Mortgage products in Africa exclude an awfully large portion of the population. The exclusion is due to banking systems and policies that are meant to protect lenders from default risk.
The policies, even though crafted with the best intention, act as barbarians that prevent the majority from accessing a basic service. By financially excluding the generality of the populace, the policies dis-incentivize land developers from constructing houses that carter for the majority.
Displacing Demand Ultimately Results in Compressed Supply
Affordable housing developers have tried to find ways around the barbarians, so that they can service the low-end market. There have been a few successes here and there, but in general, the so-called affordable houses are still expensive for the majority.
Some developers have given up. They have left it to God and the government to address the problem. It is a problem that is deemed not viable enough to warrant resources from the capitalistic economy. They do not see a way of profitably servicing that market.
Thus the problem of displaced demand has led to compressed supply.
What’s Wrong with Mortgage Products Copy-Pasted from the West
The western civilized model works right! Why not just copy it and paste it in Africa? Well, it’s not that simple. There are several reasons why this has not worked:
- The financial system’s penetration in Africa is not deep. Deposit mobilization is weak. Banks and other financial institutions in Africa do not amass a large volume of deposits that allow them to undertake significant mortgage lending. Their balance sheets do not allow them to do that.
- Where there are some resources available for mortgage lending, there are some barbarians at the gate that prevent masses from accessing these products.
- There are no stocks of rightly-priced houses. Right in the sense that the average African worker can afford.
The most prominent barbarians at the gate are reckless lending regulations and credit scores.
Reckless Lending Regulations
Banking policies prohibit a bank from lending to a client if the client will end up paying more than 30% of his/her salary towards a mortgage payment.
Reckless lending is when the bank lends money to a person who is highly likely to eventually default. This is especially so if the borrower is paying more than 30% of his salary towards a mortgage. But a mortgage is a housing product that is always backed by the house which can always be repossessed in case of a default. If defaults are high, banks will be left with too much illiquid property assets on their balance sheet. They can easily run into liquidity problems and may fail to honor withdrawals from clients. That is the reason why banks have to limit their mortgage exposures. Fair enough. But surely if housing is an essential basic need, there should be other term-deposit mobilizing companies that can fund this market.
If your credit score is too low, you will not get any credit. There are many reasons why a credit score can be too low. The main reason is living beyond your means. One of the biggest factors that contributes to people living beyond their means is high rental expenses in the big cities. There are millions with more than 60% of their earning going towards rent, electricity, and water, leaving a small portion for food, clothing and transportation thus needing to fund food and clothing from credit sources.
It is dilemma. For Person X to sustainably improve the credit score, he/she has to live within his/her means, which implies reducing rental costs. Reducing rental costs can only be meaningfully achieved by getting a mortgage. A mortgage can not be obtained when the credit score is low. Its a prison difficult to escape.
How Barbarians Prevent You from Entering the Housing Market
Edward is a migrant worker. He is renting a two-bedroom apartment for R 9,500 per month. He could have qualified for a mortgage on a similar apartment. But, he does not qualify, because there are some Barbarians at The Gate.
The barbarians say he does not qualify because he is a foreigner who might eventually leave Country X. But, the house belongs to the bank until the final payment. The house is in Country X, he cannot take it away with him when he goes back to his country of origin. To elbow Edward out of the processes, the bank demands 40% cash deposit for the property.
She is renting an apartment for R 6,000. Her gross salary is R 10,000. Rent is her biggest expense. Its gobbling 60% of her salary. What can she do? She has to live somewhere. She cannot stay in the crime-ridden low rental areas because the cost of being robbed time and time again outweighs the benefit of lower rentals. She applied for a mortgage on an apartment similar to the one she is occupying. The monthly payment required for that mortgage is R 5,500. The bank declined her application because it will result in her paying 55% of her gross salary towards the mortgage.
There has to be a better way
The underlying problem is obviously economical. Millions of Africans cannot afford a simple European style modern house. Incomes are too low.
However, I contend that even if incomes are low, the capitalistic economy should be able to find a housing solution that is consistent with the low levels of income. There has to be a product that meets the customers at their point of need and affordability.
There has to be a better way. There has to be a way that allows masses to access affordable housing without encountering the barbarians at the gate. The gate should be open for all who are willing and able.
We cannot place all the blame on the Mortgage Bankers. Maybe they are not supposed to be the primary method of financing housing products.
We cannot place all the blame on Land Developers, maybe their products are direct function of a rigid cost structure.
Nevertheless, there has to be a better way. There has to be a non-mortgage banking way of financing housing for both the demand side and the supply side. There has to be a way to tame the “rigid” cost structure and fundamentally change the industry.