homeowner to provide a house to a renter. Homeowners’ user cost includes property depreciation, maintenance cost, property tax, income tax and interest paid on the mortgage finance net of any capital gains. In summary, we can write this relationship for a given period (monthly or yearly) as:

Rent= [(interest+property tax+dep+maintenance)- Cap gains)] x House Price

The central assumption of the above relationship is that when rent exceeds the homeowners’ user cost (right hand side) significantly, the renters will be motivated to switch tenancy either by borrowing and buying or building their own houses. In effect, demand for rental houses will reduce and rents will come down again (alternatively, high demand for mortgage finance will push interest up), which ensures a return to equilibrium in both rental and housing markets.

Nevertheless, as often asked, not everybody can borrow at any time and as much as they want whenever they feel. Therefore they cannot join the homeowners who are making huge profits from their rent payments even when their rent payments easily service a mortgage loan. This is a common phenomenon in Africa and other developing countries where the rental prices are persistently higher than homeowner’s user cost. We say that an affordability gap exists continuously in such countries. Where interventions, such as housing subsidies assist in eliminating the gap, investors and other housing market players have often complained that subsidies can distort the efficient market functioning and scare investors away. However, approaches aimed at addressing the gap using the factors in an equilibrium relationship as discussed above may not affect the market negatively but instead may attract more investments into the market segment as discussed below.

Firstly, a strategy aimed at reducing the cost of housing finance to low-and middle-income builders. Governments can do much to support developers in this segment by facilitating the supply of long-term capital to lenders and developers in this segment at competitive interest rates. Such capital can be distributed through the community based organisations, such as FED-UP in South Africa and SDFN in Namibia or through a specialized lender such as National Housing Finance Corporation Ltd in South Africa. Any action that leads into a reduction in the interest rates will translate into reducing the cost to homeowners which should either translate directly into a reduction in the rental prices or indirectly encourage individuals in this segment to buy their own houses by borrowing from the bank.

In addition, financial products targeting such developers can be introduced with flexible repayment plans or pegged to rental collection or with attractive tax incentives. These types of financial products can perform much better with the middle class in Africa where the majority of home constructions are reportedly being carried on in incremental basis and the bulk of them are not funded by mortgage loans for a variety of reasons. A very interesting product in this set is the Jamii Bora’s tenancy purchase agreement in Kenya. This is where tenants enter into a one year renewable agreement in which their rental payments are equivalent to a 20-year mortgage bond monthly repayment. This means that a tenant can convert his/her tenancy into a house purchase at any time by using the previous rental payments as a down payment. In the same way, a well-structured funding can enable the developer to charge a price for small but decently built houses in which the financing may be repaid at a rate as fair/close to rental payments.

Another strategy could target land and the overall cost to private developers and investors. If the cost of land could be significantly reduced or eliminated, then developers could be encouraged to build houses that can be rented or sold at a lower cost. This approach has been identified as an effective way of addressing housing delivery in China and in some cities in India by UN-HABITAT and by other organisations in developed countries such as Home and Community Agencies in UK .

Additionally, an alternative approach could be the use of tax incentives to developers in this segment. From the mathematical relationship above, property tax could be eliminated completely and even invert the role of tax from a homeowners’ cost into an income by offering additional tax holidays for such developers.   In the US, such an approach has been implemented as the federal low-income housing tax credit program (LIHTC) that is credited for increasing production of low-income rental houses

Clearly, the persistence of incremental construction of property projects, increasing rental prices, the growing middle income and the ballooning population of people living in squalid conditions suggests that financial innovation in low-and middle-income segment is necessary. It is much more interesting to note that there are several interventions that could be achieved without distorting the market or using unsustainable approaches as was done in the past.

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4 responses to “Meeting the Challenge of the Housing Affordability Gap in Africa

  1. Almost every country on the planet at the moment has one form of housing affordability problem or the other. The problem in Africa is the absence of the requisite political will in many countries to carry out the required interventions needed to begin to address the situation. Some of these possible interventions have been outlined above. Many African countries still struggle with basic issues such as secure land rights. The amount of dead assets presently locked out of the formal economy within many African economies in stupefying. The process of securing title to land in many African countries is still very arduous with very high attendant costs in some cases. If governments make it easy and cheap for home owners to secure title to their current houses, they could easy use those assets to help finance the construction of a second rental property. This will also help increase the stock of houses available in these countries. This is also another possible intervention for consideration.

  2. Please could u advise me as to how i may purchase a home of my own earning a in the salary bracket of R10 000pm. My husband is the sole bread winner and we are paying a rent of R4000pm. The bank will not afford us a decent loan to purchase a house, we donot qualify for housing in the income bracket of the R3000. Please could you advise us on where we can obtain a suitable housing loan.

    .kind regards
    Muriel Walshe

    1. Hello Muriel. With your household income, you should be able to apply for the Finance Linked Individual Subsidy Programme (FLISP), which gives households earning between R3501-R15 000 per month a subsidy that acts as a downpayment linked to a mortgage bond. The FLISP subsidy for a household earning R10 000 is about R43 000. If you have no other debt, you should also be able to get a mortgage of about R227 000. This means that you should be able to afford to buy a house costing about R270 000. While there are some new houses on the market at that price, they’re very few. Rather, what would be more cost effective, would be to look for a house on the resale market for that price. Have you seen my blog on how the FLISP works in the resale market? Take a look: http://staging.signpost.co.za/housingfinanceafrica-old/blog/flisp-housing-subsidy-extends-to-resale-market/ and you can see what sorts of houses you might be able to find in that price range. Once you’re ready for information on the FLISP subsidy and how to get it, email your questions to the NHFC: flisp@nhfc.co.za.

    2. Hello Muriel,
      I am a journalist working on a story for Business Day about people who find themselves in the situation you are in — unable to qualify for a RDP house and unable to find a mortgage. Could you please let me know if you’re available to be interviewed? My email is robynmurray28@gmail.com.
      Thank you!
      Robyn

Leave a Reply

Your email address will not be published.

4 responses to “Meeting the Challenge of the Housing Affordability Gap in Africa

  1. Almost every country on the planet at the moment has one form of housing affordability problem or the other. The problem in Africa is the absence of the requisite political will in many countries to carry out the required interventions needed to begin to address the situation. Some of these possible interventions have been outlined above. Many African countries still struggle with basic issues such as secure land rights. The amount of dead assets presently locked out of the formal economy within many African economies in stupefying. The process of securing title to land in many African countries is still very arduous with very high attendant costs in some cases. If governments make it easy and cheap for home owners to secure title to their current houses, they could easy use those assets to help finance the construction of a second rental property. This will also help increase the stock of houses available in these countries. This is also another possible intervention for consideration.

  2. Please could u advise me as to how i may purchase a home of my own earning a in the salary bracket of R10 000pm. My husband is the sole bread winner and we are paying a rent of R4000pm. The bank will not afford us a decent loan to purchase a house, we donot qualify for housing in the income bracket of the R3000. Please could you advise us on where we can obtain a suitable housing loan.

    .kind regards
    Muriel Walshe

    1. Hello Muriel. With your household income, you should be able to apply for the Finance Linked Individual Subsidy Programme (FLISP), which gives households earning between R3501-R15 000 per month a subsidy that acts as a downpayment linked to a mortgage bond. The FLISP subsidy for a household earning R10 000 is about R43 000. If you have no other debt, you should also be able to get a mortgage of about R227 000. This means that you should be able to afford to buy a house costing about R270 000. While there are some new houses on the market at that price, they’re very few. Rather, what would be more cost effective, would be to look for a house on the resale market for that price. Have you seen my blog on how the FLISP works in the resale market? Take a look: http://staging.signpost.co.za/housingfinanceafrica-old/blog/flisp-housing-subsidy-extends-to-resale-market/ and you can see what sorts of houses you might be able to find in that price range. Once you’re ready for information on the FLISP subsidy and how to get it, email your questions to the NHFC: flisp@nhfc.co.za.

    2. Hello Muriel,
      I am a journalist working on a story for Business Day about people who find themselves in the situation you are in — unable to qualify for a RDP house and unable to find a mortgage. Could you please let me know if you’re available to be interviewed? My email is robynmurray28@gmail.com.
      Thank you!
      Robyn

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