IMPACT OF HOUSING FINANCE MARKET ON GROWTHOF SELECTED AFRICAN ECONOMIES

IMPACT OF HOUSING FINANCE MARKET ON GROWTH OF SELECTED AFRICAN ECONOMIES

ABSTRACT

The motivation for this study arose from the need to place the African Continent on the part of sustainable economic development. Most Countries in Africa have been adjudged to be among the poorest nations, in sharp contrast with the abundant resources in the housing sector. The study adopted the ex-post facto research design. Annual longitudinal data from 1997 to 2014, a period of 18 years were collected from various data banks. The classical linear regression model was used in testing the seven hypotheses formulated from the sampled economies of Kenya, Nigeria, Burundi, Morocco and Namibia. Real Gross Domestic Product (RGDP) constituted the dependent variable, which is proxy for economic growth while outstanding mortgage loans by mortgage banks (MBOHL) and Commercial banks (CBOHL) constituted the independent variable. While interest lending rate (LINT), Total housing loan as a percentage of total loans (THLPTL) and total housing loans as a percentage of GDP (THLPGDP) were proxied for control variables. The findings revealed that housing finance is positive and statistically significant for some African nations, it is positive and none statistically significant for some other African nations. The study recommends a holistic approach to housing finance through Government policy direction, market based economy and introduction of Mortgage Backed Securities (MBS) in the capital markets across the African continent.

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Researchers in the fields of Finance, Economics and Urban Development have revealed that the term housing goes beyond the provisions of a place of residence; it includes the available social services such as pipe-borne water, electricity and sanitary condition of the environment among others. Hence decent housing is said to have a positive effect on the lives of the residence in terms of being more productive, improved health, self-confidence and dignified personality. Conversely, a robust housing finance market is a catalyst for economic growth through the creation of employment in other sectors of the economy, assisting household in asset acquisition and improvement in living condition of societies(Bank of Ghana, 2007; Rahman, 2009: Doling, Vandenberg & Tolentino, 2013). Likewise Hassler (2011), affirm that real estate investment is a key contributor to economic growth, household welfare and urban development. Construction is one of the sectors with the most impact on the economy. It deepens and makes the financial system more efficient by helping to mobilize savings, expand access and reduce informal sources of finance.

Conversely, Ade (1983) posits that financing of real estate, which includes our homes, shopping centers, office buildings, firms and factories, is one of the major responsibilities of our financial system. Housing is considered as a basic necessity for man. According to Hanif and Hajazi (2010), Housing is a basic need and the major problem is the shortage of housing units, especially in less developed economies, Pakistan inclusive. This view was supported by Coskun (2011), he argued that the housing problem is an unresolved issue in Turkey.

Housing was made a constitutional issue due to the importance attached to housing by the Turkish government. The Turkish Republic Constitution of 1982, article 57, specifically states that the government will take steps to meet the demand for housing delivery within the context of a policy which will consider the peculiarities of towns and environmental conditions and supports community housing projects. The place of housing in the economic development of nations is so important that government all over the world, including Nigeria makes provision for decent and affordable housing for her citizens. Onuigbo (1999), opined that housing is a very important facility in the scheme of economic production. All the above authors argued that a well housed workforce enjoy good health, physical comfort and composure of mind, which impact positively on economic production. Similarly, Olaniran  (2003); argued that housing transcends mere provision of shelter. Rather it includes the provision of utilities and community services which enhances human dignity, creates conducive social climate, facilitate orderly development of society and improve the health and sanitary conditions of the people. From the above context three (3) conclusions could be drawn; first is that housing is a fundamental human need. Secondly, that those who live in decent houses are more likely to make positive contributions to the economic growth and development of society. Thirdly, that the term housing includes the environment and social amenities available for the consumption of its occupants. Obadian (2007); puts its thus: “the demand created by housing needs of modern man transcend the provision of mere shelter as it embraces all other social services and utilities that enhances the dignity of a man living a decent life”. Olayiwola, Adeleye & Ogunshakin (2005), posits that housing is one of the three basic needs of mankind and it is the most important for the physical survival of man after the provision of food. Adequate housing contributes to the attainment of physical and moral health of a nation and stimulates the social stability, the work efficiency and the development of the individuals.

Since housing enhances production, it then means it is a tool for rapid economic growth of a nation. The housing sector has a multiplier effect. In most developed economies, the housing sector is seen as an important sector for stimulating economic growth (Okonjo-Iweala 2014; Isa, Jimoh & Achuuenu, 2013; NHBI 2012). Also Igbinoba (2011) asserted that the housing sector has the ability to stimulate economic growth and development in a depressed or stagnant economy and raising the standard of living of the people. It could be argued that there is a strong correlation between housing contributions to a nation’s Gross Domestic Product (GDP) and the people’s ability to own their own houses.

Similarly, it has been argued that Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential property. It is normal for home purchase to be funded by mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed (Andrew, 2010; Haurin & Munasib, 2006; Wilcox, 2005). Giving special attention to the housing finance market in Africa is important for the following reasons: It will enable the low and medium income earners who cannot ordinarily build or buy a house out of their small earning to own a house.

These workers will in turn pay property rent to the government, thereby expanding the government revenue base. This point is crucial when viewed against the background that 70 percent of all tax revenues raised by local municipalities in the United States, comes from property taxes (Igbinoba, 2011). Also a well-developed housing finance market will provide paid employment and stimulate economic development in the other sectors of the economy. It has been argued that the US real estate industry is a major contributor to the national economy. In 2001 it provided job for 1.7 million Americans and it generate hundreds of billions of dollars every year as an economic output. (Igbinoba, 2011). Aside from enabling the low income group to own a house, tax revenue to governments and generation of employment, the desire to build or purchase a house is a primary motivation for the generation of household savings in the financial system.

Housing finance market is a segment of the capital market. It has been argued that housing finance refers to the activities of both private and public sectors in providing financial resources with or without financial agents and intermediaries for the purchase, construction, improvement or renovation of a housing unit including the immediate infrastructure (Onuigbo, 1999). Also Boleat (1985), observed that the purpose of a housing finance system is to provide the funds which home-buyers need to purchase their homes. However, there may be differences and complexities from country to country due to government intervention, but the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.

There is a strong correlation between the housing finance market and development as evidently demonstrated in the US economy before and after the economic meltdown of 2008.It is as a result of the positive relationship between the housing sector and economic development that the US economy experienced a fast growth between 2001 and 2007, a period referred to as housing bubble. However, with a crash in the housing sector which occurred between 2008 and 2010 as a result of the subprime lending crises, (bubble burst) the US economy also declined within the period. The purpose of this study is to ascertain the effect of the housing finance market on the economy of African’s States. Activities in housing fiancé market were examined in Kenya, Nigeria, Burundi, Morocco and Namibia due to the relative availability of data in these markets. There is dearth of data in housing finance in most African countries, consequent upon the under development of the market in the continent. Similarly, it has been noted:  when it comes to African economies, and that of many other developing countries, I think this conventional wisdom on the importance of the housing sector seem to be forgotten. The housing sector is almost a big elephant in the room which seems to have escaped the attention of policy- makers, multilateral institutions and the private sector. At present, housing finance remains under developed in most emerging markets. The lack of financial services in developing countries has a significant negative impact on the efficiency of urban investments, of which housing constitutes probably form about 60 percent if the experience of advanced economies in any guide (Okonjo Iweala, 2014; Renand, 2004).

Among the countries of North Africa region, Morocco has the most advanced housing finance market while the Egyptian mortgage market is the least developed. Egypt housing finance market is relatively young, although the country has a long history of provision for housing. In the 60s and 70s the policy was provision of mass housing by the state. The policy was later considered to be inadequate as the burden of provision of houses especially for the poor was becoming unbearable for government. The government has since charted a new course, the provision of enabling environment for private sector to thrive. Hassan (2014) posits that with the establishment of Egyptian Mortgage Refinance Company (EMRC) in 2006 with the objective of providing long-term finance to the mortgage finance companies, the housing finance market has witness a tremendous growth. EMRC issues bonds duly collateralized by real estate loan portfolio, which help enhance the bond market and provide long-term finance resources.

On the contrary, growth in the Nigerian housing finance market has been slow. It accounts for only 4 percent of Gross Domestic Product (GDP) at its Peak. At a time it was as low as 1 percent (Kolawole, 2015). According to Kolawole (2015) the sector has in recent time out grown the GDP at 8.7 percent. On the other hand Namibia has a strong and efficient finance market. It is estimated that about 52.8 percent of the total credit in 2012 were mortgage loans.

Comparatively, the Namibian financial sector is second only to South Africa within the African continent. Thus South African has a history of sound financial system. The government introduced several measures to induce financial institutions to invest in the housing sector. Part of the measure was the establishment of the National Urban Reconstruction and Housing Agency (NURCHA). It was established to provide guarantees to both bank and non-bank lenders as a mean of lowering the risk of operating in this segment of the market (Moss 2009).

1.2 STATEMENT OFTHE PROBLEM

The African continent has been adjudged to be one of the poorest regions in the world. This is in sharp contrast with the huge abundant resources in the housing and housing finance sectors waiting to be taped. Several studies have been carried out on housing finance market.

However none seem to have addressed collectively the problem of the impact of housing finance market on the economies of Kenya, Nigeria, Burundi, Morocco and Namibia. It has been argued that housing and housing finance has the potential of re-positioning the economy of nations. On the other hand, international experience in high income economies shows that a well-functioning mortgage market will provide very larger external benefits to the national economy efficient real estate development, construction sector employment, easy labour mobility, capital market development, more efficient resources allocation, and lower macroeconomic volatility (Renaud 2004).

This study is shaped around Oyalowo (2012). The research conducted by Oyalowo in (2012) examined the constraints limiting lending institutions’ participation in housing finance supply in the West Africa region. It also examines how governments across West Africa can tackle these constraints. It was based on regression analysis of secondary data related to factors necessary for lending institutions’ participation in formal housing finance supply. The ratio of the private credit to GDP of West African countries between 2008 and 2010 is regressed against the independent variables inflation rate, procedures to register property, time to register property, cost to register property, strength of legal right index and depth of credit information system. Similarly, Chen et al (2006) focuses on economic development and housing affordability in China. It argued that the importance of housing finance industry in the Shanghai economy increased significantly since 2000. Its share in Shanghai GDP was 5.5% in 2000 but has risen to 8.4% in 2004, it is now the third largest industry sector in Shanghai and ranks behind only the IT and finance industry sector. Other studies asserted that the housing sector is an important segment in any economy. As such housing policy must be seen as one of managing an important economy sector, with crucial links to overall economic performance, rather than, as is a common view, simply producing dwellings as a component of the social welfare system. These links, through the real, fiscal, and financial circuits of the economy are becoming increasingly well understood. As these become more transparent, the stakes of good housing policy become more and more evident. Furthermore the housing sector is said to have a multiplier effects on the economies of nations. It is an important tool for stimulating economic growth (Mayo 1991, Okonjo-Iweala 2014 Akinwunmi et al 2008).

Given the role of housing finance in economic growth it has been observed that the main factors determining the growth of mortgage lending activities related to the development of the economy of Latvia are: growth of the GDP, the development of the construction sector, and increasing transactions in the real estate sector (Solks, 2010). While the above studies emphasized the role of housing finance in economic growth, Tomlinson (2007), looked at the study from s different dimension. He argued that for a long time, studies relating to housing tended not to focus on housing finance per se, but rather emphasized topics such as urbanisation, unplanned settlement upgrading, the lack of residential land for formal housing and so forth. In such context, housing finance has primarily been discussed as one of a number of constraints, rather than as the focus of the research. Also a growing body of research has been highlighting its importance for social and economic development, causing housing finance to become a distinct field of knowledge and endeavour. It has slowly emerged from the grey zone between urban development and financial sector development, to assert it claim as distinct filed in its own right (Porteous, 2006).

From the body of literature reviewed, it is evident that there is a gap in knowledge concerning housing finance market in Africa. The gap reveals that there is no known impact study of housing finance on African economies. Also there is no known comparative study of housing finance market on the economy of Egypt, Nigeria and South Africa. It is these gaps that the study seeks to fill.

1.3       OBJECTIVES OF THE STUDY

The major objective of the study is to find the impact of Housing finance market on growth of selected African Economies while the specific objectives are:

1. To analyse the impact of the contributions to housing finance by Mortgage banks on economic growth of Kenya.
2. To examine the impact of the contributions to housing finance by commercial banks on the economic growth of Kenya
3. To determine the impact of the contributions to housing finance by Mortgage banks on the economic growth of Nigeria.
4. To ascertain the impact of the contributions to housing finance by commercial banks on the economic growth of Nigeria.
5. To evaluate the impact of the aggregate housing finance on economic growth of Burundi.
6. To appraise the impact of the aggregate housing finance on economic growth of Morocco
7. To determine the impact of the aggregate housing finance on economic growth of Namibia.

1.4 RESEARCH QUESTIONS

The following research questions were postulate in order to have a clearer understanding of the subject matter.

1. To what extent have the contributions to housing finance by Mortgage banks impacted on the economic growth of Kenya?
2. To what extent has contribution to housing finance by commercial banks impact on the economic growth of Kenya?
3. How far have the contributions to housing finance by Mortgage banks impacted on the economic growth of Nigeria?
4. How far has the contribution to housing finance by commercial banks impacted on the economic growth of Nigeria?
5. To what extent has the aggregate housing finance impacted on the economic growth of Burundi?
6. To what extent has the aggregate housing finance impacted on the economic growth of Morocco?
7. To what extent has the aggregate housing finance impacted on the economic growth of Namibia?

1.5       HYPOTHESES

The following null hypotheses will be tested in this study:

Ho1 the contributions of housing finance by Mortgage banks does not have positive and significant impact on economic growth of Kenya.

Ho2 the contributions of housing finance by commercial banks does not have positive and significant impact on economic growth of Kenya.

Ho3 the contributions of housing finance by Mortgage banks dos not have positive and significant impact on economic growth of Nigeria.

Ho4 the contributions of housing finance by commercial banks does not have positive and significant impact on economic growth of Nigeria.

Ho5 the aggregate housing finance does not have positive and significant impact on economic growth of Burundi

Ho6 the aggregate housing finance does not have positive and significant impact on economic growth of Morocco.

Ho7 the aggregate housing finance does not have positive and significant impact on economic growth of Namibia

1.6       SCOPE OF THE STUDY

The housing finance market is a part of the wider mortgage finance market, concerned principally with the provision of loans for the purchase or development of real asset.

Activities in the real estate market ranges from the provision of land and the necessary documentation associated with such purchases, to the acquisition of an already completed building or erecting a new building on a parcel of land. There are different types of building at different cost. The choice of building to be constructed at any point in time depends on two factors. These are the intended use of the building and the financial position of the owner of the building.

Housing is synonymous with status symbol. The type of a house one lives in is a reflection of his social standing in society. Discussion on housing finance could be approached from two perspective, access to mortgage finance and effect of mortgage finance on the economy. In this study, the focus is on the effect of mortgage finance on the economy. Period under investigation is thirty (30) years 1985 to 2014

1.7       SIGNIFICANCE OF THE STUDY

This study will be most significant to the following groups. These groups are:

1. Government:-

This study will be of immense benefit to government at the federal, state and local government level. It will assist government in formulating and implementing appropriate developmental policies. It has been argued that housing finance has a multiplied effect to the economy because of its backward and forward integration.

Conversely, when governments formulate appropriate policies that will create an enabling environment for the growth of the housing sector and housing finance market, it will automatically stimulate growth in the economy. Growth in the housing sector and housing finance market has the potential of affecting the economy in positive ways. First is creation of mass jobs for artisans, engineers and other skilled and unskilled labour.

Secondly, is the eradication of poverty when majority of the people are gainfully employed and there is a free flow of economic activities, poverty will be reduced to its barest minimum. Thirdly, it will lead to increase in financial intermediation. More people will demand for mortgage loan, thereby stimulating economic growth. The significant of the study on housing finance market is derived from the importance of housing as a tool for economic development and the attention paid to housing delivery by various governments all over the world. Housing has been said to rank next to food among the basic necessities of man. Consequently there is the need to adequately house the inhabitants of a nation, especially when viewed against the background that a well housed workforce contribute maximally to the production of goods and services in any economy.

In effect adequate housing of the African worker is a necessity. While the provision of affordable housing for the low and medium workers in the public service are capable of addressing the following issues in Africa:

• Attainment of the sense of fulfillment among the low and middle level public servants.
• Elimination/reduction of corruption in the public service.
• Increased productivity of the public servant, thereby leading to increased national output.

2. Investors

Both local and foreign investors will benefit maximally from the study. It will expose them to the opportunities available in the housing finance market. It has been argued that the real estate sector contributed greatly to the transformation of the American economy. In like manner a well-developed housing finance market is capable of transforming the African economies while at the same time creating mass employment for the teaming population of African. Warnock and Warnock (2008) observed that while housing finance is a vital component of a well-functioning housing system, to date there has not been a systematic analysis of the depth of housing finance across a broad set of countries. In fact, as far as we know, no formal cross-country study of the size of the housing finance market exists. Existing international housing finance studies tend to be descriptive and highly informative, but lack any forma empirical analysis and often focus on one or more country case studies.

3. Academia

This study is intended to contribute to existing theoretical an empirical literatures in housing finance discipline. Specifically, its aim to determine the impact of housing finance market on growth of emerging economies like Egypt, Nigeria and South Africa. There is dearth of literature on housing and housing finance market in Africa despite the importance of this field of study. Conversely, this study will stimulate interest on further research, teaching and learning on how a robust housing finance market could be used to accelerate growth of the African economies and other economies of emerging housing finance markets.

4. Financial Institutions

This research will maximally be beneficial to financial institutions, especially insurance companies and pension funds administrators. The housing finance market will serve as an investment hub for the excess liquidity of these institutions. Also it will enable the Primary Mortgage Banks to introduce mortgage backed securities which will be traded in the stock exchange market.

5. General Public

The result of this study, is believed will be of immense benefit to the general public. Housing is a basic necessity that touches on every life. It is the desire of every working adult to own a house to which he will retire to one day. Housing is a capital project and a study on housing finance market is one of the surest ways to enlighten members of the public on how to access finance to build their own houses.

1.8       LIMITATION OF THE STUDY

Like most field of studies, housing finance as a new field of study in finance is associated with some limitations. The main limitations of this study are:

Size of the Market: The mortgage market and the housing finance market are interrelated for there to be a robust housing finance market there have to be sound mortgage market that supply fund. In most African Countries, it is either the market is non-existed or under developed.

Materials: As a new field of study, there are no enough indigenous materials. The researcher has to rely mostly on materials from developed countries such as USA and United Kingdom.

Materials were also sourced from some developing countries. Among the countries are China, India, Egypt, South Africa, Ghana and Nigeria.

1.9       OPERATIONAL DEFINATION OF TERMS

1. Mortgage Loan: money obtained from financial institution, secured by real assets
2. Housing Finance Market. A specialize market for funds for building construction, purchase of land and renovation of house is traded. It is a market restricted to real estate only; fund for the construction of different types of houses, such as housing estate, shopping complexes and residential houses are obtained in this market.
3. Housing Finance. It refers to the activities of both private and public sectors in providing financial resources with or without financial agents and intermediaries for the purchase, construction, improvement of renovation of a housing unit including the immediate infrastructure (Onuigbo, 1999).
4. Housing: The provision of shelter which includes the provision of utilities and community services which enhances human dignity creates conducive social climate, facilitate orderly development of society and improve the health and sanitary conditions of the people.
5. Mortgage backed security (MBS) it is a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes, or packages, the loans together into a security that investors can buy.
6. Emerging market: Is a market that has some characteristics of a developed market, but does not meet the standards to be a developed market.
7. Economic growth: An increase in the capacity of n economy to produce goods and services, compared from ne period of time to another. It could be measure in nominal terms, which include inflation or in real terms, which are adjusted for inflation
8. Economy: The wealth and resources of a country or region, especially in terms of the production and consumption of goods and services

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