WILL MORTGAGE RATE SURGE HURT HOUSING MARKET IN NIGERIA?

 By Olumide T. Agunbiade |Nigerian Real Estate Writer and Blogger

Follow @olumideblogzin 

I

F Nigerians were not buying homes when rates were 18%, what happens now that rates have been increased to over 20%?

Back In October 2011, the Monetary Policy Committee (MPC) in an emergency session to bail the depreciating currency, stabilize the naira and peg the inflation pressure; announced the following rate changes: Monetary Policy Rate (MPR) was increased by 275 basis points from 9.25% to 12%. The Central Bank of Nigeria (CBN) also maintained the current symmetric corridor of +/-200 basis points around the MPR. Also, the Cash Reserve Ratio (CRR) was increased from 4 to 8%.

Before seeking and sampling the opinions of experts on these astronomical hikes, several questions besieged my thoughts: Should the quest to save the naira be a singular reason to hike? Did the MPC consider the impact on the real estate sector?

Was the timing right, considering the fuel subsidy removal already generating heated debate? Does saving the depreciating naira and foreign reserve have a huge economic impact as to adjusting rates and fiscal measures to impact on agriculture and housing market?

Increasing rates do not make it any easier for homeowners to sell and for existing mortgage borrowers to maintain their loan facility. But, how much will it hurt? Economists say, mortgage loans are the quickest loan basket to get re-priced upwards in such market conditions.

Today, Michael Brown, 35, web designer, is drawing his retirement plans. Recently, he inspected and planned to acquire a property on mortgage; near Eleko beach road, Lekki Peninsula, close to the new Airport, new Seaport and the Free Trade Zone.

 Before the hike, he was at an advanced stage of securing N15million loan to purchase his dream home at an interest rate of 18%. Now at 22%, he needs an additional N600, 000 in order to qualify for a loan on the N15million home he plans to purchase. How many first-time home buyers have access to that kind of money?

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. Yet, if loans are less expensive and easier to qualify, then the property becomes more liquid.

 Also, the absence of Credit Information Database [CID] that financial institutions provide information to and can get the history of all information from-as available in developed nations-ensured, Nigerian financial institutions settle for lending to the rich.

Primary Financial Institutions [PMIs] typically at the moment, offer equity loan rates of around 20%. In addition, the borrower will pay 2% management  fee charged quarterly, 20-30% home equity contribution, legal fee charged by the real estate attorney recommended by the bank and all title registration fees required by the State government.

It is alarming to note that a mortgage of 20% accessed on a N80m home, will require  borrowers  to pay the full amount of the property in interest alone in 4years, and the property still far from becoming their own.

Besides, a country that currently operates on the culture of ‘cash and carry’ in all her activities can only be dreaming of housing. ‘‘Until the nation sits up and rolls out a virile, sustainable, non-elitist mortgage system, the housing situation in Nigeria will remain comatose.’ says  Mr. Bode Adediji, President, Nigerian Institution of Estate Surveyors and Valuers (NIESV) in an interview published in ‘The Vanguard’.

The engine that drives the economy of most advanced countries is mortgage and housing. The current loan exposure of Primary Financial Institutions (PMIs) in Nigeria is about 1% and the total contribution of housing, property and construction to the GDP about 3%.

 According to the Managing Director, Federal Mortgage Bank of Nigeria (FMBN), Gimba Y’au Kumo, the inability of the CBN to pay its equity contribution into the National Housing Fund is responsible for the apex mortgage bank’s inability to either provide the housing needs of Nigerians or mortgage for people to build their own homes.

Is there a way out? 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 to middle income earners once such mortgage loans meet  prescribed underwriting standards. In the event of default, the government indemnifies the lenders to a prescribed level.

The current situation in Nigeria is similar to what was prevalent in United States of America until the Roosevelt Administration (1933-1945) established the Federal Housing Administration (FHA) to provide insurance against mortgage defaults.

Before the recession, the U.S housing finance system is used as the model for most emerging mortgage markets. Hence, government should start thinking of re-organizing the Nigerian Federal Housing Authority (FDA) into a government sponsored mortgage insurance institution that will provide this service.

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, such 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 issuances of bonds and other financial instruments to finance infrastructural projects, compared to the current method of funding through annual budgets which results in having several uncompleted projects when revenues fall short of expectation, as has been the experience in the nation’s history.

Indeed, the hike will certainly affect the availability of capital, the demand for properties and the accessibility of loans. Though some analyst believes the hike will not affect the market.

Finally, in order to find and adopt a realistic exchange rate for the naira, the CBN should as a matter of deliberate policy continue on a gradual systematic devaluation of the naira and pay its equity contribution into the National Housing Fund to enable FMBN to either provide the housing needs of Nigerians or mortgage for people to build their own homes.