alexa High mortgage rates restrict low-income housing - Daily Nation

High mortgage rates restrict low-income housing

Wednesday November 20 2013

A graphic showing housing rates are going up.

A graphic showing housing rates are going up. Photo/FILE

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While the high-end real estate market continues to grow astronomically, the lower and middle-income segment is facing a housing crisis.

In this respect, Kenya would do well to borrow a leaf from Egypt, which provided soft loans for youth to buy houses.

The Sh43.3 billion ($500 million) Mubarak Youth Housing Project comprises 70,000 units distributed across 15 Egyptian cities, with a design that allows for ample green areas, parking spaces, and social services.

Each structure has a maximum density of 120 persons per acre and a height of five floors.

The government provided soft loans of 15,000 Egyptian pounds ($2,730 or about Sh235,000) payable over 40 years at five per cent interest rate, to Egyptian youths whose low income would not allow them to own a house.

Legal Notice No. 115 of  September  2, 2008, defines a “low-income housing project” as a project of not less than 20 housing units intended for low-income earners, whom it describes as people whose monthly gross earnings are Sh35,000 or less.


The notice defines “low-income house” as a house built at a cost of not more than Sh1.6 million, with a plinth area of not less than 30 square metres.

It further states that developers of low-income housing projects qualify for value-added tax (VAT) remission and capital allowance of five per cent on approved low income rental housing.

The rate increases to 25 per cent if the developer provides roads, power, water, sewerage, and other social infrastructure.

Meanwhile, capital allowance for industrial and hotel buildings stands at 10 per cent, and for educational buildings and hostels at 50 per cent.

After completing the Mubarak Youth Housing project in December 2000 — it began in 1996 — Egypt decided to replicate it on a larger scale.

“These measures have helped reduce annual demand for affordable housing in Egypt to 40,000 units per year, compared with 150,000 units in Kenya, which has only half of Egypt’s population,” says Mr Daniel Ojijo, a property expert.

According to Mr Ojijo, the Kenya Government’s participation in the property sector has been slow or improperly structured in helping bridge the gap between supply and demand.

“The National Housing Corporation’s role in providin gaffordable housing should be more proactive as millions of low-income earners remain without houses,” he says.

Mr Ojijo adds that affordable housing is a major challenge in the country.

“Devolving the responsibility of housing to counties is also having a huge impact on the supply of housing as it moves to address the current problems brought about by a centralised housing delivery model,” he said.

This model is monopolised by the National Housing Corporation, which mainly focuses on urban areas, especially Nairobi.

Localising housing solutions seems more likely to succeed in helping narrow the gap between supply and demand in the counties.


Mortgage rates remain high, averaging 16.96 per cent, which continues to slow the uptake of new mortgages.

World Bank statistics indicate that less than one in every Kenyan living in urban areas can afford a mortgage, while rural incomes are too low to even consider the option.

“Kenya’s mortgage market is estimated at 1.1 billion, and is the third largest in sub-Saharan Africa after South Africa and Namibia,”  says Ojijo.

“I believe the attention the industry should now be giving to options to increase the accessibility and eligibility for mortgages is genuinely urgent, and indeed, overdue,” said Mrs Caroline Kariuki, managing director of The Mortgage Company,  during the unveiling of the company’s third quarter mortgage report in October.

Mrs Kariuki said it was a matter of national importance since the average mortgage rate from mainstream commercial banks was not much lower than it was three months earlier, despite downward adjustments by seven banks during the quarter.

Four banks have increased their rates, with four more still offering rates of 18 per cent, against a Central Bank of Kenya rate of  nine per cent.

Kenya has only 20,000 mortgages in the market, against a population of approximately 3.9 per cent of country’s population of 40 million, deemed to be in the middle-income bracket.

This represents just 0.5 per cent of the potential market.


This is low compared with other countries.

The United Kingdom, for instance, has 9.2 million mortgages, representing 37.3 per cent of households, while the United States has 44.5 million mortgages, representing 59.3 per cent of households.

South Africa has a representation of 56 per cent. This narrows the base of mortgaged home owners — which as long as three years ago drew the attention of institutions such as the World Bank — as an obstacle to Kenya’s development as a nation and has contributed to a situation where a fifth of urban residents are tenants rather than homeowners.

However, even as efforts continue to develop products that are attainable, eligibility conditions remain a stumbling block.

At the moment, the mainstream market is structured almost exclusively for those in formal employment.

Over the past 10 years, the number of the employed has increased from 1.6 to 2.2 million people, while the number of self-employed has increased from 800,000 people to 1.2 million.

“Despite this, when a self-employed person walks into a financier’s office, they are sure about one thing: Getting financing will be very difficult.

Not until mortgage structure financing is made suitable and accessible to those who are self-employed will urban Kenyans truly have a widespread opportunity to become homeowners,” says Mrs Kariuki.

Consequently, real estate players are keen on the pledge by the government to lower mortgage rates.

“Low rates will in turn make mortgages affordable to many, and, thereby, increase home ownership,” says Mr Ojijo.

The government can come up with an alternative mortgage plan for low-income groups that are still unable to buy homes, he suggests, adding that it should also speed up the process of land registration at the Ministry of Lands.

In a speech read during the official opening of the 18th edition of the Blue Triangle Kenya Homes Expo on November 14, Lands Cabinet secretary Charity Ngilu said a draft Housing Bill was underway to establish a national housing fund to, among other functions, facilitate access to housing by low-income earners and economically vulnerable groups.

“Housing finance institutions should consider coming up with affordable financing models, which may include multi-generational financing mechanisms to enhance access to housing,” she said.

The government is also committed to confronting the slum challenge through the twin interventions of improvement and prevention co-ordinated under the Kenya Slum Upgrading Programme (KENSUP) and the Kenya Informal Settlements Improvement Programme (KISIP), she said.

Under the auspices of the Kenya Private Developers Association, the minister urged private developers to take advantage of emerging real estate opportunities in the counties and seek innovative solutions and/or products that could address the plight of the lower segment of the housing market.

The ministry will also continue to co-ordinate and use appropriate building technologies (ABT) to make housing affordable and sustainable.

Mrs Ngilu said the government had established ABT centres in various counties to promote the use of interlocking stabilised soil blocks, while Housing Finance has set up factories to produce expanded polystyrene (EPS) panels to facilitate mass production of houses.


“The East African Portland Cement, the four-year title sponsors of the Blue Triangle Homes Expo, should  take the lead in lowering the cost of cement to make housing more affordable as the government seeks to lower the cost of energy.

Let us take a cue from countries like Egypt, whose cost of cement is almost half that of Kenya’s,” Mrs Ngilu said.

With the devolved system of government taking shape, the housing sector is one of the key development areas.

“We urge the government to embrace stakeholder advice as they come up with investor-friendly strategies.

Matters of taxation and levies should be administered properly, chosen wisely, and their impact well thought out before being signed into laws in the counties,” Mr Ojijo says, adding “Unnecessary bureaucracies and unfriendly fees have been discouraging many investors in the country and the counties should be wary of this.”

Developers are keen to see the government implement its manifesto regarding land and housing.