Living without Mortgage

The conversation on Naija Twitter around housing and mortgage caught our eye. The obvious conclusions are that home ownership in urban centres is low and mortgage-affordability is weak. What is not so obvious to many people are the reasons.

This is a complex topic but we will do our best to break it down.

The Dynamics of Housing in Nigeria

Nigeria’s housing problem is in a way an urban one. According to the 2018/19 living standards survey, the share of housing rented in rural Nigeria is low at 10.4% while for urban it is high at 49.2%. Home-ownership is high in rural Nigeria with 68.6% household and low in urban with 32.5%. Nationally, 25.8% of households rent their housing while 54.3% have ownership. This is lower than in countries like Singapore (90%+), China (89%+), India (86%+) and US (65%+), among many others.

Share of housing rented is highest at 68.3% in Lagos, with home ownership lowest at 17.9%. In other standalone cities, these indicators are considerably better. 71.7% of households in Kano have ownership while only 10.1% rent. In Abuja, this is 61.4% and 28.9% respectively. One could extend the argument that our housing problem is a Lagos one, although we are yet to see data on other cities.

However, a strong counter-argument would be that while home-ownership is high in rural Nigeria, the quality of housing is poor. 86.4% of urban households live in houses with cement or concrete walls, compared to 43.8% for rural. This is highest in Lagos at 96.8%. In Kano it’s just 33.7% as mud houses dominate at 56.6% - the state is very rural in nature. The bottomline is that lack of high-quality housing is still a big issue across the board.

Depending on the source, there is an estimated 16-22 million deficit in housing units. Different governments have focused on building low-cost houses, but they lack the capacity to deliver. This is why the solution must depend both on the private and public sectors. Urgency is required because the demand for housing is driven by population growth rate of around 3.0% and urbanisation rate of around 4.0%.

Why is Homeownership Important?

While home ownership seems to be an urban problem, the missing development that home-ownership enables is a national problem.

Homeownership gives you freedom, independence and stability. It’s a good long-term investment that appreciates in value. It also offers significant tax savings to households. Even more, it helps you build wealth. About 50.0% of household wealth in the US is tied to housing. The equity you have in your home can also provide leverage for more economic activities. This is especially true for the middle class. It is more than 60.0% of their assets in OECD countries.

What makes this easy is that housing can be bought with debt or mortgage. Mortgages are loans facilitating the purchase of a home. Mortgage debt is more than 50.0% of total household debt in OECD countries and more than 80.0% of homeowners total debt. Beyond the opportunity provided by debt, there’s potential risk. The crash of the housing market in the US during the global financial crisis is an example.

What is the state of mortgages in Nigeria?

The mortgage market in Nigeria is almost non-existent. About 15 years ago, only 5.0% of housing units were financed with a mortgage. There is little evidence that much has changed. Mortgage finance as a share of GDP is still less than 1.0%, compared to 29.0% in a peer country like SA. There is a long list of complex, interrelated reasons for this.

With all the potential benefits, why is mortgage adoption low?

Financing is a big problem. Government’s mortgage institutions and the core lenders (primary mortgage institutions) still have low capital despite a series of recapitalisation, which means that they can’t finance a lot of loans. Other lenders such as commercial banks have a higher capitalisation but their funding is short-term and asset allocation favours less-risky, short-term liquid assets and not mortgages which are usually long-term and illiquid. The sort of long-term capital required is in the pension/insurance industry where there are long-term liabilities. This analysis is yet to account for the low pool of savings that can be used for financing.

Can we unlock financing? Perhaps, but this will take time. The pool of savings is still low. The secondary market for mortgage, which would facilitate liquidity and capital, is weak. The mortgage market is not yet integrated with the debt market which is where long-term financing can be obtained. The Nigeria Mortgage Refinance Company (NMRC) was created to use long-term capital obtained from the debt market or other long-term lenders like the World Bank to put more liquidity in the system. This is done by the NMRC buying mortgages from the originators, freeing liquidity for more mortgage lending.

Even when there is liquidity, there are other serious challenges. This is demonstrated by NMRC which was setup to buy mortgages (25.0% of assets) but has more government securities (64.0% of assets) in its balance sheet. Originating high-quality mortgages is hard and NMRC wouldn’t want to buy poor assets.

On the demand side, there is weak mortgage affordability. This is due to a combination of low income (per capita income of $2,230 (N1.07m) and high interest rates (17.0-25.0% vs 2-3.0% in developed countries). Mortgage adoption increases with household income as this determines repayment capacity. The income level also determines the affordability of the high upfront cost (initial equity), which could be around 10%-20% of the property cost. The high interest rates on mortgage partly reflects high inflation (12.0%+), which must be reduced. There are other considerations that raise interest rates because this type of lending is a risky adventure. Households rarely have a good credit profile while mortgage lending is both illiquid and long-term. For the youth, homeownership and access to mortgage is a pipe dream given these considerations.

On the supply side, the challenges include the lack of property rights. Getting titles to land is extremely difficult. In Nigeria, only 13.2% of households with owned dwelling have a title deed while 71.4% have supporting documents. Certificate of occupancy which is an alternative is also low at 8.1%. This means mortgage lenders can’t use the land/property as collateral, making them less willing to lend.

Access to land is also difficult given the land use act of 1978. Builders need approval from state governments while there is a general lack of clarity around ownership given the power of revocation. Land transactions are also slow and costly.

The land management system and records are poor and not useful to facilitate housing development.

The regulatory framework is not conducive. Legal/regulatory processes consume considerable time and money. The foreclosure procedures, which allows mortgage lenders to sell non-performing assets upon default, are also not encouraging.

The high cost of building materials is another critical factor that goes into how costly housing is in Nigeria. This is not surprising, after all we pay one of the highest cement prices in the world. Poor infrastructure connecting towns/cities also contribute to the high cost of land and property.

As we can see, there are many parts to the housing and mortgage problems in Nigeria. Resolving these challenges would be tough but they are necessary to promote homeownership via mortgages and help households build stability and wealth.