Banks Make Big Spreads
Despite the banks reacting sharply to the upward changes in the Central Bank Rate, they have been very slow to react to the downward changes in the rates during.
Making Mortgage Accessible in Kenya
If we are to see the uptake of mortgages increase from 17,000 as per the last official figures to 100,000, we need to focus on several aspects. The mortgage report today focuses on these interventions that can radically shift mortgage uptake and set many Kenyans on the journey towards home ownership.
Funding Mortgage in Kenya
Today , the funding of mortgages is done primarily through bank deposits making the industry vulnerable to shifts in short-term market liquidity . The impact of this cannot be underestimated with the interest rates in the market moving in October 2011 from an average of 14% to 24 % leaving many mortgage takers in distress after their mortgage payments doubled. Although this position has improved slightly , we require a long term and sustainable solution to funding of mortgages to give a lasting solution to this challenge.
We need to get cheap long term loans directed towards mortgage financing to enable us move towards single digit interest rates and radically change the affordability of mortgages. In the USA, mortgage rates range around 3.5%. A 2 Bed Apartment in Syokimau of Ksh 3.9 million taken for a tenor of 20 years at the best commercial rate in Kenya of 15.5% will cost the home owner approximately Ksh 42,357 while the same home at a equivalent US rate of 3.5% would cost the home owner Ksh 18,095 per month to mortgage. One can imagine the impact of this shift in affordability .
To encourage the flow of long term funding we need to seriously look at the possibility of developing a well organized secularization programme where financiers can obtain funding from the capital markets. While REIT s will be great for developers and long-term investors in commercial properties, we need to address the more important aspect of allowing the flow of Pension funds, SACCOs and Insurance funds to the mortgage market.
Affordability of Mortgage in Kenya
Affordable home ownership is still a pipe dream for most Kenyans. The high land prices and high cost of infrastructure coupled with the developers need to make a profits keep most homes out of reach for most Kenyans.
Government interventions will be necessary to provide an enabling environment. The first being provision of affordable serviced land for developers. The cost of infrastructure adds an additional 20-30% to the cost of homes. If this could be addressed through infrastructure bonds serviced through utility payments, we could achieve a significant reduction to the cost of homes in the country.
The setting up of Counties provides the perfect opportunity to begin development of this model. Secondly , making interest payable on owner occupied homes fully tax deductible up from the current maximum of Ksh 150,000.- would encourage many to make this decision. Working to reduce high closing costs of 7-10% of the cost of the home e.g. through reduction of stamp duty would ensure that many are able to commit to home ownership with ease. Allowing access to pension benefits towards payment of the down payment towards purchase of a home would be a positive way of ensuring that each employed person makes the first step towards home ownership.
For the lowest end of the market, subsidies would be needed to get rid of informal settlements and convert these to simple yet affordable homes for the low income earners.