How to reposition housing sector for economic growth
At the National Built environment conference (NABECON) 2017 organised by Nigerian Institute of Building and Council of Registered Builders of Nigeria (CORBON), a former president, Nigerian Institute of Quantity Surveyors (NIQS), AGELE ALUFOHAI made some recommendations. Among them are; the adoption of public-private partnerships for financing infrastructure and Singaporean model for mortgage financing to stimulate construction activities.
Housing policy must seek to work for all Nigerians – the rich, the poor, civil servants, small business people, artisans, informal sector workers and entrepreneurs, young graduates, young people with limited formal education, banks, construction companies for it to boost construction activities and make a significant contribution to economic development.
It must not seek to deliver 500 units of housing to civil servants and 400 units plus 2,000 units of so-called low-cost houses scattered around state capitals. It must be transformational. It must be revolutionary. For example, it should seek to redevelop a whole neighbourhoods, some of which are mini cities, of 400,000 to 600,000 units and deliver houses and supporting infrastructure that compare favourably with what we find in the United Kingdom or middle-class areas of South Africa.
I was in the office of an old friend and he being a good old friend, he could discuss business with his colleagues in my presence. They were discussing raising offshore funds, in this case from British institutions, to lend as mortgages in Nigeria. The same institutions lending to them lend to house buyers in the United Kingdom where they would for the foreseeable future not charge more that 5per cent interest rate on loans offered for 25-30 years. Most banks offer an introductory rate of under 1per cent for the first two years. Some with even a £500 “gift”! The mortgage rate in Nigeria is usually 20per cent or higher. Usually for five years.
Monetary and fiscal policies must support what is sustainable and good for the Nigerian economy in 10-20 years rather than what is good for us now which lead us often to what levels to maintain current consumption of imports. What investors require is a credible, sustainable and stable exchange rate, not a high or low one that is highly vulnerable to movements in oil prices. If the Central Bank of Nigeria had decided to maintain the exchange rate six months ago at N450-to-$1, decided to design its intervention in the market to sustain this rate, a lot of imported goods, including shampoos, would have become unaffordable to Nigerians, and Nigerian businesses would have moved to exploit this opportunity by producing them locally.
Sustainable exchange rates would not only stimulate offshore investment into mortgage lending in Nigeria, it would aid the diversification of the Nigerian economy, in terms of boosting the competitiveness of our local products. The gains are diverse; they will stimulate investment and economic activity that we or the government cannot possibly foresee. I once saw a study that described how a Spanish building materials’ company decided against investing in producing in Nigeria when the naira value plunged in the late 1980s. Why was such a decision taken? The analysis of the would-be investors was that once oil prices recovered, Nigeria would pump dollars in the market and resume importation again. Unfortunately, oil prices by nature fluctuates, basing the value our currency on it means we have elected to have a “yo-yo” economy. Unstable exchange rates also of course fuel inflation. Nigeria should have the boldness to aim for stable and sustainable exchange rates and stable prices or low inflation.
Mortgage is critical to construction because all over the world houses are expensive investments; for an overwhelming majority of people in the world, it is the single biggest investment they will ever make in their lives. Mortgages accelerate or bring forward the purchase of homes by hundreds of thousands, if not millions of citizens. In developed and successful emerging markets, mortgages are by far the predominant means through which people acquire houses. Mortgages constitute about 10per cent of the assets or loan portfolios of banks in the west, rising to 20per cent for some banks.
In Nigeria unfortunately, less than 3per cent of homeowners acquire or build through mortgages. Between 1960 and 2009, mortgages in Nigeria were less than 100,000. Every developing or poor country lacks the financial depth or huge savings that are the bedrock of mortgages. What countries like Singapore, Indonesia, Malaysia, Korea etc have done is to create a pool of “forced savings” i.e. compulsory contributions by all workers of a percentage of monthly salaries, as high as 20per cent in the case of Singapore, into a pool of funds from which they could access mortgages.
Nigeria has tried this approach but it has largely failed. One of the key reasons for the failure is that those who contribute cannot access the loans because they are too ill paid to afford the deposit for houses. Nigeria has to revamp the National Housing Fund (NHF) and find ways to mobilize contributions; a critical component will be the upward review of the interest paid on deposit. It is much better to mobilize funds so that 45per cent of Nigerians could get mortgages at 14per cent than have only 2per cent of Nigerians access mortgages through the NHF. Of course, a low inflationary environment is also very conducive to the growth of the mortgage industry as many more people would be able to afford the interest rate. If inflation falls to and can stay between 7-9per cent for 8 years, enabling banks to lend at around 12per cent, this would provide the biggest boost imaginable to mortgage lending, construction and economic growth in Nigeria.
According to the Federal Mortgage Bank of Nigeria (FMBN), we need to build 720,000 units of houses per annum in Nigeria at a cost of N56 trillion per annum to close our housing gap! The total assets and liabilities of all mortgage finance institutions in Nigeria as at March 2017 was only N97 billion with about N10 billion being contributions into the NHF. This is less than 0.3per cent of GDP compared to South Africa where mortgage assets are almost 40per cent of GDP and 80per cent, 50per cent and 33per cent in the United Kingdom, Hong Kong and Malaysia respectively. The Nigerian Mortgage Refinance Corporation, a recent innovation in the housing space, to date has only N40 billion in assets.
The clear challenge is that for mortgages to play an effective role in stimulating construction and economic activities, it has to play the major or at least highly significant role in the way Nigerians build or acquire homes. It can’t remain an option for only a few hundred elite Nigerians in highbrow areas of Lagos and Abuja or a few civil servants. The clear solution to me is the Singapore model – creating a pool of funds into which everybody contributes monthly and from which everybody borrows to buy a flat or house. The Federal Government “tops up” contributions into this remodeled NHF with at least N10 billion every year and it’s perfectly alright if it spends every kobo on its intervention in housing on this.
The Government of Egypt, through the Central Bank of Egypt, in 2014 decided to advance 10 billion Egyptian pounds to banks to be used to support 7-8per cent mortgages for low and middle-income houses. In 2017, the Central Bank of Egypt increased the Mortgage Finance Fund to 20 billion Egyptian pounds ($1,133,963,800.00) after seeing how effective the scheme quickly proved in expanding homeownership. The Egyptian scheme is working for even the very poor with those who earn 1,400 Egyptian pounds or N29, 000 per month getting mortgages at only 5per cent. Rather than have a multiplicity of schemes, the Singaporean model, which the government also tops up, is appealing.
The government would need to have very strict specifications for the sort of housing that should be financed – for instance, large units of new multi-storey apartments with required amenities and supporting infrastructure, thus stimulating critically required urban redevelopment and efficient use of land. Eligible lenders would only need to have contributed to the scheme for three to five years, boosting the pool and making it cover informal sector workers.
Regulation of construction has to become much more stringent. As more Nigerians acquire houses through mortgages, it will become easier to do proper urban planning. Cost of infrastructure could be spread over more housing units. What we have now often are new unplanned neighbourhoods that have been developed without roads. Homes in such new neigbourhoods are built over 3-7 years, during which the capital invested is idle, as the homes cannot be inhabited. These funds would be saved in a remodeled NHF and be immediately used to stimulate construction of new houses by being converted into mortgages. What we need to do is signal to the tens of millions of Nigerians who aspire to build homes and have incomes to save in the NHF, even if it’s N10,000 per month that they can easily obtain 8-10 per cent mortgages after saving in the NHF. Regulations have to be tightened to make the construction of sub-standard housing with absent infrastructure near impossible.
Supplying homes through a system of bigger, well-regulated developers who can raise funds to build thousands of units because a revamped NHF is enabling thousands of Nigerians to obtain lower-cost mortgages will go some way in improving infrastructure. The cost of roads can be spread over houses when houses are being delivered in thousands especially because the development of dwellings must occur as well-planned urban redevelopment. But this obtains only for roads and other infrastructure like bridges that immediately lead to or surround our houses. We have to still fund the hundreds of major roads that connect our towns and states, which are the arteries of economic production and exchange.
As a country, we now use as high as 66per cent of tax revenues to service debts. This is very likely to rise as we will accrue more debts if we don’t make any serious effort to reduce expenditure. I have not heard any debate about any plan or intention to reduce expenditure. A nation has to run its account like an individual or household; when revenues shrink expenditure has to also go down. The household has to cut down the budget for parties and believe me, despite the recession, we still have party-like expenditure in this country. The household has to spend more of its resources on things that make it more productive and enable it to earn more income. In the case of Nigeria, this includes infrastructure interstate roads, bridges, and seaports, built not for political calculations but on the basis of precise analysis of how they can help us be more economically productive.
Meanwhile, the oil income is taken up by salaries and other forms of overheads. Where do we find the money to build critical economic infrastructure? To my mind, while we make serious, sincere and valiant efforts to shrink our expenditure, we have to find alternative means of financing infrastructure.
(How productive is our civil service to justify borrowing money to pay it?) We have to turn to Public-Private Partnerships as a means of financing infrastructure. We have to tighten the rules and processes, assure investors of transparency. In and outside Nigeria, investors have far more money than we need to build infrastructure. Unfortunately, we are not the only nation that needs the money; it will go to boosting investment in infrastructure in nations that can best fight for it. The big boost building critical infrastructure in Nigeria will give to our GDP-
I will hazard a guesstimate of an additional 1.5per cent per annum for every 3per cent increase in investment in transparently procured good quality infrastructure – will calm nerves and make us a richer, more united country.
As professionals and academics, we should set our ambitions very high. And, in our interactions with policy makers and politicians, let’s set for them very big goals. I have no doubt it’s fairly easy, with the right policies, to mobilize N15-20 billion to support the mortgage sub-sector in Nigeria. This investment in construction activities will go a long way in reducing Nigeria’s unemployment burden, creating jobs in bricklaying, cement manufacturing, painting, carpentry, interior decoration, banking, insurance and transportation. Skills in many of these sectors are grossly deficient; Federal and State Ministries of Commerce and Labour have to work hard to create, train for and strictly enforce standards.
As another electoral cycle draws near, let’s impress it on our politicians that we are not expecting modest improvements in policy and palliatives. Let’s share and develop with our bureaucrats, political parties, investors and businesses, big visions for how we can have macroeconomic policies that deliver stable prices and low inflation, and single digit interest rates. For how we can mobilize funds into the National Housing Fund, so it becomes truly national rather than something that is relevant to the housing needs of only a few thousand Nigerians. There must be big visions for effective regulation of urban planning and regeneration as well as efficient use of urban spaces through the development of multi-storey apartment blocks that are supported by requisite infrastructure.
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