By Roland Igbinoba
Housing plays a special role in the social, political but more importantly economic dialogue in most societies. Housing has been known to be a major component of creating stable and healthy communities and it is often the largest single category of household expense. For housing to be successful, a country needs to have a stable macroeconomic environment. Moderate to high inflation rate and nominal interest rates as witnessed in Nigeria are typical features of volatile economies. These features have strong effects of reducing the affordability of mortgages. A volatile economy also affects the supply of funds and the types of mortgages offered by lenders. In such an environment, lenders are concerned about liquidity risk and reluctant to offer long term loans. The solution to this then becomes government’s strong institutional intervention in terms of favorable policy drafting and implementation. The coming on board of the Nigerian Mortgage Refinance Company (NMRC) is a commendable step towards scratching the surface of this challenge.
Another distinguishing characteristic of housing finance is the ability to mortgage the property to secure the loan. This means that the land laws and processes (title registration, foreclosure laws, etc.) have to be put in place to allow enforceability. An accurate and comprehensive land registration system is a necessary condition for effective property rights. This is largely absent in Nigeria. However, it is important to mention that a few states have begun to address this problem through the setting up of several land registries at the state level. It is pertinent that the states are encouraged to get these initiatives to a cruising altitude. At the Federal Mortgage Bank of Nigeria (FMBN), tireless efforts are being made to also contribute to solving this problem through the bank’s centralized repository land and assets registry system. At the Federal level, creating or sponsoring a Mortgage Electronic Registration System as is done in the United States and other emerging markets will also help to increase the ability to mortgage properties.
There are a whole lot of other risks and challenges associated with housing provision for the low and medium income earners. They include, Credit Risk; Liquidity risk; and Cash flow risk. Information on borrower credit history is an important component to mortgage underwriting and credit risk management. Mortgage lenders rely on credit information compiled by efficient credit bureaus to ascertain a borrower’s track record of handling credit. Liquidity risk is the risk that money may be needed before it is due. A lender that is faced with short term and unstable sources of funds may not be able to package mortgages due to the risk that it cannot meet its cash flow needs. Cash flow risk is related to uncertainty with respect to inflation, real interest rates and exchange rates. It encompasses what is usually called interest rate risk and prepayment risk (Lea 2005). Cash flow risks are characteristic of macroeconomic environment and types of mortgage instruments available.
We have examples of countries like Mexico, Brazil, Egypt, Morocco, Singapore, Malaysia, India and Thailand that have become first class models of emerging economies that have developed sound housing finance systems that overcame all these challenges and mitigated these risks. These countries were worse off than Nigeria at some point as it concerns housing its citizenry. But high level of professionalism and strong political will witnessed in their housing sector has made them succeed.
In all countries of the world, formal sector financial intermediation can only exists with support of some government intervention. Government may intervene through enhancing a legal system of enforcing private businesses or may even operate or be a significant player in the primary housing finance system. Today, countries enjoying very high level of housing finance systems are the ones that have created sound enabling environment for the private sector (except Thailand whose Government Housing Bank is a world class model of direct government involvement in lending to the individual through the primary lending model).
What has happened in many emerging economies all over the world is that the government of the day has hired housing experts and policy analysts (strictly on professional basis, devoid of political gimmicks) to devise ways to overcome housing challenges in their countries knowing how significant housing is to a nation’s GDP. Recent examples include India, Mexico, Jamaica, Malaysia, Brazil and Thailand. These countries have deployed strategies and models ranging from Home Loans Guarantee, Mortgage Insurance, Liquidity Facilities, Pass-Through Mortgage Backed Securities, Tax Credit for Low Income Housing, Seed Capital, Hedging of foreign long term debt for private market operators, etc. While not recommending a direct transfer of these models, a critical look at them in relation to our internal environment will help a great deal. More importantly let our policy analysts and leadership get to work rather than play lip service.
In Nigeria today, what we need in policy making are housing specialist who have the requisite knowledge and competence and not just political figures who do not understand by any means the role of housing in an economy. With a population of over 170 million people, a good, sound and smart team of policy makers with leadership (not based on geopolitical zones) will boost the housing and housing finance market. The forward and backward linkages of a viable housing industry are obvious. Let me not even go into that area. But what I must mention is that with such a population, and still growing, Nigeria faces significant challenges in both its present and future housing stock requirements.
Frankly speaking, Nigeria’s housing problem is derived from a historical lack of focus on housing development. Over the years, the country has not been able to develop a viable and sustained housing finance system either because of lack of expertise, up to date and knowledgeable industry leaders especially in the policy making arms, lack of funding for relevant institutional agencies / department, political and selfish gains. Twice in the housing development history of Nigeria has the Ministry of Housing been created and scrapped. Government has oscillated between direct construction of houses and direct lending to the individuals. In all the scenarios, what is evident is that we have not hired professional policy makers and implementers who have deep interest in housing and in providing houses to over 14 million households in demand of housing. We have always taken our Housing Ministry as one of the other numerous government functions that should be politicized or zoned or used to satisfy political thirst and loyalty. Thus what we have always come up with is a situation where the government at the center has not prioritized the housing ministry. Again, the importance of housing to our overall economy cannot be overemphasized.
These events all together have created neglect for the housing needs of the citizenry, which when combined with a series of economic, financial, weak macroeconomic environment and poor title registration system; make it extremely difficult for the housing sector to blossom in the country. It is very important to mention here that the present administration is doing everything humanly possible to fit square pegs in square holes. In view of this, I will suggest further that housing and housing finance should be made a top national priority with a clear and professional leadership with unified direction of all government agencies related to the provision of housing for Nigerians.
Housing should be treated with a holistic approach that encompasses all elements and processes required in housing production. This will mean that housing should be placed in cadres of Ministry of Finance, Central Bank of Nigeria, etc where these institutions are run by experts in their field. The Minister of Lands, Housing & Urban Development must be an individual with passion and interest in the housing sector. He/She must be a professional who is interested in making significant positive strides in the sector. Furthermore he/she must be an individual who has undergone requisite capacity building and acquired relevant knowledge concerning this industry not just locally, but also globally. That is the kind of person we need in the housing industry, and it should not matter from which geopolitical zones the leadership emanates from. The first criteria should be the deliverables as it concerns the sector.
For specificity, the most qualified housing minister irrespective of which geopolitical zones he/she is from should be a professional from a related discipline with a high ethical personality to (a) pursue the strengthening of institutional framework and effective coordination of the sector (b) vigorously undertake land reforms (with strong will), urban development, property rights and infrastructural investment that affects housing finance (c) should possess requisite knowledge to increase the efficiency and quality of housing subsidy programs that are effectively harmonized with other factors of housing production (d) roll out policies to expand and diversify market-rate housing credit (e) push for adequate laws, titling systems and strong judicial process that allows household to establish ownership of property. This will enhance enforceability and will make mortgage business attractive to the lender (f) promulgate policies that will make for competitive and efficient primary mortgage markets, backed up with developed risk-sharing mechanisms like Mortgage Insurance, Liquidity Facilities, etc. This will definitely expand the supply of credit to low and moderate income households (g) immediately provide an infrastructure for assessing collateral risk and credit risk. (h) Focus on the development of mortgage capital markets. Sustained ability to access long term funding through issuance of mortgage securities that enhances supply of funds.
The above is not a job for a professional politician who has no idea in this field or any passion to provide houses to millions of Nigerians who pay over 40% – 50% of their earnings for rent (or the lower end Nigerian who do not even have sustainable income), but a job for a professional housing/housing finance expert who has zeal to excel in this uncontestable blue ocean market space that will boost our country’s GDP.
Whether that individual is from the North, South, East or West or from the innermost remote part of Nigeria that is not zoned for any government appointments does not matter. What matters is to have an expert to man the Ministry of Lands, Housing & Urban Development, and the provision of housing to our citizenry. It is no longer news that access to housing strongly supports economic growth and poverty reduction. This is basically because; amongst other things housing construction constitutes an engine for both employment and industrial growth.
If we limit our focus to deliverables instead of geopolitical zones, I am certain that we will find some revolutionists who can lead the sector in promulgating policies that will bring a turnaround in our housing/housing finance sector. This will ultimately fix our housing problems.
Igbinoba, Founder of PISON HOUSING COMPANY, a real estate and housing finance advisory firm based in Lagos is an alumnus of the Harvard University Graduate School of Design with concentration in Real Estate Development & Finance, and the Managing Director/CEO of FHA MORTGAGE BANK LIMITED. He is currently also undertaking a doctorate of business administration in Economics & Finance (with concentration in housing finance) at the prestigious Cranfield University in the UK.