So, how big is the property market?

My intention here is to share some insights and also to get your critical input on the assumptions that I am using in the computations.

One of the unanswered questions in this industry is the magnitude of the effective demand for housing in Africa. Just how big is the property market?  One’s approach to the answer of this question has a significant bearing on what one understands the size of the mortgage finance market, the owner-occupied housing market, the rental market, and all housing and construction and related industries, to be.

To answer this question, my first instinct is to look at the population size and the income distribution, especially in urban centres. Then, if we know the cost of the cheapest, new, developer-built house in a country (and assuming this house is representative of the market), and the prevailing mortgage conditions, we can work out the monthly mortgage payments required.  From that, we can use population and income distribution data to work out how many people can afford such a commitment.  If we assume that all people with such affordability choose to make such a purchase (and that so many houses exist), we can determine the prospective size of the mortgage market.

The approach depends on four assumptions:

• first, that a mortgage market exists in at least the urban centres of each country (although this is not currently true – look at my previous blog on Monetary Policy Actions);
• second, that the mortgage conditions include a loan-to-value ratio (LTV) of 80% and a repayment period of 15 years (though only a few countries have such a lengthy period repayment period because of uncertainties);
• third, that all house purchases would be made with a mortgage loan (also presumptive); and
• fourth, that all borrowers could amass the 20% equity required for such a purchase (unlikely among lower and moderate income earners who are first time home buyers).

From the World Bank’s Household Income and Consumption surveys and using their online poverty analysis tool called the Povcalnet, the proportion of the total population that could afford such monthly repayments in each country could be estimated. Then assuming the distribution of income is similar across the country as it is in urban centres, then the proportion of people in urban centres that can afford mortgage loans can be deduced.

To work out the number of rental units needed in urban centres, I have made an extra assumption that the number of people that can afford mortgage loans represents the number of households, not just persons. If this holds, then all of remaining urban population must be catered for through the rental market.  Clearly, a diversity of affordability would exist in this market.  Initially, I thought that slum dwellers could be segregated as representing an affordable rental market but research done among such households, for instance in Kenya and South Africa, has found a wide diversity of affordability – living in a slum is not an indicator of housing affordability, but rather an indicator of housing supply.

Data on average mortgage interest rate is derived from the Centre for the Affordable Housing Finance in Africa (CAFH) product survey, data on the cost of the cheapest, new, developer-built house is obtained from CAHF’s 2011 Year book, house costs are denominated in the United States Dollars, %age denotes percentage, and household size is expressed as number of persons per family. 

There are some interesting inferences that can be extracted from this table.[1] For instance, looking at mortgage repayments, one would say that owning a house is very difficult in Zambia and Tanzania but fairly affordable in Namibia and South Africa. This is not surprising since statistics on the sizes of national mortgage markets ranks Namibia and South Africa as the highest in Africa while Zambia and many other African countries do not have a significant or noticeable mortgage markets. Nevertheless, despite South Africa having a bigger mortgage market, it has among the highest rental demands because, unlike other African countries, about 68% of South Africans live in urban centres. Furthermore, on average, only 7% (100% minus 93%) can afford a mortgage in the countries above which closely resonates with World Bank’s estimate of 3% for the whole of Africa when countries such as DRC and Central African Republic with almost 0% are included.

Statistics on household size were obtained from various census data sources, although indicative, it needs to be remembered that some of the data are more than five years old. Given the global trend towards shrinking size of the family and that urban household sizes tend to be smaller than in rural, I can say that the rental demand is highly underestimated and may be much higher than the given figures. These statistics, together with population growth statistics and the national dwelling units’ statistics can be useful in informing investors about the extent of the backlog and exact housing needs for every year in a country and similarly inform on the policy change needed to increase access to mortgage finance and construction finance.

Nevertheless, if countries in Africa secure these conditions and in addition, implement more favourable housing policies, then the table above will not only be indicative of the potential property market size but also the minimum size any investor could expect. Obviously, given the underestimations, favourable policies, income growth and stability in macroeconomic sense and politics certainty, the property market is all set to expand much beyond the above figures.