Housing is the item of the highest expenditure of a typical household and it can hardly ever be purchased directly from one’s earnings. Consequently, access to housing finance is crucial in the acquisition of housing, but this has always eluded low-income earners to a great extent. Research shows that poor housing delivery can be ascribed to a number of factors namely; deficient mechanism and systems for land allocation, construction funding, inadequate sustainable infrastructure and unavailability of affordable mortgage.
In view of the above, Land is vested in the custody of the government of Nigeria, and the acquisition of land for housing projects is expensive and transactions on land are very challenging. All of these setbacks negatively impact the end-users who bear the high cost of house acquisition. More so, the location of land affects the pricing as land located in places such as Lagos, Abuja and Port Harcourt are comparatively more expensive than similar lands sizes in other states. Therefore, the prices differ according to various areas and neighborhoods even within the mentioned states.
Furthermore, there is a remarkable high rate of rural-urban migration which additionally causes skyrocketing housing demand, over-crowding, and resulting slum and other informal settlements in the urban areas. The urbanization process in many developing countries especially Nigeria, has not been accompanied with a corresponding supply of adequate housing, infrastructures and basic amenities. The most popular direct adverse effect of urbanization includes the lack of durable housing or housing shortage. This has lead many of the city-dwellers to resort to alternative means of shelter within “Informal Settlements” of the cities.
Essentially, it has already been established that the cost incurred on housing development affects the end-price and its affordability. Where the end-cost of housing acquisition is very high, only a few people are able to afford to buy a home. This anomaly originates from the huge gap which exists between income and housing expenditure cost in Nigeria. Thus, the low-income earners at the bottom of the pyramid are almost eliminated from the housing market.
Currently, there are a number of factors which influence accessibility and physical characteristics of desired house-types such as preferences, financial resources (purchasing power) and social status. Other factors that affect delivery of housing in Nigeria include but not limited to the following:
- Access to Finance
The process of obtaining funds for the purpose of supporting a development can be termed financing. Housing finance refers to funds provided by any source other than the residents or builders of the dwelling, for the purpose of constructing or purchasing of housing. A housing finance system is a structure of laws, institutions and relationships between institutional and non-institutional units that facilitate the process of financial intermediation and capital formation in the housing sector. An efficient housing finance system is one which significantly facilitates the purchase, rental, construction and improvement of housing for the population, also being able to effectively cater for the low income households and economically disadvantaged. In Nigeria, housing is generally financed through a number of institutional sources including commercial banks, insurance companies, and pension funds, State Housing Corporations, the Federal Mortgage Bank of Nigeria (FMBN) and mortgage banks. These constitute the formal institutions. There are also informal means through which people obtain funds for housing e.g. cooperatives, gifts and loans from relatives and esusu (collective savings).
Access to finance, including funds for developers and mortgage for end-users continues to be a huge challenge for the development of the housing sector.
- Property Development Finance: Capital for housing development is difficult to access due to the long-term nature of the facility and the high interest rate. Institutions in the financial sector hardly invest substantially in the housing sector. Institutions that consider such investments have lending terms that are quite unfavorable and this sets hurdles for developers seeking these funds. Developers who are able to successfully obtain financing facilities often have huge repayments to make and this cost is transferred to consumers.
- Mortgage Finance: Mortgage finance is typically unavailable, unaffordable or inaccessible. It is difficult for the average low to middle income class to process mortgages. The mortgage market is inactive and Mortgage debt to GDP is about 0.5%. Only 0.6% of Nigerians have outstanding loans for the purpose of home purchase. A greater proportion borrows for direct home construction, 1.7%, which is still very low.
Up to N30 trillion (USD 187.5bn) is the estimated mortgage finance required to meet mortgage demands in the country as stated by Mortgage Bankers Association of Nigeria (MBAN). Inadequate capital, short-term funds, registration of property hassles, absence of a defined foreclosure law, high cost of houses, etc impede the development of the mortgage market in Nigeria.
The apex mortgage institution in Nigeria is the Federal Mortgage Bank of Nigeria (FMBN). The FMBN has a product called the National Housing Fund (NHF) designed to create mortgage accessibility for even low income earners. The product requires contributions of 2.5% of salaries from employees earning up to N3 000 (USD 18.18) monthly. Consistent contributions for a minimum of 6 months makes a contributor eligible for mortgage finance for up to N15 million (USD 90,909). A NHF mortgage loan, if accessed, is currently the most affordable mortgage financing available in Nigeria. A mortgage through NHF requires the mortgagor to pay a 6% interest per annum for a 30-year maximum period, whereas the average mortgage loan directly through other mortgage banks is between 20% and 25% for a maximum of 15 years. A NHF loan is disbursed by the FMBN through a primary mortgage bank (PMB). The banks are given the facility at 4%, so a 2% margin is channeled to the PMB. However, NHF loans have their accessibility challenges, even for qualified contributors.
Another product by FMBN to support housing development is the Estate Development Loan (EDL) given directly to housing estate developers for their projects. The EDL loan, similar to the NHF loan, is at a subsidized rate of 10%.
Challenges of the NHF and primary mortgage banks in general are largely due to low capital base. Since 2011, FMBN has recorded a collection of N58.8 billion NHF contribution, making a cumulative total of N110.79 billion NHF collection. Nevertheless, the mortgage demand far outweighs the availability of funds in the scheme. Commercial banks and insurance companies are required to also contribute to the program. However, there is no enforcement law related to this mandate and the institutions do not comply as required. FMBN in 2012 stated its intention to recapitalize to N200 billion.
Due to ongoing reforms of the mortgage sector, licensed mortgage banks which were 101 in number in 2011 are currently 85. The reforms are ongoing. Under guidelines by the Central Bank of Nigeria (CBN) for primary mortgage institutions now have to be capitalized to the tune of least N5 billion to operate on the federal level with the consent to have branches nationwide, and N2.5 billion to operate on a state level. It is expected that when the mandate fully takes effect, the number of mortgage banks in Nigeria will reduce drastically.
In a further attempt to boost the country’s housing market, the FG currently launched the Nigerian Mortgage Refinance Company (NMRC). The company is government led but private sector driven; it aims to bridge the funding cost of mortgages and promote availability of good housing by offering better tenures and much lower interest rates. As a financial intermediary between the capital market and the providers of mortgage loans, NMRC would raise cheap funds via the capital market by issuing long term bonds and on-lend the proceeds to these mortgage lending providers through loan facilities.
In addition to the funds raised from the capital market, the NMRC would receive a World Bank approved concessional US$300M 40 year interest free International Development Association (IDA) loan, most of it as Tier 2 capital and tied to certain KPI’s. NMRC has lofty long term objectives of duplicating the success of a similar programme in Malaysia. Its first phase however, is to ensure average Nigerians with sustainable and verifiable level of income can access mortgages easier and faster from participating mortgage lenders. The programme would initially pilot in 14 Nigerian states and the FCT, Abuja.
- High Cost of Land, Land Registration and Building Materials
Cost of land and building materials are relatively high in Nigeria. Over 60% of materials are imported and the cost of shipping and related costs are transferred to the product cost. Even locally produced materials are high in cost due to a number of factors like rent of manufacturing space and electrical power supply.
Land accessibility and affordability has always been a fundamental challenge in the industry. Land costs can gulp as much as 30% to 40% of total project cost. The country’s Land Use Act of 1978 has vested the allocation of title to land in the state government. However, the process of obtaining title to land and other building approvals is very burdensome and expensive. Issues related to the registry system inadequacy, property transfer systems, etc are faced. In the survey of Registering Property index conducted by the World Bank in 2012, Nigeria ranks 180 out of 183 countries. This demonstrates the complications and difficulties of land and property registrations and transfers. Executing the registration involves 13 procedures, at least 82 days and a cost of an estimated 20.8% of the property value as reported by the World Bank.
All these costs are transferred to the real estate property built which escalates the final price. This is a major reason why home ownership is very low. About 85% of the urban population lives in rented buildings and over 40% of a person’s income is usually spent on rent.
- Inadequate Policies and Legal Framework
Existing policies, regulatory and legal environment further affect housing development. This denotes constraint and poor incentive for investment by the private sector into the industry. The cost and process for registering land and obtaining building approvals is very cumbersome and works as an obstacle to housing accessibility. There are hardly policies in place to support housing development, with the exception of newly introduced NMRC and Lagos HOMS.
However, the Federal Government is continuing to put in efforts for the growth of the housing industry. The Central Bank of Nigeria has established a N200 billion (USD 1.25 billion) housing intervention fund. This fund will be structured as a loan facility disbursed to prospective beneficiaries through the FMBN. In the country’s budget of 2013, N151 billion (USD 882 million) was pledged towards public works (roads and bridges) program which involves labor intensive projects in various sectors which include construction and housing. Creating policies, regulatory mechanisms, strategies and schemes will be constructive to the housing market. There are also reforms for the mortgage industry that will positively impact the housing market.
- Dearth of Skilled Professionals in the Industry
It is imperative to have skilled manpower in the real estate, housing, construction and mortgage sectors. Even developed countries consider capacity building significant to end results and they train workers in the sectors to further equip them. Knowledgeable professionals are needed in the physical construction aspect, financing aspect and regulatory aspects of the system to facilitate its growth and development. Artisans building should be well trained, experts structuring financing should have the knowledge of what will work for an efficient system. Unfortunately in Nigeria, not much significance is placed on skill acquisition and development in the industry.
- Lack of Basic Infrastructure
Adequate infrastructure is required to support the development of housing in an economy. Infrastructure influences the habitability and comfort of a home. Infrastructure such as roads, drainage system, bridges, etc can affect the housing industry. Areas that are deserted with no support for habitation already denote an obstacle to housing development. Having good infrastructure in place stimulates housing growth. Furthermore, developers channel a high proportion of funds to infrastructure when developing property and this is recognized in the selling price of a property.
Infrastructure and Housing – Existence of infrastructure in an economy is significant and affects the overall development of the economy. Adequate and efficient infrastructure facilitates movement of goods and people, flow of information, production of goods and basically diversifies various sectors of the economy. Infrastructure is defined by the World Bank as an umbrella term for many activities referred to as “social overhead capital” which includes services from public activities such as power, telecommunications, water supply, sanitation and sewage, solid waste collection and disposal, and piped gas. It also includes public works such as road and major dam and canal works for irrigation and drainage; transport facilities such as urban and inter-urban railways, urban transport, port and water ways, and airports.
However, the current state of infrastructure in Nigeria does not meet the standard required for economic development, especially considering the population of the country. A huge infrastructural gap still exists even though Nigeria has adopted various initiatives that include privatization, concession, and public private partnership (PPP) to build the sector. The total road network in Nigeria is 194, 800km. Of this road network, the Federal Government is responsible for 22 percent of roads, while the state and local governments are responsible for 27 percent and 51 percent of the roads, respectively check compendium. Electricity generation capacity is about 6,000 megawatt (mw) but about 10,000mw is required.
Infrastructure ultimately affects the cost of materials, which thus affects the cost of housing. Cost incurred on power while manufacturing products used in construction, transportation costs, etc all inflate the end-cost of housing. People need houses that come with good roads, drainage and sewage systems; these facilities if available increase the demand and cost of the housing.
The National Planning Commission states that Nigeria will require 2.9 trillion dollars in the next 30 years to bridge its huge infrastructure gap. Of this amount, 52% is intended to come from the treasury, while the private sector is expected to cover the balance of 48%.