Why Nigerians pay more for mortgage than African peers
Whereas housing anywhere in the world is a basic necessity, which in the order of human needs, ranks third after food and clothing. But in Nigeria, it is a luxury accessible by only the rich who constitute less than 10 percent of the country’s over 200 million population.
Access to affordable housing in Nigeria is crippled by among other factors the lack of a non-functioning mortgage system, high cost of property development buoyed by the country’s 42-year-old Land Use Act.
A poll of mortgage rates in 40 African countries shows that Nigeria has one of the highest interest paid for housing loans at 25 percent per annum, and is only less than Guinea (26%) and Zambia (32%).
Nigeria’s ballooning inflation rate, which quickened to a 48-month high in February, is the key reason for the high mortgage rate in Africa’s most populous nation, analysts say.
Countries like Morocco, Senegal and Egypt ride on record-low inflation rate to post an average mortgage rate of about 5 percent per annum, five times less than Nigeria’s 25 percent.
The gradual upward movement of prices due to inflation is a reflection of the overall economy and a critical factor for mortgage lenders.
When the price level rises, each unit of the naira buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money. Mortgage lenders generally have to maintain interest rates at a level that is at least sufficient to overcome the erosion of purchasing power through inflation to ensure that their interest returns represent a real net profit.
For example, if mortgage rates are at 10 percent but the level of annual inflation is at 8 percent, the real return on a loan in terms of the purchasing power of the naira the lender gets back is only 2 percent. Therefore, mortgage lenders carefully monitor the rate of inflation and adjust rates accordingly.
Nigeria’s inflation hit a four-year peak in February as food prices jumped more than 20 percent, heaping financial pressure on households already faced with a shrinking labour market and a stagnant economy at a time of mounting insecurity.
In double-digits since 2016, Nigeria’s inflation reached 17.33 percent, driven by the impact of a coronavirus epidemic that has also induced a drop in the price of oil, Nigeria’s main export, and weakened the naira currency.
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If Nigeria wants to bridge its housing deficit and enable mortgage access to its country’s 46 million people who are employed yet cannot afford to buy a house, it would have to first achieve a single-digit inflation rate, Victor Ndukauba, deputy managing director, Afrinvest, says.
“I think to address Nigeria’s housing deficit and solve the challenges in the property industry it comes down to what I like to call the primary objective of the central bank, which is price stability,” Ndukauba told BusinessDay with the assurance that “If we have single-digit inflation rate we’ll bridge the housing deficit.”
Despite various policies and strategies adopted by the Nigerian government to combat Nigeria’s housing crisis, the country still has one of the lowest homeownership rates in Africa and requires over N300 trillion to bridge its housing deficits of over 20 million units.
“To address the housing challenges, you need to have a mortgage industry and it has to be at an affordable interest rate,” Funke Okubadejo, director, real estate, Actis, notes.
A typical mortgage rate in Nigeria ranges between 7 and 10 percent for Federal Mortgage Bank of Nigeria (FMBN) and between 15 and 25 percent for commercial mortgage institutions, making it one of the highest in the world.
Aside from the interest payable, the potential buyer would also need a certain percentage of the total amount required for the purchase; this amount is known as equity and ranges between 30 and 70 percent of the total cost of the home.
Morocco’s less than 1 percent inflation rate allows mortgagors to give 4 percent interest on housing loans.
In Nigeria, if a mortgagee takes a mortgage loan of N25 million at 15 percent per annum, he or she would be paying N37.9million in interest over the 15year period, N12.9 million higher than the principal. The trick here is that at a 15 percent interest rate, it takes a lender approximately 7years to recover the N25million loan. That is about 6 years if the interest rate is 20percent.
With that sort of interest rate, it seems arguably difficult for many salary earners in Nigeria to acquire a house through the mortgage system.
Data from Graeme Blaque Group, a Lagos-based advisory firm, put employed Nigerians who can buy affordable housing at only 7.19 percent, meaning as many as 41 million people who earn less than N3 million per annum cannot afford to acquire their own home except, of course, they win a lottery.
Ofure Imafidon, an Edo-based single mother of three, fears she might lose her mortgage that she has serviced for almost five years due to the high servicing cost that is now hard to maintain following a slow down in her business.
“The biggest problem in the sector is the high cost of the very limited mortgage that is available. If they can develop a policy to ease housing finance, it will be impactful,” Wole Olabanji, the CEO of CoBuildIT, a Lagos-based real estate firm, states.
Despite its large population size and self-acclaimed giant of Africa, Nigeria is crawling behind its peers in terms of homeownership level. While the homeownership level is 84 percent in Indonesia and 75 percent in Kenya, Nigeria with a lot more population, has 62 percent.
No wonder Nigeria’s mortgage-to-GDP ratio is estimated at 0.6 percent, as opposed to 2 percent in Ghana, 31 percent in South Africa, 32 percent in Malaysia, 77 percent in the United States and about 80 percent in the United Kingdom.
Going forward, Ndukauba recommends a pension fund as a sector where Nigerian real estate developers can access long-term capital to provide the affordable properties needed by a lot of Nigerians.
“Maybe there can be a way we can create the right incentive so that the pension fund can start looking into the real estate industry,” he says.
Real estate developers have continually been in search of viable alternatives sources to funding real estate projects in a country where the cost of funds has made bank credit inaccessible, unaffordable and unattractive to the sector.
The major issues that continue to affect housing delivery in Nigeria, which also account for the wide demand-supply gap, include constraints related to the high cost of securing and registering secure land title, according to Nasir el-Rufai, Kaduna State governor.
“The cost of building a house is the same, whether you are building in Victoria Island or Ikorodu, but it is the land value that drives the cost of properties high,” Adekunle Abdul, Managing Director, Metro & Castles Homes, a real estate development company, states.
Enacted in 1978 during Nigeria’s military regime, the Land Use Act, which has not been reviewed in the last 42 years, was signed to curb land speculation but is now a key driver for the astronomical rise in land cost.