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State subsidies needed in real estate

By By FRANCIS AYIEKO | February 21st 2014


When the Hass Property Index report for the fourth quarter of last year came out last month, the findings weren’t unexpected. During the last three months of 2013, the report said, the real estate market had become relatively sluggish; there were fewer new developments; prices had slightly gone up; and mortgage rates remained high.

For an aspiring first-time homeowner, there was hardly any encouraging thing in the report. Unfortunately, that has been the trend over the last few years.

But the mortgage report, released simultaneous at the same event by The Mortgage Company (TMC), provided some food for thought for the government, apparently in the hope that the state is still interested in seeing more become homeowners.

TMC Managing Director, Caroline Kariuki, made a passionate appeal for the establishment of a secondary mortgage market that could see interest rates go down to single-digits. But even more important was her call for the introduction of measures that would encourage first-time homebuyers.

In countries where home ownership penetration has grown, she argued, the government had either had to chip in to force savings as in the famous Singapore model, or create incentives that encourage first time homebuyers through very attractive tax incentives.

“In Kenya, these incentives are not aligned to the market realities — the developers who can access incentives can only do so for homes not exceeding Sh1.6 million,” she said, noting that given the rise in cost of land, construction and the many taxes introduced to the “booming” sector, the government is not addressing the housing challenge.

According to her, the world over, affordable housing market cannot purely be the responsibility of the private sector. “Subsidies are the only way to support this sector.” Institutions such as the National Housing Corporation should focus primarily on this sector, leaving well-served middle-income housing to the private sector to service,” she said.

In late 2011, a review of Africa’s housing finance markets by the Centre for Affordable Housing Finance in Africa said that Kenya was exploring the possibility of adopting a housing subsidy scheme modelled after South Africa’s as one of the strategies of meeting the huge housing demand in the country.

The strategy would include providing full subsidies and credit guarantee programmes as well as the promotion of alternative construction materials that would deliver cheaper housing. We have never heard anything about that to date.

To its credit, the government has since 2006, been working on incentives for private developers. That effort, however, only yielded token incentives, which developers say are not enough to help them develop low-cost housing.

Interestingly, even if the government were to get it right with developers’ subsidies, it would still not have helped aspiring homeowners much.

What government bureaucrats don’t seem to understand is that without giving incentives to buyers, incentives given to private developers cannot achieve much.

What the government should do, other than giving developers appropriate incentives, is to introduce a housing finance subsidy to households. This will increase the housing purchasing power of lower middle-income households and help them own a house produced in the formal market.

Where they have worked, such subsidies have helped households to take on a larger loan than they would otherwise be able to, and have assisted households directly in paying for the acquisition and improvement of their homes without necessarily borrowing.

A good example is South Africa the government announced in early 2012 that it would implement the R1 billion (Sh11 billion) Guarantee Fund announced in 2010 to promote access to loans by people struggling to secure finance for housing.

Under the scheme, people earning between R3,500 (Sh38,500) and R15,000 (Sh165,000) were to be given a subsidy of up to R83,000 (Sh913,000) to enable them to obtain housing finance from an accredited bank.

The closest we have come to that is the Sh150,000 tax rebate for first-time buyers introduced almost a decade ago by the Narc government.

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