How Sh3m could afford you three-bedroom house

Three-bedroom houses.

As details of President Uhuru Kenyatta’s half a million housing plan that has rattled many employees take shape, the homeownership markets may be in for a rude shock if the State implements its raft of proposals.

The new home ownership plan could also redefine Kenya’s landscape. Though doubts linger at the viability of the ambitious project, especially on the ability of the State to draw in the private sector, the project’ success could alter sectors of the economy.

Banks which have been eating into mortgage rates may soon face drastic price disruption as the Government moves to cap lending rates under the affordable housing initiative.

Principal Secretary Housing and Urban Development Charles Hinga said the State will lock beneficiary banks of cheap onward lending from the Government at 10 per cent.

“Through the National Housing Development Fund and the Kenya Mortgage Refinance Company (KMRC) we are going to offer you a 10 per cent fixed interest for over 20 years,” Mr Hinga said.

Banks hold about 78.4 per cent of mortgage loans in Kenya on variable interest rates basis compared to 62.1 per cent in 2016. And as opposed to 20 years repayment period, currently, the average loan maturity is 11.9 years.

Charge market rates

The Ministry says that KMRC has received World Bank funding in addition to State funding. This will defeat its purpose if lenders are allowed to charge market rates thus forcing the State to cap mortgage rates.

The preaching PS who would easily sell you a dream turned to the National Housing Corporation, urging it to lower lending rates when funding rural homeowners under the scheme.

“Rural homes will get funding from NHC at 13 per cent, but that is too high so we are going to fix it,” he said. Banks have been content with a small circle of premium homeowners and their own employees to limit risk thus avoiding the larger market.

“Almost all banks were offering mortgage loans for both their staff and customers. However, the number of institutions offering mortgages to customers was 31 in 2017 as compared to 35 in 2016,” CBK said in the Annual Banking Supervision report.

This has constrained the mortgage lending market to 26,187 mortgage loans in the market in December 2017 up from 24,059 in December 2016. The rates remain high even though this segment is fully backed by a physical house, land title and valued property.

The Central Bank of Kenya (CBK) puts the interest rate charged on mortgages at 13.57 per cent on average, ranging between 10.8 per cent and 14.0 per cent mainly due to interest rate cap.

The average rate stood at 18.7 per cent prior to rate capping - ranging between 10.5 per cent to 18. In terms of value, the average size of a home loan is Sh10.9 million locking even more borrowers out of the housing market.

But the Government wants to offer a three-bedroom apartment for Sh3 million. According to HassConsult, the average price for a three-bedroom residential property is Sh13.6 million.

Small landlords

Cheap housing has been the premise of small landlords who own one to two apartments. This is the market that is being targeted by the State, which could leave landlords with empty houses or seeking to lower rents.

“The president was very clear when he defined affordable housing, it is a house where you pay the same amount that you pay as rent but own it at the end of the period own the house,” noted Hinga.

Those earning a maximum of Sh15,000 will be placed in the social housing scheme. Those between Sh15,000 and Sh50,000 will get affordable housing and those between Sh50,000 and Sh100,000 though qualify, will not be considered.

The PS noted that these groups make up 97 per cent of the formal workforce and the State wants to ensure that like rent, their mortgages will not climb above 30 per cent of their incomes. This comes even as there seems to be a notable general decline in rental incomes since January 2013 as a result of increased supply.

CBK in the Kenya Financial Sector Stability Report says a faster deceleration was seen starting in December 2016 and remaining in negative territory since May 2017. “The fourth quarter of 2017 recorded a three per cent decline in rent growth rates compared to an increase of four per cent in quarter fourth of 2016,” the report states.

The housing dream is premised on the Government’s promise to initially allot land to the private sector to construct houses for public servants who will then rent to own.

This will help cover the legal conundrum of giving out pricey State land held in trust to private developers while eliminating the cost of the land in construction, which is estimated at 40-60 per cent of current housing projects.

This dubbed Lot 1 will be President Kenyatta’s flagship take-off projects that will target Government and State agencies, the land where 70,000 units have been committed. Lot 1 will cover areas like Parklands, Starehe, Shauri Moyo, Makongeni and Mavoko with ambitions to break ground within the month.

The second lot will target informal areas such as Kibera, Marigoini and Kiambiu where residents will be moved to transitional housing.

Just like in Kibera, the residents will be moved to a site next to Lang’ata Prison then moved back once their units are established.

The Ministry says they have mapped 498 slums and will input the data into a digital inventory to ensure one does not benefit twice as it happened in the Kibera slum upgrading programme.

Another lot will be given to counties which will put up an average of 2,000 units with Kiambu targeting 6,000 units for the three municipalities.

PS Hinga noted that since housing is a devolved function, the Government had to rope in counties with 22 devolved units already having signed up to the deal led by Homa Bay.

Nairobi County will also set up houses in its estates including Bahati, Maringo, Ziwani and Jericho.

The final lot will be the rural housing where the Government will not build houses but will offer affordable materials at technical and vocational education and training institutions as well as leasing Hydraform, brick and block making machines.

The funding for rural housing will come through the NHC which proposes to charge 13 per cent.

Those with private land can also partner with developers as long as the prices remain within the Government range.

They can then approach the State to build the houses. If any of the houses are not taken up, the State will buy them using the monthly statutory contributions in the National Housing Fund.

PS Hinga says this will require sacrifice to unlock the housing dream. He believes the funding model will be lucrative enough to woo investors who will also get rebates and subsidies.

“We are asking the investor not to look at your bundled income because they will say you are not bankable; we tell the investor to look at the cash flow from National Housing Fund - bringing in on average Sh600 million monthly.

Every Kenya with a payslip will help the Government fund the half a million housing plan under the Finance Act that will charge 1.5 per cent of workers’ pay or Sh5,000 a month.

Employers will also painstakingly part with a similar amount, an additional labour cost which will go into the housing kitty whose modalities and running are yet to be made public.

Transport and Infrastructure Cabinet Secretary (CS) James Macharia‏ said the Government has been in talks with trade unions and the employers despite most workers crying foul about the plan.

“We had a session up to 4:30 pm at the State House with Cotu (Central Organisation of Trade Unions) and I believe by the time we were leaving, brother Atwoli (Cotu Secretary General Francis Atwoli) was converted,” the CS said.

 Employers’ lobby

The CS noted that the State is also in talks with the Federation of Kenya Employers Executive Director Jacqueline Mugo over the issue.

He said that once the money goes into the National Housing Development Fund, it can then be accessed through a tenant purchase deal for those in affordable housing bracket or securitised for mortgages for those with means.

The Housing Ministry will then create a website and assign each person an automated score on where they fall under low-cost houses, social houses or the mortgage cap.

According to the PS, the State will then run a lottery annually to match the bookings to the number of units available to avoid the risk of monied Kenyans buying several units then rent them, thus distorting the market.

While CBK denies any property bubble due to large housing deficit, especially in low-income segments of the population and tight lending conditions given the low approval rates of new plans, President Kenyatta’s housing plan will turn home ownership on its head if successful.  

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