Prices lock out many from home ownership

You
need a monthly income of at least Sh100,000 to qualify for an average mortgage
loan – this is the sad news facing prospective first-time home owners in the
country.

A
survey conducted by the Central Bank of Kenya and the World Bank in June 2010
focusing primarily on the residential mortgage market revealed that low incomes
are a major bottleneck locking out many Kenyans from homeownership as a large
portion of the population cannot service the average monthly mortgage
repayments estimated at Sh42,615.

Only
eight per cent of the urban population – representing about 1.4 million people
or 350,000 households – can qualify for mortgage loans. People in the rural
areas cannot afford mortgages due to meager incomes, far too low to make
economic sense for the fledgling Kenyan mortgage market. Even though the
average mortgage loan size has increased from Sh2.5 million in 2006 to Sh4
million in 2010, Kenya’s potential mortgage market is about Sh1,128 billion,
with only 15,049 outstanding mortgage loans.

The
income distribution shows that only one per cent of the population earns Sh2.6
million or more and only four per cent earns between Sh1.8 million to Sh2.6
million. Only this top-end market can afford to purchase in cash and do not
rely on financing.

“Below
that, the formal sector needs mortgage loans. Housing microfinance is very much
needed for long-term lending in the housing sector,” said Simon Walley, the
senior housing finance specialist at the World Bank, while presenting the
mortgage market survey on Thursday.

According
to the survey, the annual housing demand in 2010 was estimated at 210,000 units
against a current supply of about 50,000 units – resulting in a shortfall of
two million houses.

Typically,
for a property valued at Sh4 million, banks give a mortgage loan amounting to
Sh3.2 million (or 80 per cent of the property value), with a maturity period of
15 years at an average 14 per cent interest rate.

To
qualify for a mortgage loan for such a property, a typical borrower has to be
earning a minimum of Sh1.3 million annually (or about Sh108,350 monthly), with
savings of at least Sh1.2 million to cater for a 20 per cent deposit
(Sh800,000) and 10 per cent (Sh400,000) mortgage fees which include stamp duty,
legal fees, valuation, arrangement fees and mortgage protection policy premium.

The
high fees charged on mortgages only serve to lock out hopes of potential
homeowners in country where the bulk of housing funds come from household savings
and the housing finance market is yet to move downstream. “If we want to expand
this (mortgage) market, we have to minimize these fees and costs,” said Walley.

Late
last year, the Ministry of Housing said it was considering borrowing from the
Turkish model to prolong the mortgage repayment period and introduce
inter-generational mortgages but the survey says extending the maturity of
mortgage loans does not work with high rates – averaging 14 per cent. Analysts
and players in property market then said extending the maturity period would
not make sense with the high interest rates since this would negate the little
benefits brought about by the longer repayment period, as this would only mean
passing over debts to subsequent generations.