On September 18, 2020, the Kenya Mortgage Refinance Company (KMRC) received a license from the Central Bank of Kenya (CBK), which essentially gives it the greenlight to commence operations.
KMRC’s core business will be to provide fixed long-term financing to participating primary mortgage financiers, namely banks, microfinance banks and saccos, for onward lending to borrowers seeking long-term home loans (at affordable rates).
Long-term funding has been a challenge for mortgage financiers; and because short-term customer deposits have been the main source of funding, financiers have had to cope with refinancing risks due to the long-term nature of mortgages.
Basically, funding a 20-year mortgage loan with 90-day money is a mismatch between funding and the asset.
This mismatch has been one of the major pricing factors, and partly contributing to the prevailing high mortgage rates. Part of the problem is that the capital market has failed to provide securitisation; whereby all mortgage debt contracts are bundled together as securities and their related cash flows sold to long term investors, such as pension funds.
Through securitisation, mortgage financiers can worry less about funding and instead focus on volumising mortgage assets. Mortgage financiers such as HF have previously run debt programmes with maturities of about seven years, but that’s the best capital markets have had to offer.
KMRC, by providing long-term funding, will help alleviate this demand-side constraint. But long-term funding is just one side of the equation. The other stubborn side of the equation is the supply-side.
On its website (which I accessed at the time of my writing), KMRC lists, as one of its core offering, the provision of affordable housing loans; which are to be capped at Sh4 million within Nairobi metro (Nairobi, Kiambu, Machakos and Kajiado), and Sh3 million elsewhere, extended to borrowers with a monthly income of not more than Sh150,000.
A Sh4 million house within Nairobi metro? It could be possible.
However, given the government’s own goal of delivering 500,000 affordable houses by 2022 has run into tumult, the pendulum is swinging towards impossibility.
Further, the economics of affordable housing is also a tough call. And not forgetting that the housing market is also a big bubble, thanks to Nairobi being the hub of hot money.
You just need to look at the prevailing net rental yields against the cost of money. A typical middle-class buyer would be funding a house at 12-13 percent against prevailing rental yields of four-five percent; with the wide gap pointing to some form of over-valuation (and a lack of price discovery).
Broadly, if the government fails to deliver on its pledge of affordable houses, then biting supply-side constraints will emasculate KMRC’s core objective(s). It is my considered view that the government must be at the forefront of all initiatives aimed at alleviating supply-side issues, starting with digitisation of land registries.
Furthermore, in addition to targeted tax incentives, a national land value index can help map the cost of land, which remains a significant cost input. Consequently, the Treasury needs to finalise on the national land value index.