Removing the barriers that prevent low-income households from accessing formal property market systems would have a beneficial impact on both households and the cities in which they live, says Illana Melzer, Engagement Manager at 71Point4.
In developed economies, housing is the ‘uber’ asset, influencing consumption and investment patterns broadly. Housing-related items (property taxes, rentals or mortgage repayments) or services (electricity and water, maintenance and repairs, and furniture purchases) typically account for a higher share of consumption expenditure than any other category.
Housing also shapes many other expenditure categories, at least in a pre-Covid context; where the consumer lives influences transport expenditure, the second-biggest consumption expenditure category on aggregate.
Beyond shelter, housing also enables people to access services such as electricity, water and sanitation, which are critical for health and wellbeing.
Increasingly, purchasing decisions and instructions emanate from within its confines too, as shopping moves online and the Internet of Things takes hold. And now with Covid-19, houses have become workplaces, classrooms and gyms.
In developed economies with high home ownership rates, housing and pension assets typically account for the bulk of assets on the household balance sheet. Households leverage this value to support investment in education and businesses.
Meanwhile, housing also underpins the liability side of the balance sheet, with mortgages dominating consumer credit markets. And it is via interest rates on variable rate credit dominated by mortgages, that central banks influence expenditure patterns in the household sector.
Housing also plays a critical role in city financing and budgets. Taxes on residential properties and service charges are a significant source of revenue, allowing cities to provide and maintain public infrastructure.
On the basis of such infrastructure, cities are in turn able to support and attract even more economic activity, and deliver services that increase the benefits of housing to households, in a virtuous circle.
Benefits less evident in Africa
While the beneficial role of housing is apparent in higher income economies, it is less evident across the African continent. According to an analysis of Nigeria’s Demographic and Health Survey, only 2% of households have both some sort of flushing sanitation (not necessarily linked to sewers) and drinking water piped into their dwellings.
Urbanet estimates that Nigerian cities would need to provide 700,000 new housing units per year to accommodate population growth and urbanisation – but according to official data, new housing delivery is less than one tenth of this, and the vast majority at prices affordable only to a tiny minority of households.
Aside from negatively impacting on household wellbeing, the very limited supply of affordable formal housing has a detrimental effect on wealth trajectories.
According to survey data, 79% of households in Lagos rent their main dwellings. Terms are very much in favour of landlords; standard arrangements require that renter households pay a year’s rent upfront. While renting may be a choice for some, many have no alternative; the first rung on the house-ownership ladder is simply out of reach.
According to data published by the Centre for Affordable Housing Finance in Africa (CAHF), a starter housing unit of 35 square metres in Nigeria would cost N15,598,181 (US$40,913). This would be affordable to around 20% of the urban population, assuming the buyer could access a 20-year mortgage. In that regard, across the entire country there are fewer than 40,000 mortgages outstanding, in a country with a population of over 200m.
In many African cities, weak administration has negatively impacted city finances. A recent report on property taxes in Kenya, noted that “Nairobi has continued to rely heavily on transfers from national government and neglected to exploit own revenue sources such as property taxation”, and that “property taxation is an underutilised source of government revenue”.
At the same time, informal housing market activity is significant, if poorly captured by administrative systems and overlooked by the financial sector. In some cases, costly and inaccessible land administration systems coupled with restrictive land use and building regulations contribute to the informal market activity.
Removing the barriers that prevent low-income households from accessing formal property market systems, as well as official recognition of tenure for those living in unplanned or informal settlements would, no doubt, have a material beneficial impact on both households and the cities in which they live.
Despite these challenges, the housing opportunity across the African continent holds very real promise for households, cities and the financial sector. Unlocking that opportunity should be a priority, more so in a post-Covid recovery environment.
Illana Melzer is Engagement Manager at 71Point4, a Cape Town based strategic research consultancy specialising in data-driven research.
To read more articles from our special report on affordable housing in Africa, coordinated by AFFORD UK, visit the Housing a Continent webpage.