Purchasing one’s own home with the aid of a mortgage is so much a part of life in the West that many are surprised to learn that mortgages are not available or are very limited in a market that has been much in the news in the last two years: Africa. In this article, we consider the ways in which housing is financed in Sub-Saharan Africa.
In addition to the development finance institutions (DFIs) actively looking at the mortgage market in Africa, a large number of African banks themselves have seen the investment potential in this area. The growing upper and middle class populations in Africa are generating a more stable flow of income, have more savings and are no longer moving funds to foreign accounts. Instead, they are keen to make property investments in their own countries.
People in Africa generally are coming to appreciate the importance of property ownership and the role of banks in helping individuals to own their own homes. Until very recently, the construction of a house was mainly the joint effort of family and friends, with work progressing only when funds and time allowed. The large number of unfinished houses that can be seen when travelling through Africa gives the impression that these have been abandoned, but in fact, they are simply still under construction. Building a home in this way can often take between five and 10 years. There is increasing recognition, however, that home ownership is an essential human need which can be met more swiftly with the aid of a mortgage.
The mortgage market looks set to grow in Africa, but there are still many challenges to be overcome. Some of these are discussed below.
- In the West, we have grown comfortable with, or at least resigned to, the idea of a 25-year debt to the banks, but in general, people in Africa have not been keen on the idea of owing someone money for such a long time. This is a mindset which needs to be changed, and there should be greater awareness of the benefits of a mortgage—it is not purely a financial debt, it is also a form of saving, of obtaining ownership of a valuable asset, of having an asset that can serve as security in old age and that makes people more independent from their extended family.
- A long term mortgage loan also requires that the asset financed at least maintains its value over time, and preferably increases in value, in order to provide appropriate security to the banks. The often poor quality of building work in Africa means that houses do not last for more than a century. However, many European development companies are becoming more active in Africa. Whilst they meet the same challenges as their African counterparts (since they have to call upon the same local contractors), nevertheless they have the resources and know-how to improve the construction process over time.
- The relative scarcity of construction materials and the need to import many elements that are used in housing (cabling, windows, etc) makes the construction of high quality houses quite expensive. This creates a distortion between the price of the property itself, the mortgage and the repayment capacity of an individual with a moderate level of income.
- The large number of land ownership disputes and related legal uncertainties make it a challenge for a bank to be sure that the property it is financing is effectively owned by the borrower. This in turn creates uncertainty as to the enforcement of the mortgage.
- The banks providing mortgage products must themselves have access to long term funding in order to back their mortgage portfolio. Such long term funding is often not available at all or is very limited.
- The mismatch between supply and demand of good quality housing leads to some houses being overpriced in many African countries. This brings with it the risk that prices will tumble when there is an increase in the construction of similar houses in the future. This would clearly result in a gap between the level of the mortgage loan and the property value.
In addition to the many challenges listed above, the regulatory framework in most African countries is still in its early stages, with the old laws now unfit to regulate this type of product.
However, despite all these difficulties, construction companies remain keen to become more active in Africa, and to co-operate with local government and local banks to help to develop this promising market. Not only will such activity benefit the housing companies and the banks, it will also help people in Africa to meet an essential human need: owning their own home.