Another shot at solving the housing deficit in Nigeria
The housing deficit in Nigeria has been a recurring conversation for the past few years. According to a recent report by PWC, there exists over 17million housing deficits, and requires 700k new houses yearly, compared to less than 100k houses constructed yearly. So, why is Nigeria not able to build more than currently being built?
Governments over the past few years have been attempting to crack the deficit question, but with little success, if any at all. The housing deficit like many deficits we have in Nigeria is a question of economics(efficient allocation of resources) rather than technical(how-to). The housing deficit question has been misdiagnosed as a cost problem, rather than an affordability problem. There are deep beliefs that houses in Nigeria are expensive, thus the plans and attempts to develop Low-Cost Housing. The current Minister of Works and Housing once said, there is no low-cost building material, so, it is difficult to get low-cost housing, however, low cost might be achievable through design and scale. Paraphrased. An important point to also state is that we cannot provide house ownership to the poor, but we need to reduce the number of the poor.
The government has been laying overly much effort on the cost or price of the building of houses and thus trying to force Economics. The Nigerian Government is an expert at this. It is basic Economics that prices are determined at the intersection of Demand and Supply. Prices are not going to be efficient when we have low demand(effective) for housing as well as a low supply of housing. The question then is what are the factors determining the low demand for housing, and the low supply of housing. Which and how should we address it?
In order to increase the supply of housing, we need to increase demand. The biggest factor in increasing the demand for housing is the availability of funds by the buyer. The average length of mortgage globally is 25years (Boonbrokers), however, in Nigeria, many people have to save up to buy their houses full cash down, or with the help of short term lenders at a maximum of 2years. These practices significantly make it difficult to have an increased number of people demand houses.
Nigeria has a relatively cheap housing market (not the extreme examples in very high brow Lagos), however, the problem is often the demand for a cash payment for properties, and sometimes, the exorbitant interest rates they come with. A 3-bedroom flat in a Multi-Dwelling Units (MDUs) in the commercial capital of Nigeria which is Lagos goes for N25m to N30m(less than $80k(N380/USD)). This would be a bargain in many economic capitals of the world. A single built 3 to 4 bedroom bungalow in other state capitals would go for less than half the rate in Lagos (with the obvious exception of Port Harcourt, Abuja, and maybe Owerri).
This clearly shows that the problem of the housing deficit is more around affordability rather than cost. The Government has the Federal Mortgage Bank of Nigeria (FMBN) through the National Housing Fund to help with this, but after years of underperformance, it is obvious that it doesn’t work. 7 years ago, the Nigeria Mortgage Refinance Company(NMRC) was set up to equally address the deficit, and to date, it has been difficult to gauge their success. The truth is that we need more cash flow into housing development in Nigeria. A lot of the sleeping and dead capital in Nigeria should be woken, and invested in housing. These investments would be secure as the houses would be the collateral for such investments. The Government has rightly crashed the rates on Government Securities, thus should encourage investment in other instruments and asset classes.
The Pension Fund is an interesting source of funds for me. The pension funds are a long term fund, and as such, investment in real estate should be a logical choice. Over the years, we have reduced the options for the Pension Funds Administrators(PFAs) on where and how they can make investments. Rightly, many of them put most of their funds in Government securities, and they were yielding double-digit returns. The recent Government policy resulting in the reduction of returns means that the PFAs are on the lookout for other options. As of today, the Pension Assets is over 10.3trillion Naira, and thus, it is time that PFAs look at real estate. Imagine 10% (N1 trillion)of these assets is available for real estate through mortgages. In the past few months, returns from Money Market Mutual Funds have been hovering between 2% and 4% per annum (I hope it remains), and this makes the 6% the government encourages for mortgages attractive.
If more mortgage facilities with an average of 20–25 years at a rate of 6% per annum become available, the demand for housing would increase significantly. The increase in demand would lead to increased funds in the real estate sector, and as such developers would start to build more housings. The Mortgage companies would grow bigger possibly as a result of the acquisition of stakes by big PFAs, and the Mortgage companies are able to employ more professionals. The Insurance industry gains too as all mortgages and houses under a mortgage must be insured as well. The construction of more housing would lead significantly to the increase in the construction sector of the economy thereby improving the GDP. The financial services sector would improve as Mortgage services is a financial service. Manufacturing and Transport sector of the economy would not be left out the economic growth that would be experienced.
So, what does this cost Government? Almost nothing, except for a review of their policy and also, accepting the obvious fact that they alone cannot solve the many socio-economic problems in Nigeria without involving the Nigerian people and their cash. In the end, everyone wins, and the economy becomes deeper, grows, and more robust.
Olamide Eyinla shares his thoughts from Lagos
Premium Times; YNaija; BusinessDay NG; Government of Nigeria; Office of the Vice President of Nigeria; Stanbic IBTC; Joe Abah