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Housing Development and Economic Growth By Jimnah Mbaru Introduction The Government through the Ministry of Roads, Transport and Housing announced two months ago that it intends to construct 150,000 houses in order to alleviate the current housing shortage in the country. This is a welcome move, as shelter remains one of the unsatisfied basic human needs in this country. More importantly, the construction of these houses would form a good basis for rejuvenating our economy. Currently, wide ownership of dwelling has been hampered principally by both lack of access to mortgage finance and the high mortgage interest rates. Another contributing factor is unavailability of cheap land. Impact of building 150,000 houses on the Kenyan economy The construction of 150,000 houses entails massive financial resources. If one were to assume that each house will cost between Kshs.500,000 and Kshs. 1.0 million (a fairly unrealistic proposition), the total funds required range from Kshs. 75 billion to 150 billion. This is equivalent to between 10% and 20% of our Gross Domestic Product. The investment of such large sums of money on our economy would have an enormous impact on our economy. If one were to assume that there would be a multiplier effect of two times it means that our economy would expand by a minimum of 20 - 40%. If this construction were to take place within a period of 5 years, it means that the contribution of the housing sector to economic growth would range from 4% per annum to 8% per annum at the higher side. If other sectors were to contribute to economic growth in a modest manner say 2% per annum, it means that we can achieve an annual economic growth rate ranging from 6% to 10% per annum. What an achievement! Sources of Growth The principal source of growth would come from the activities within the construction sector. I imagine that we would need a lot of cement for construction. The stone quarries would also be active in producing stones. The corrugated iron sheets or tiles required would be enormous. What about the woodworks, plumbing, nails, electrical wiring, water tanks - it would be enormous. The labour costs involved would be enormous. In fact one way of attempting to create the 500,000 jobs promised by NARC Government would be through this housing project. There are many other activities associated with this type of construction. Imagine the amount of food construction workers would need. One needs only to visit a construction site to see how our mama's are surviving by supplying githeri, ugali and the foodstuffs to these workers. Imagine the backward integration for the agricultural sector that would produce all these foodstuffs. It is clear then that this housing sector could emerge as an engine of economic rejuvenation or economic growth for this nation. It is, therefore, very important that we address the potential sources of finances to fund this type of construction works. Try Mortgages Securitization If one were to look at our financial system, one would see that such funds would have to come from our banking systems, insurance industry, National Social Security Fund as well as the pension funds industry. While foreign funds might be available, it may not be affordable due to the high interest rates. There is also a foreign exchange risk just in case our shilling depreciated or were devalued. Therefore, the practical source of such funding is our local financial system. The capital market is also emerging well and possible debt instruments or corporate bonds could be issued to raise funds to finance such a huge housing program. I want to propose that securitization of mortgages may solve this problem. Securitization is the process of issuing debt instruments in the capital markets backed by assets or mortgages. It works like this. Several mortgages are grouped together and then a bond or debt instrument is created backed by these mortgages. The debt instrument or bond is then marketed. The instrument is a long term promissory note promising to pay a certain interest rate annually and becomes payable on maturity say in 5 or 7 years. The loan repayments for mortgages are used or accumulated to eventually liquidate this bond or debt instrument on maturity. Since these debt instruments are tradeable on the Stock Exchange they become liquid and various investors would then be interested in buying them. Such instruments then become the principal source of funding for housing mortgages. The trick here is to access cheap funding from the capital markets. Create National Mortgages Corporation To make securitization of mortgages work in this country we need to create an institution which would buy mortgages from the various originators or financiers. The current financiers include principally HFCK, Savings and Loans (K) Ltd., insurance companies and building societies. Such an institution or call it National Mortgages Corporation (NMC) would buy mortgages from these issuers. NMC would then package these mortgages into a bond issue backed by the mortgages. The bonds would then be sold to investors and the public. A secondary market for these bonds would be created at the Nairobi Stock Exchange. The funds realized through the bond issue would then be used to pay the originators. If this process was followed regularly, then the mortgage originators would have constant liquidity to enable them to originate or source more new mortgages. Once the mortgages become liquid, because they can be sold to NMC, then new originators would come into the market to provide the necessary funds. In particular, the commercial banks would now enter into this market, as they would always offload their mortgages to NMC thereby ensuring that their assets are liquid all the time. In order to make NMC an attractive issuer of mortgage bonds its ownership should be structured such that it would have a high rating in the market. With a high rating, it would then borrow funds from the market at very low interest rates probably close to the Treasury bill rate or what government pays in the market. Such ownership would probably include Central Bank of Kenya, all major commercial banks and insurance companies, International Finance Corporation, CDC Capital Partners and possibly other reputable international institutions like African Development Bank. Other incentives would be crated to make it cheaper to raise funds from the capital market. For example, stamp duty on purchase of mortgages by NMC from originators would be eliminated. There would be no need to issue an elaborate prospectus. And finally, mortgage bonds held by commercial banks should be treated as liquid assets for purposes of calculating the liquidity ratios. By the way securitization of mortgages would contribute to emergence of new capital markets institutions like rating agencies and mortgage bankers, the latter's job being to originate mortgages. It is clear from the above that once a market for mortgages is created through securitization many new players would come into the market especially commercial banks and this would be the principal source of the funds to finance the construction of the 150,000 houses. Experiences from other countries Several countries in the world have used securitization to raise funds to finance the housing sector. This they have done by creating the necessary legal and institutional framework to support securitization. The United States of America after the Second World War, created the Government National Mortgages Corporation (Ginnie Mae) to raise funds to finance mortgages cheaply for the war veterans. Ginnie Mae issued bonds backed by mortgages taken out by war veterans. As Ginnie Mae is a federally owned institution, it raises funds from the USA capital market at low rates, usually a few points above treasuries. Earlier, the USA government had set up Federal National Mortgages Corporation (Fannie Mae) as an instrument of National Housing Policy and secondly, to establish and maintain a liquid secondary market for mortgages. These two institutions were the forerunners of mortgages securitization in USA. In the process, mortgage finance in USA is easily accessible at affordable rates. And this has contributed to the resolution of housing challenges in USA. Malaysia is another country which has embraced mortgage securitization as a way of stimulating housing development and ownership at affordable rates. In 1986, Malaysia set up Malaysia National Mortgage Corporation (MNMC) also known as Cagamas Berhad. The sole purpose was to provide liquidity to financial institutions that provide housing loans. It was to ensure that there was continuous supply of mortgage funds in the economy. Cagamas Berhad is 20% owned by the Central Bank of Malaysia. Major insurance companies and commercial banks are also shareholders, among others. The Board of Directors comprises the Governor of the Central Bank as the chairman and other nominees of the principal investors. Therefore, in its construction and governance Cagamas Berhad is close to a government corporation. It is, therefore, able to issue fixed rate bonds at low rates usually pegged to Kuala Lumpur Inter Bank Offering Rate. Cagamas Bonds today in Malaysia have emerged to provide an alternative yield curve or benchmark for pricing corporate bonds in the capital market, as government bonds issuance is declining due to the healthy government surplus in the budget. Cagamas Berhad has made it possible for Malaysia to deal with its housing problem and use housing strategy as a way of stimulating economic development. Recently, South Korea has created with the support of International Finance Corporation and Fannie Mae, Korea Mortgages Corporation (KOMOCO) with the principal objective of making housing mortgages easily accessible, affordable and liquid. The structure of ownership and governance as well as the incentives created will ensure that KOMOCO is able to buy mortgages from originators at reasonable prices which will eventually translate into lower overall mortgage rates within the economy. Conclusion It is clear from the above discussion that the decision to construct 150,000 houses within the country in the next few years is a move in the right direction. The construction of such will lead to alleviation of housing shortages in this country and in particular in the urban areas. The program will also contribute enormously to the rejuvenation of this economy as well as stimulating economic growth. Through securitization, funds would be obtainable from both our domestic capital market as well as possibly, international capital markets. To raise Kenya shillings 75 - 150 billion we need to securitize our mortgages. It behoves us to come up with the appropriate institutional and other frameworks to enable securitization to succeed. The experiences of other countries and in particular Malaysia, can help us to see through the mist and appreciate the importance of securitization in resolving housing problems in this country as well as creation of jobs and ultimately, faster economic growth. The writer is the Chairman of Dyer and
Blair Ltd., a stock broking company, a member of the Nairobi Stock
Exchange. E-mail address: mbaru@dyer.africaonline.co.ke
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