HOUSING FINANCE SOURCES & STRATEGIES FOR PROVIDING AFFORDABLE HOUSING IN LAGOS STATE
Housing Finance and Demand for Formal Loan
A lot has been documented about the shortage of financing for mortgage and home acquisition. In this report, with the use of results from a recent survey in Lagos state, we examine the main sources of housing finance, their popularity, usage and related sub-topics to offer readers further insight into the housing finance problem. The other section of the report discusses innovative strategies that could boost the level of housing finance available in the market.
Chart 1: Level of Awareness of Loanable Financial Institution
According to Chart 1, 54% of total intending home owners are aware of financial institutions that provide housing finance, while 46% are not aware, indicating a low awareness level in the market. So the challenge here for sector investors is not only to provide housing finance products but also to create the requisite awareness for potential home-owners to make informed choices.
Financial Institutions – Usage & Awareness
We also investigated the usage and popularity of loan providers. Commercial Banks came out tops with awareness and usage levels at 82% and 41%, respectively. This is expected as people generally rely on commercial banks for daily business and personal transactions.
Microfinance bank follows distantly, with 68% awareness and 4% usage levels. Others are Mortgage (66% awareness and 4% usage levels) and Cooperative/Esusu (54% awareness and 5% usage levels).
The very low awareness and usage level for major players in the housing finance sub-sector is attributable to the current low activity in that sector. Again emphasizing the challenge for sector investors is to develop a robust education and enlightenment program that will create interest and awareness among potential consumers.
Housing Finance Plan
We asked our sample survey how they would finance a mortgage.
Chart 2: Housing Finance Plan
Personal savings ranks highest (87%) as the most preferred means of financing home acquisition among intending home owners. This statistic reflects the low level of activities of financial intermediaries in housing finance. Commercial banks only chip in 8%.
The other less preferred sources are, in that order:
- Installment payment plan (16%)
- Cooperative (14%)
- Government scheme (11%)
- Loan from Commercial banks (8%)
While the other sources of housing finance should not be ignored, innovative methods of encouraging and boosting the personal savings scheme should be developed because of its apparent appeal in the Lagos market.
House Acquisition Loan – Repayment
Chart 3: Repayment Duration for House Acquisition Loan
Among intending house owners, about half are unable to indicate approximate duration for loan repayment.
A good proportion of those intending to use loan facility are willing to repay between 3-5 years (Commercial bank, 30% and Mortgage bank, 22%), whilst others selected 6-10 years as repayment period (Commercial bank, 14%; Mortgage bank, 17%).
House Acquisition Loan – Interest Rates
Chart 4: Affordable Interest rates
Among prospective home owners looking to finance house acquisition/mortgage via loan, about half are unable to envisage the interest rate affordable by them.
However a good proportion of those intending to use loan facility are willing to pay 1-5% interest (Commercial bank, 28% and Mortgage bank, 22%). Some others say they would be willing to pay 6-10% interest (Commercial bank, 15%; Mortgage bank, 19%).
House Acquisition Loan – Collateral
Chart 5: Preferred Collateral
As collateral for the loan arrangement, intending house owners would be willing to deposit some valuable documents with the financier. The more common collaterals that borrowers are able and willing to deposit are:
- Land C of O (38%)
- House document (34%)
- Educational certificates (14%)
Reasons for low interest in house acquisition through loan
Chart 6: Reason for Low Interest in House Acquisition through Loan
According to Chart 6, the major reasons for the apparent low interest on the use of loans for house acquisitions are as follows:
- Perceived high interest rate (53%)
- Fear of the consequences of failure to repay (42%)
- Lack of trust on the system (17%)
- Lack of understanding of the benefits (15%)
All the issues raised are either real or imagined. The challenge for Sector investors is to engage constructively with relevant stakeholders and address their fears and needs.
The next section of the report would introduce some new policies to address some of the issues identified above as barriers to home financing via loans in Lagos.
Strategies and Policies for affordable housing delivery in Lagos State
The Lagos State government should adopt a targeted approach towards providing decent and affordable housing for the weaker section of the state, which otherwise is excluded from the housing market distribution system. Housing policies should be designed and targeted towards these segments that form the highest percentage of the housing demand in the state.
Introduction of Subsidies
In designing housing subsidies, the government either provides supply-side subsidies or demand-side subsidies. Supply-side subsidies include development of public housing and providing subsidy to developers and encourage them to develop more units. On the other hand, the demand-side subsidies may involve periodical cash allowances to the households to support housing cost (rental) or capital grants to rehabilitate or buy units. Preference of house ownership in case of demand-side subsidies depend on socio cultural elements and income levels. These can be through low-income housing assistance provided only through subsidised rentals; or a combination of rental and ownership schemes depending on the target group’s profile and income level.
Whilst commending the Lagos State Government for its recent intervention through subsidizing both the supply and demand side of the housing market through the introduction of the Lagos Home Ownership Mortgage Scheme (Lagos HOMS) through direct construction of affordable housing projects in different locations across income segments and subsidizing interest rate payment on mortgages as well as extending tenures with a view to increasing affordability levels, a lot still needs to be done to build sustainable models targeted at the low- middle informal segment of the housing market that are most excluded in policy decisions.
The state also recently passed the Lagos State tenancy bill into law, the law seeks to prohibit landlords from collecting 2-3 years rent arrears which was the practice thus making it extremely difficult for low income households to afford rent payments. The law allows landlords to collect rent only for 1 year in arrears and sitting tenants will only pay 6 months arrears as rent. The law has witnessed some success in increasing affordability in the rental segment but it’s mainly challenged by non-compliance and low level enforcement because private and individual developers control 95% of the rental housing market and housing demand constantly on the rise. The end user usually has no choice rather than to accept the terms of the landlord even when such terms contravenes the law.
The government needs to develop models that would encourage private sector supply of rental housing rather than the current focus on home ownership alone. The Lagos State government should enact laws that will influence the development of mass rental housing schemes in all locations in the state.
Incentives and Administrative Streamlining
In order to attract private participation in the lower income segment, the Lagos State government should provide a range of incentives at state and local levels. These include tax deductions, density bonuses (percentage allocation of units in residential projects by the developer, and in return, the developer is allowed extra market rate units), direct subsidies, land grants, land use changes etc. Streamline the administrative requirements through fee waivers and fast-tracking procedures for low income housing developments will also attract developers to this segment of the market.
The Lagos State Government could achieve this through;
- Reduction in fees charged for securing planning approvals and building licences and permits by developers especially those targeting housing projects for lower income segments.
- Adequate availability of land should be ensured for housing and infrastructure by computerisation of land records, use of Geographical Information Systems, efficient dispute resolution mechanisms and implementation of master plans.
- Inclusionary zoning, stipulating a given share of new construction to be allocated for low-income group housing could also be adopted.
- Developing a strong regulatory framework and successful implementation of comprehensive package of legislation for affordable housing provision.
- Establishing sustainable Public Private Partnership models, wherein the government provides land for low-income housing and streamlines administrative procedural aspects, and the private partner provides financial resources, supports implementation and delivers units.
- Providing infrastructure and basic amenities that support housing development most especially in opening up suburban satellite towns where lower income segments gravitate towards due to lower land prices in such locations.
- Improvement in infrastructural connectivity to far-flung locations will increase the acceptability as residential destinations. Developers want to tap into the changing perception before land prices appreciate such levels that do not support low- income housing.
- Providing an effective and convenient public transport system will reduce loss of man hours and also make suburban peripheral locations within the state more attractive to both individuals and developers.
- Include mass housing zones in city plans and develop them within a planned schedule
- Schemes for redevelopment and slum rehabilitation should be developed with incentives that generate sufficient returns for the developers whilst controlling the development density. The cost-benefit analysis of regulations should be carried out from a development perspective to ensure that schemes to facilitate the development of affordable housing are feasible.
Mortgages and outright purchase of homes remain an exclusive method of home ownership for upper middle to high income groups in Lagos State. Form the study it can be seen that 83% of residents in Lagos State rent. Innovative financing mechanisms that are sustainable, affordable and accessible need to be developed that will create access to finance for home ownership or rental support for residents in the State. Interestingly, Flexible payment mechanisms should be put into place, as households in low-income groups typically have variable income flows with lower level risk and defaults compared with higher income lending processes where default rates and credit risks are higher. Some of the financing mechanisms available and affordable for lower income groups include;
- micro mortgage financing mechanisms
- housing micro finance
- rent to own schemes
- housing cooperatives schemes
- rent financing support schemes
- project financing guarantees developers of affordable housing projects
Formulate policies that will encourage innovation in terms of technological solutions, project financing and delivery of affordable housing projects, which reduces costs of construction significantly despite rising costs of inputs. As construction costs form a significant portion of the selling price of affordable housing units, the savings in construction can immensely benefit the end user or buyer.