Developing Kenya s Mortgage Market

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1 Developing Kenya s Mortgage Market Simon Walley Senior Housing Finance Specialist World Bank 17 February, Nairobi

2 Outline Rationale for developing the mortgage market Mortgage Market Summary Housing Demand Potential Mortgage Market Tackling Affordability Funding Mortgages Action Plan Further Work

3 Housing Finance is interface between housing and finance sectors.. Interest Rates Land Tenure Housing Financial Foreclosure Urban Policy This Market Market This Competing asset classes Term 3

4 Challenges to Meeting Housing Gap Demand for Housing Lack of long term funds Credit Risk Informality/low incomes High interest rates Foreclosure system Lack of affordable housing Financial literacy Supply of Housing Availability of Developer finance (debt and equity) Planning and building regulations Cost of infrastructure Access to Land Titling/Registration system Lack of Effective Demand Lack of Affordable Supply

5 Providing means to finance housing demand expanding access to housing finance down-market and increasing the effective demand for housing High Income Cash Purchase Mortgage Low Income Housing Microfinance Micro-credit/savings Objective Incremental Construction

6 % 30% 25% 20% 15% 10% 5% 0% Mortgage Balances Outstanding Ksh billions Mortgage Debt/GDP 32.7% Mortgage Market (1) 7.0% 6.0% 2.4% 1.0% 0.4% 0.2% Mortgage Market growing at between 30-40% annually Not always clear whether loan is for home-ownership or for business purposes Mortgage Debt to GDP of 2.4% Mortgage debt to GDP around 50% in Europe, over 70% in US

7 Average Loan Amount Ksh million Mortgage Market Shares Mortgage Market (2) Top 3 Lenders represent over 2/3 of market 32 banks have reported data for mortgage portfolios Average Mortgage Rate 15% 14,151 mortgage loans 5.1% 8.2% 10.7% 18.3% 29.7% 27.9% KCB HFCK Stanbic Stan. Chart. Barclays Other Average loan size Ksh 4 million Average new loan Ksh 6.6 million

8 Rural/Urban Population - millions Urban Rural Annual Housing Need 000s Urban Rural Housing Demand Current urbanization level is 39.7% (Census 2009). Projected to hit 50% by Annual housing need estimated at 210,000 Future demand largely in urban areas Current supply estimated at 50,000 Existing shortfall of 2m houses

9 Housing Affordability Typical Mortgage Property Value: Ksh 4.0 m Loan Amount: Ksh 3.2 m Loan Maturity: 15 years Interest Rate: 14% Maximum Payment to income: 40% Maximum Loan to value: 80% Typical Borrower Monthly Repayment: Ksh42,615 Fees (10%): Ksh 400,000 Deposit (20%): Ksh 800,000 Min. Annual Income: Ksh 1.3 m Savings of Ksh 1.2 m

10 Affordability Urban Income Distribution Potential Mortgage Market (8%) 1% 4% 15% Ksh 2,656,203 ($32,874) Ksh 1,800,463 ($22,283) 30% 50% Ksh 502,515 Ksh 343,964 Ksh 0 ($6,219) ($4,257)

11 Affordability Summary No affordability in Rural areas income not high enough for mortgage market to develop In Urban areas just 8% of the population could afford a mortgage product. Represents around 1.4 million people or 350,000 households Potential mortgage market therefore around Ksh 1,128 billion or $13.7 billion

12 Tackling Affordability Typical Mortgage Property Value: Ksh 4.0 m Loan Amount: Ksh 3.2 m Loan Maturity: 15 years Interest Rate: 14% Maximum Payment to income: 40% Maximum Loan to value: 80% Typical Borrower Monthly Repayment: Ksh42,615 Fees (10%): Ksh 400,000 Deposit (20%): Ksh 800,000 Min. Annual Income: Ksh 1.3 m Savings of Ksh 1.2 m

13 Size of Mortgage Loan (Ksh million) Mortgage Products Improving Affordability Maximum mortgage loan based on a constant Ksh 42,615 monthly payment 20 per cent 15 per cent 10 per cent 5 per cent Years Limited range of products Average Rate of 14% major constraint on affordability Extending Maturity does not work with high rates Need other products to help affordability

14 New Products - Innovation Consider Graduated Payment Mortgage Gradually rising payments (2% per annum) Avoid negative amortization Can lead to 10%+ improvement in affordability Consider variable rate loans (not discretionary) Indexed loans Linked to inflations Other innovative solutions (shared appreciation, incremental loans) Efficiency and Risk Management Improvements

15 Funding Mortgages Good pool of long term funds in Kenya Pensions, Insurance, Investment and banks Some examples already of capital/debt raising Housing Finance Bond/KCB Rights Issue Issue is access for smaller institutions, cost and depth of market No specific vehicle for capital market funding Securitization? Covered Bonds? Liquidity Facility? Solution should also include extending maturity of savings and using core deposits Treasury Management also duration matching

16 Mortgage Liquidity Facility Grant Loan Funding Funding Borrowers Lender Liquidity Facility Investors Mortgage Collateral & Payments Sell with recourse or assign loan & Payments Bonds & Payments

17 Benefits of a Liquidity Facility Reduce cost of long term funding Allows smaller lenders to access Capital Markets creates more competition Leverages deposit base Provides a risk management tool for lenders Can help to introduce market standards Provides an investment outlet for pension funds and insurance companies

18 Conclusions Main building blocks of mortgage market all present, although could be improved Major Affordability Constraint due to high cost of housing and cost of mortgages Mortgage market only available to small proportion of population but big potential as part of financial sector development Need to also address access for lower income segments Expansion of housing supply will become ever more important as urbanisation continues

19 Action Plan for developing mortgage market Short Term Mortgage Market Group Mortgage Regulations Mortgage Data CRB to collect more data Feasibility Study for a mortgage liquidity facility Medium Term Review Pension Backed Mortgages Mortgage Liquidity Facility Standardise Documentation Mortgage covered bond New Products Long Term Modernise Registration System Government Low Income Program Mortgage Law

20 Further Work Mortgage only part of solution Rental systems need to be developed protect tenants and landlords Develop housing microfinance Housing Supply is a major constraint Look at financing of housing supply Construction finance, role of NHC Urban plan including more land and infra-structure Role of Government housing policy, subsidies

21 Simon Walley Please Provide Feedback Senior Housing Finance Specialist World Bank Website:

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