Why mortgages may be a bad option for home buyers

When breaking ground for a Sh3.5-billion housing project in Kisumu last week, African Union High Representative for Infrastructure Development in Africa Raila Odinga remarked on how expensive owning a home is in Kenya. 

“I am told that some of these houses cost Sh1.5 million. That is still too high, many people cannot afford that,” he said.

“We want to bring it to hundreds of thousands. That is what is easily affordable by most of our poor people who are working.” 

The question of affordability when it comes to housing has always been a grey area for developers, the government and home buyers.

How much a prospective homeowner can afford compared to what is in the market has always been the disconnect.

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“The question of what is affordable is pervasive, but the answer still eludes us. Basically, housing affordability is a function of the purchase price, finance and the cost of living,” says Shelter Afrique Head of Policy, Research and Partnerships Muhammad Gambo.

“However, if household affordability is not accurately gauged by public or private sector developers, then there is a serious risk that there will be insufficient effective demand by households to purchase or rent the houses produced.”

It is against the backdrop of this disconnect that Shelter Afrique, a Pan-African housing company that draws shareholding from African nations, and the Centre for Affordable Housing Finance in Africa came up with the housing affordability calculator.

Once you key in your household earnings, distance from Nairobi’s Central Business District (CBD) and other details such as interest rates, the calculator tells you how much you can afford for a house mortgage.

If you are earning Sh100,000 and you desire to live 50 kilometres away from the CBD, then the house you can afford will be priced at Sh2.04 million, according to the affordability calculator.

Available amount

The mortgage available for you is up to Sh2.27 million. This is if you deposit 10 per cent and with a bond of 25 years, assuming that you only have Sh20,000 available in your monthly budget for housing.

If the distance is adjusted to 30km, then the house price becomes Sh2.5 million with an available mortgage of Sh2.24 million.

A 15km distance from the CBD changes the values higher to Sh2.7 million as the house you can afford and Sh2.45 as the mortgage available.

These calculations are pegged on the 2021 interest rate of 11 per cent, and the presumption that you will spend no more than 20 per cent on housing every month.

Just from the above numbers, it is evident that a mortgage is still not a very affordable way of owning a house. You may end up with a house that does not fit your desires or you are forced to move far from Nairobi.

For example, a three-bedroom house in Ruiru, which is 29km from Nairobi’s CBD, goes for Sh6.5 million. This is Sh4 million more than what the mortgage calculator shows for towns 30km from CBD.

Nashon Okowa, a property manager and author of Don’t Buy that House, agrees that a mortgage is still expensive in the long run.

“It is expensive if you are going to pay something for 20 or 25 years. Definitely, it will drag you in terms of finances,” he said in an interview with a local media house.

Once you decide to build it yourself, he says, you eliminate the developer’s profit, which reduces the cost of the house.  

“You already know your cash flow as a couple or family. Developers have made it easy that you can have a payment plan,” Mr Okowa said.

“Unless you are working in a bank where you get it (mortgage) at four or three per cent, then it makes sense. But if you are not a bank employee, at the end of the day it is a lot of money for you.”

From the calculator, even when the distance is altered to 100km from the city centre, the house price that one can afford with the same salary of Sh100,000 is Sh2.27 million. This is with a 10 per cent deposit. 

Dr Gambo said the push for housing development across Africa has led to a boom in new homes, but the high cost of construction, infrastructure, land and compliance mean the majority of such houses are too expensive for those who need them most.

“In most countries in Africa, even the cheapest newly-built house is still not affordable to the majority of the urban population leading to high vacancy rates as we’ve seen in some countries such as Nigeria and Kenya,” he said.

Developer-built housing, he said, typically targets the higher end and is rarely delivered at scale.

“But even a Sh2.32 million house is unaffordable for the majority – and these are only available in limited projects,” said Dr Gambo.

He said poor affordability targeting could put pressure on governments to provide further subsidies as in the case of Vision City in Kigali, Rwanda or the Kilamba Development in Angola, and at the same time impose target prices that cannot be feasibly delivered by a developer.

“Our aim is to improve the provision of affordable houses across Africa and we hope that the affordability calculator will help us achieve this goal by making such projects feasible and viable on both the demand and supply sides,” he said