Why Nigeria has one of world’s lowest mortgage to GDP rate

With the highest population in Africa, Nigeria has more than 17 million housing units deficit. According to the Association of Housing Corporation of Nigeria (AHCN), an umbrella organization for all federal and state housing agencies, more than 90 percent of new homes use funds from personal savings for incremental construction.

A key culprit for this situation is mortgage rates. Typical mortgage interest rates in Nigeria range between 7-10 percent for Federal Mortgage Bank of Nigeria (FMBN) and between 15-25 percent for commercial mortgage institutions, making it one of the highest in the world. The rate could also go higher without sufficient capacity to derisk investment.

For instance, a mortgage of N25million at 15 percent per annum interest rate means repayment of N37.9 million in interest only over the 15 year period, which is even more than the principal itself. The trick here is that at 15 percent interest rate, it takes a lender approximately 7 years to recover the N25million it lent you. That is about 6 years if the interest rate is 20 percent.

In advanced economies, the mortgage industry makes significant contribution to economic development with single digit interest rates. Nigeria’s roaring inflation rate and the attendant high mortgage rate dampen housing demand and blunt developers’ investment appetite.

This is why Nigeria has one of the world’s lowest mortgage to Gross Domestic Product (GDP) rate of about 0.6 percent, which lags behind Ghana’s 2 percent, South Africa’s 30 percent and crawls after the U.S and UK rates of 60 percent and 70 percent respectively.

In the last 41 years of its existence, FMBN said it has so far disbursed N193.4 billion to 18,935 Nigerian workers.

Property analysts polled in a BusinessDay survey link the poor performance of Nigeria’s mortgage industry to legal, economic and socio-cultural factors coupled with lack of advocacy, as studies have shown that only one out of may be 15 adults in the country understand what mortgage means.

Other factors that have dogged the housing sector in the country can be linked to high cost of construction, a chaotic exchange rate system which sends the cost of building materials through the roof.

This therefore means that long term and patient capital is priority for driving the housing sector that has contracted for 11 consecutive quarters till Q3 2018.

The recent figures compiled from National Bureau of Statistics (NBS) shows that Nigeria’s property sector was among the least attractive sectors as it was only able to attract N710.2 billion in the third quarter of 2018 as against the N744.56 billion and N784.2 billion it got in Q2 and Q1 in 2018 respectively.

Way forward

Nigeria is yet to realize its real estate sector’s potential, considering it was only able to contribute 6.50 percent to the country’s GDP in Q3 2018 as against its 6.83 percent it contributed in the second quarter of last year, and the 5.63 percent contribution it reported in the preceding quarter.

Whereas in South Africa, the region’s most industrialised and second largest economy after Nigeria, its real estate sector contributes about 30 percent to GDP, and in the UK, the property industry contributes about 70 percent.

Solving the sector challenges as compiled from industry experts will entail collaboration between the private and public sector, with the government creating an enabling environment in terms of policies, legal, economic and investment of long term capital in the industry.

Meanwhile, in solving the data and information challenge which experts say could attract more foreign investors into the sector, the Real Estate Developers’ Association of Nigeria (REDAN) in collaboration with the Central Bank of Nigeria, the Federal Ministry of Power, Works and Housing, and other stakeholders established the National Real Estate Data Collation and Management Programme (NRE-DCMP) in February 2018, to make available data about the sector.

For example, the often quoted 17 million housing deficit has remained unchanged for over a decade despite the fact that the average population growth rate of the country stands at about 3 percent per annum. The place to start, for Nigeria, will be to first get its data right.

Endurance Okafor