THE CHALLENGES OF MORTGAGE AND AFFORDABLE HOUSING IN NIGERIA

                                                                                                          

By Olumide T. Agunbiade

Several years ago, two notable economists, Arvind Subramanian and Xavier Sala-I-martin, in a paper for the IMF said Nigeria was a ‘metaphor per excellence of a failed development experience,’ describing the government as so damaging to progress that Nigeria would be better off if someone sat down and wrote out cheques to every citizen to the portion of their share of oil receipts.

All governments in Nigeria since independence have highlighted housing as a priority. Unfortunately, the nation is yet to develop a vibrant mortgage market and houses continue to be provided through the usual traditional method of buying land and building over some years or saving to buy a home which could take an individual’s entire lifetime.

Recently, the Federal Government has appealed to private sector operatives to increase their investment in the housing sector in order to assist the government in housing the citizens in line with vision 2020 when the nation hopes to join the 20 largest economies of the world.

Experts also believe that efficient, accessible, simple regulations and clear property rights can expand the natural entrepreneurship of small and medium size firms even further. However, the ‘World Bank’s Doing Business’ in Nigeria 2010 report revealed that it is easier to do business in Jigawa - a state declared as the poorest state in Nigeria by World Group and the CBN two years ago - and other northern states than any major cities in Nigeria.

In Nigeria, 2012 was characterized by inactivity in the construction sector, low level of effective demand for properties and tumbling of property values and rentals especially in frontline cities of Lagos, Abuja and Port Harcourt. “There is a gradual improvement from the depressed state of 2011 and this is a good development for property and related transactions,’ says Chudi Obosi, a Consultant at Ubosi Eleh and Company, an estate surveying firm, ‘the greatest opportunities for real estate lie in the middle to low income sector where demand greatly outstrips supply.”

The ‘World Bank’s Doing Business’ in Nigeria 2010 report also revealed that certain reformation carried out by states will gradually encourage business activities in small, medium-scale enterprise. “Nigerian government has never been openly committed to solving the nation’s housing problem. For any country to solve their housing problems, there are fundamental steps to be taken that are totally non-negotiable,’ says Mr. Bode Adediji, President, Nigerian Institution of Estate Surveyor and Valuers (NIESV).

Lenders, investors and borrowers prefer a stable economy where decisions can be taken without any apprehension. Inflation should be kept at a manageable level, interest rates reduced and other macro variables should be reduced.

Generally, investing in real estate involves more than simply buying a property, finding a tenant, and watching the cash inflow. While stock investors buy shares and sits back waiting for dividends and increase in stock price, real estate investors may need to spend time dealing with a vast array of tenants, managing the property, supervising repairs, renovation costs and complying with regulatory requirements.

Documentation requirements can also make investment in real estate in Nigeria tedious. Delays in the issuance of a Certificate of Occupancy and governors’ consent can affect the timing of the sale of property as collateral.

Challenges aside, it is wise and profitable to invest in real estate, the basic is to buy a property, hold it for a period, renovate it to enhance its value, and then sell it. Another investment strategy is the buy-to-let where acquired properties are rented out. The aim is for the rental income to cover the mortgage cost with a view to selling it in the future at a profit. Investing in land is another option.

Unfortunately, in Nigeria there is no mechanism for risk sharing that will encourage banks and other financial institutions to extend loans to people at the lower income level. Also, the absence of a Credit Information Database (CID) that financial institutions can use to track and access borrowers’ information – as is available in developed nations – ensures that Nigerian financial institutions settle for lending to low risk customers.

Primary Mortgage Institutions (PMIs) typically, at the moment, offer equity loan rates of around 20%. In addition, the borrower will pay a two percent management fee charged quarterly, 20-30% home equity contribution, a legal fee charged by the lawyer recommended by the bank and all title registration fees required by the state government for registration and documentation.

It is alarming to note that a mortgage of 20% interest rate accessed on N80 million, will require borrowers to pay the full amount of the property with interest in a short tenure of 10 years. At this stage of our economic life, Nigeria should have developed several instruments with longer years of maturity as applicable in more advanced economies.

Is there a solution? Yes – if the government will provide guarantees in form of mortgage insurance to lenders for loans granted to first-time buyers with no credit history and low middle income earners once such loans meet prescribed underwriting standards. In the event of default, the government indemnifies the lenders to a prescribed level.

Also, such insurance will guarantee mortgage lenders some level of comfort and will encourage them to extend the loans for longer periods to low and middle-income earners. In providing liquidity, insured mortgages may be securitized; that is, pooled by the Federal Mortgage Bank of Nigeria (FMBN) and sold in the domestic capital market to interested investors.

In addition, the capital market can be a good source of providing long-term funds through the issuance of bonds and other financial instruments to finance infrastructural projects, instead of the current method of funding through annual budgets, which results in having several uncompleted projects when revenue falls short of expectation, a common experience in Nigeria’s history.

The current situation in Nigeria is similar to what was prevalent in USA during the great depression era in 1929 until the Roosevelt administration (1933 - 1945) established the Federal Housing Administration (FHA) to provide insurance against mortgage and was a model for most emerging mortgage markets before the recent depression.

Hence, the Nigerian government should re-organize the Federal Housing Authority (FHA) into a government sponsored mortgage insurance institution that will provide this service to ensure affordable housing.

Currently, the mortgage rate surge is threatening the already fragile housing sector such that fiscal bail out may be the only way out. According to a report from the House of Representatives, only 37% of Nigerians own houses, with a population that has nearly doubled since 1991 from 88.9 million to 160 million, there is an urgent need for policies to improve and for housing to move up on the Nigerian government’s priority list.