BY KWEKU DARKO ANKRAH
Housing does not only provide shelter. It has significant impact on the lives of the dwellers in terms of the potential for income generation, increased security, health, self-confidence and dignity. Housing finance boosts equitable economic growth and reduces poverty by helping households acquire assets. Availability of adequate shelter improves living conditions, empowers the middle- and lower-income population, and strengthens communities. Despite its considerable socioeconomic potential, housing finance remains underdeveloped in Ghana.
The typical household, including the Ghanaian one, is faced with three choices when considering the acquisition of shelter. Depending on income levels and access to land, in the case of Africans, households can either rent single rooms or apartments, build or purchase an existing house outright through savings or through a mortgage. However, at the very early stages of an individual’s working life, many people rent accommodation. As incomes increase above the level of basic consumption needs, investing in housing becomes a prime objective for many. Nonetheless, since the acquisition of housing involves huge capital outlays and most Ghanaians are in the medium-to-low income bracket, very few can afford decent shelter.
Despite these hurdles, home ownership remains the preference of the majority of the population. The attractions of security, stability, investment returns potential and a sense of pride outweigh the fear of insecurity or bankruptcy if it becomes difficult to pay the mortgage or the concerns about the responsibility for repairs and maintenance.
That being said, the Ghana Real Estate Developers Association (GREDA) says only five to eight per cent of Ghanaians can afford a house from their own resources, that is, without accessing bank or mortgage loans, and most of these are resident outside the country. About 60 per cent of people in Ghana need some form of financial assistance, while up to 35 per cent will not be capable of owning or building a house in their lifetime. This is because the majority of people do not have access to long-term loans or mortgage products. This situation has made most Ghanaians prefer incremental housing (self-help building), which accounts for nearly 80 to 90 per cent of home ownership. Incremental housing is the practice where prospective house owners become self-developers, relying on their meagre income to build gradually over a span of five to 15 years. They partly use their sweat equity and personal savings accumulated over long periods to accomplish their home ownership goal.
Resort to a mortgage The mortgage market offers outstanding benefits to the borrower and the wider economy as it enables homebuyers to spread the cost of purchasing a house over a reasonably long period. It aids the buyers to meet the huge housing cost obligations with their existing incomes. Mr. Nicholas Addai Boamah, a lecturer at the Department of Real Estate and Land Management (DRELM), Faculty of Planning and Land Management, University for Development Studies, WA Campus, Tamale says the mortgage market ensures that many individuals and families are housed adequately without constraining their abilities to meet other basic necessities of life, such as food and clothing. It also stimulates housing demand and, thus, engenders economic growth through job creation. “A well-functioning mortgage market improves housing affordability, enables more people to be adequately housed and, hence, helps improve public health, labour productivity and social stability. With this in mind, investors will not only get good returns on their money but will also help to eradicate the housing problem currently confronting the country,” Mr. Addai Boamah asserted.
Access – and lack of it In the more advanced countries, the majority of the population (between 70 to 90 per cent) purchase houses through mortgages. The mortgage industry has proved to be the most capable and superior financier of the housing needs of the population. In Ghana, a robust mortgage industry could lead to the resolution of the 2.5 million unit housing deficit. The Ghanaian mortgage market is however still developing. Research shows that between 12 and 15 per cent of people, comprising mainly of verifiable salaried workers such as bankers and top civil servants have access to bank loans to build or buy. Conversely, this means a large number of Ghanaians are unable to access loans for home purchasing or building since the mortgage market is still in the rudimentary stage. Very few companies/banks advance loans for home purchase. Even in such cases where mortgage products are extended, about 60 per cent of the market participants are resident non-Ghanaians or non-resident Ghanaians.
For example, in July 2014 Stanbic Bank launched a Diaspora mortgage product, the Stanbic Diaspora Mortgage, specially designed for Ghanaians living in London, England, and the rest of Britain. The product offers lower interest rates, greater flexibility, and a safer and more secure investment opportunity as well as a more cost-effective means of keeping up with mortgage repayments. According to Ms. Anna Owusu-Sekyere, Home Loans Officer at Stanbic, the product could be used for home completion, building of a new home, equity release and for buy-to-let purposes. “The product has no cap on how much an individual can borrow provided their income can support the repayment schedule,” she explained.
Major players Industry experts are quite optimistic but also of the opinion that Ghana has some ways to go to create the necessary systems to support mortgage lending. Currently, there are five major players in the mortgage market: HFC Bank, Ghana Home Loans (GHL), Fidelity Bank, CalBank (CalMortgage) and Stanbic Bank. These banks offer a variety of mortgage products similar to those provided by Stanbic Bank.
Delivering a presentation themed, “The Mortgage Market In Ghana: The Past, Current and Emerging,” Dr. Kenneth A. Donkor-Hyiaman, a real estate and planning expert at the University of Cambridge’s Department of Land Economy, explained the mortgage market shares of the major participants. Dr. Donkor-Hyiaman said that as at 2008, the shares stood at 30.03 per cent (HFC Bank), 27.02 per cent (Ghana Home Loans), 24.96 per cent (Barclays Banks) and 11.81 per cent (Fidelity Bank). “With an average maximum term of 20 years, current mortgage rates of Ghana Cedi-denominated and US dollar-denominated mortgages have averaged astronomically at 30% and 13% (fixed) respectively. The mortgage portfolios of the two major players, Ghana Home Loans and HFC Bank stood US$65 million and US$7.57 million in 2011 respectively, contributing to a mortgage-to-GDP ratio of about 0.5%. This is a significant underperformance compared with mortgage-to-GDP ratios of 85% and 77% in the UK and USA respectively,” he disclosed.
Among the major players in the mortgage industry, the only non-deposit taking financial institution which provides funds for home purchases is GHL. GHL has played an important role in the provision of housing, contributing immensely towards reducing the housing deficit. Since commencing operations, GHL has disbursed more than US$115 million to 1,600 households, with an average loan size of US$69,000 more than 50 times the Ghanaian per capita income. It has a strong asset quality, with a level of non-performing loans of less than three per cent.
The pioneering mortgage-based securities company is currently owned by a private equity company, Dubai’s Abraaj Group. The Group bought a majority stake in October 2014. GHL was founded by three Ghanaians who secured funding for their operations from Standard Bank of South Africa, the Dutch development bank, FMO and the United States development finance institution, OPIC. It also received funds from Proparco, the International Finance Corporation (IFC), Shelter Afrique and the German development bank, DEG.
GHL currently offers fixed rate mortgages denominated in US dollars up to a maximum amount of US$100,000, with a maximum tenure of 15 years. In 2007, loans to housing and construction had risen to about 11 per cent. This is indicative of the fact that there are more opportunities for investors to enter the mortgage market in Ghana and provide funding for home building and purchases.
Analysts assert that the steady growth in the housing sector has put pressure on mortgage companies, which have struggled to raise funding to meet demand. Ghana’s first mortgage-backed security was approved by the Securities and Exchange Commission (SEC) in 2013. Ghana Home Loans developed the corporate bond that targets local pension funds, insurance companies and the state retirement fund manager, Social Security and National Insurance Trust (SSNIT). According to the Chief Operating Officer of Ghana Home Loans, Mr. Kojo Addo-Kufuor, the company charges a base lending rate of 12.5 per cent for dollar-denominated mortgages, which it gives to people who earn salaries in the US currency. “Cedi loans are given at the 91- or 182-day Treasury-bill yields plus a margin. Yields on 182-day notes were 21.3 percent on April 11, 2014”, Mr. Addo-Kufuor told Bloomberg this past spring.
Risk of default Despite the effort being played by a few mortgage companies to ease Ghana’s housing problems, the sector itself is also grappling with macroeconomic volatilities, which distort price signals, heighten the perceived risk of default and credit loss, and increase risk premiums in the property market. “This is evident by the wide disparity between the Bank of Ghana policy rate (16%) and the average mortgage interest rate (30%) as at end-2013. This is interlinked with the weak legal and regulatory environment, low income levels, the lack of refinancing opportunities and reliable credit rating activities,” says a real estate developer. Hedging against these risks, the mortgage market is de facto dollarized, altogether serving as a further disincentive to long-term investment.
Industry players opine that this situation makes mortgage lending unattractive and expensive. As a result, only the few rich benefit. The mortgage market typically experiences long-term capital scarcity, leading most banks to resort to using short-term cheap deposits to fund long-term projects introducing and deepening the maturity mismatch in the overall banking sector.
There is also the issue of mortgage qualification, which constrains the eligibility pool. Borrower eligibility has to do with the payment-to-income ratio, loan-to-value ratio, down payment value and monthly repayment amount. These variables underlining mortgage demand, more often than not, lead to blacklisting quite a number of potential borrowers from the mortgage market. Owing to the risk of default, lenders offering conventional home mortgages usually require borrowers to meet some standard down payment and payment-to-income requirements. It is normally difficult for households that do not meet these criteria to obtain mortgage loans, and even when available, they generally carry prohibitive interest rates to compensate for this (perceived) risk. The qualification constraints affects both mortgage demand and the underlying demand for housing.
The newly restructured banking system in Ghana tries to insulate banks from significant risk through an arrangement whereby the primary institution would bear only 10 per cent default risk, with government bearing 90 per cent in the case of mortgage banking. The commercial bank remains the main portfolio lender, with the general objective as a lender to run a low-cost and low-risk business. Since their major preoccupation is to survive, make profit, and thrive, lending requirements are watertight and quite inhibiting for ordinary Ghanaians. Nonetheless, the deposit required of borrowers (about 20 to 30 per cent) remains a major problem for many people largely due to the lack of savings instruments. In addition, borrowers are expected to maintain a certain payment-to-income ratio through the line of the loan. Usually, the monthly payment must not exceed 40 per cent of one’s income. This again is problematic in developing countries where income levels are generally low or seasonal. This also creates a challenge for potential developers since their finished products may not be bought due to the poor mortgage system and low purchasing power.
Additionally, most mortgage transactions require clients to provide documentation of regular incomes but most Ghanaians operate in the informal sector and lack evidence of regular income streams. “Mortgages do not fit well with the financial profile of most people in Ghana. As a result, the incremental building process is currently being used largely by the citizens. This is because mortgage loans are quite discriminatory and the people in the lower income brackets are largely blacklisted from accessing it,” an official at the Ministry of Works and Housing laments.
The other options Due to the inequitable accessibility of the public to mortgage products, the cardinal role of the mortgage industry to help reduce the housing deficit is defeated. Some industry players argue that incremental housing is the only building strategy that works for low- and moderate-income households. It is therefore not shocking that private real estate developers provide only 10 per cent of the new housing supply while homeowners deliver 90 per cent directly to market.
An alternative touted by some as the next game-changer for funding home purchases or construction is Housing Microfinance (HMF). HMF is already exhibiting its ability to adjust to the unique financial realities of its borrowers and client cash flows, which makes it a good fit for many Africans’ house financing needs whether proceeds are used for incremental house construction, renovation, land purchase, or site improvement.
Another newcomer entered the scene in 2013. NewLine Capital Partners, a New York City based private equity firm launched the New Urban Finance Fund (NUF) for Africa. The US$100 million housing fund provides direct investments into the housing sector through local banks and microfinance institutions across Africa and the Middle East. The fund will initiate investments first in Kenya, Ghana, Tanzania and Uganda. The investments will go towards housing programmes for affordable real estate development. A small portion of the fund will be invested in an IFC programme on credit enhancement for housing microfinance.
As housing microfinance is relatively young, there is the need for capacity building. It is expected that the multinational financial institutions (MFIs) and other organisations will help in training the the necessary human capital. To this end, Habitat for Humanity has launched the Centre for Innovation in Shelter and Finance, an initiative through which the global housing non-governmental organisation is engaging financial institutions and other private sector actors to develop and scale up accessibility of microfinance to the housing sector.