Can West African households dream of purchasing a home?
110 million people currently live in the WAEMU region; over the next twenty years, an additional 100 million more will be born. Most of them will be urban dwellers, as the area is experiencing rapid urbanizing. This trend is aggravating an already large housing deficit, which mostly affects lower income groups in a context of widespread poverty (about 43 million live below the extreme poverty line). In Abidjan alone, 40,000 additional new households come to the city every year. Municipalities are struggling to keep up with population growth and rapid urbanization and as a result informal settlements and slums are growing.
So how can the growing housing deficit be addressed? Making housing finance more affordable will enable a greater number of households to purchase a home. The latest data (2013) indicates low mortgage penetration with region-wide residential mortgage lending at just 15,000 new loans, despite a documented need for nearly 800,000 homes a year. WAEMU governments are acutely aware of the demand-supply challenges, and most have developed ambitious programs to build affordable housing; however, these are not enough to meet the existing demand and the quantum of public spending required is not sustainable. Instead, country and regional policies should leverage the resources of the financial sector to grow effective demand by increasing affordability via reductions in monthly required payments.
Fortunately, the WAEMU region presents some of the best conditions in sub-Saharan Africa to develop housing finance. The peg of the FCFA to the Euro has imported low inflation and favored macroeconomic stability creating an ideal environment for lengthening loan tenors. By contrast, rates in Nigeria, Kenya, Uganda and Ghana are double digits, reaching above 30% in Ghana.
Short loan tenors present one of the greatest constraints. Currently, average mortgage interest rates are 7.5% with loan tenors of 7 to 8 years. If we consider the cheapest formal house priced of FCFA 7 to 11 Million (USD 11,300 to 17,800), a household needs a minimum annual income of USD 6500 to 10000 in order to afford it. When the loan tenor is lengthened to 15 years, the income required is lowered by 40%. Extending tenors with fixed rate loans has a much greater impact than lowering the rates themselves. We have estimated that by increasing tenors to 20 years, up to 1.5 million additional households will be able to afford the cheapest currently available houses on their local market.
So what can be done to lengthen tenors and increase affordability? Five years ago, the WAEMU governments and the private sector acted by establishing the Caisse Regionale de Refinancement Hypothecaire (CRRH), a public-private regional liquidity facility that refinances banks' mortgages by borrowing in the domestic markets. Since 2012, it has issued six bonds, which helped provide ten year loans to banks to refinance their mortgage portfolio, thus allowing them to make customers' mortgages affordable by extending the tenor. These efforts should be encouraged. The CRRH has so far only refinanced over 4000 loans, which is little compared to the needs.
Longer term financing into the CRRH would allow it to refinance banks at longer maturities. At the same time, the CRRH should look at ways to refinance the large microfinance and cooperative networks which are in good standing and are interested in extending housing loans. Over 70% of WAEMU households work in the informal economy, are excluded from the banking sector and rely on microfinance networks for their financing needs. Supporting the CRRH with long term financing will enable banks and microfinance institutions to gain access to long term liquidity. The results will be directly captured by households who will have access to longer term loans and thus increase their home purchasing power.
Will this be enough? The housing value chain in the WAEMU region presents many weak links that need to be addressed in order to promote a healthy housing market. Access to clean property titles remains a significant issue which continues to curtail both the supply and the demand side of the value chain. Though some countries have implemented reforms to improve their land systems (new Code Foncier in Benin in 2013, Reform Sheida in Niger in 2006, and digitization of the tilting agency in Cote d'Ivoire), these reforms have yet to pick up speed and be implemented at the regional level. The construction of affordable housing must also be supported as government programs have proved slow and mostly target public sector employees.
Finally, rental housing should not be left behind as home ownership is not the only option to promote a better quality of life. The affordable housing sector is in the process of being catalyzed. There is now a widespread awareness in all WAEMU countries that something must be done to address the urbanization and population growth. Steps are being actively taken to address the housing deficit across the region. We believe that through the supported development of CRRH, the dream of buying a home is at last within grasp.
About the Authors
Caroline Cerruti is a Senior Financial Sector Specialist in the Africa region of the World Bank. She works primarily on housing and infrastructure finance, financial sector restructuring issues, and financial inclusion. She has been involved in various financial sector assessments jointly with the IMF. Before joining the World Bank, Caroline worked for the French Treasury on trade and financial regulation issues, and for three years as a banker in the European Bank for Reconstruction and Development. Caroline was educated at the Institute of Political Science in Paris (Sciences-Po), the Ecole Nationale d'Administration (ENA) in Paris, and is a CFA Charterholder.
Olivia Caldwell is Project Manager at the Affordable Housing Institute (AHI) where she focuses on housing development and finance in Sub-Saharan Africa and Haiti. Before joining AHI, Olivia worked with CEMEX and Bayer's Inclusive Business Platform, where she helped develop energy efficient affordable housing and infrastructure projects in Latin America and South East Asia. Olivia holds an Executive MBA at the London School of Economics and an MA in Sustainable Development from the United Nations Mandated University as well as a BA in Anthropology from McGill University.