Why mortgages continue being expensive

Opinion and Analysis

Net foreign inflows into the NSE stood at $16 million (Sh1.4 billion) last month compared to net outflows of $35 million (Sh3 billion) in the first three months of the year. Photo/FILE 

 

By George Bodo

Whereas demand for long-term loans for homes is strong, supply is negligible.

On April 25, the Business Dailyheadlined findings of a real-estate sector report that painted a grim picture on the affordability of mortgage in Kenya.

The report, which was the product of a survey by The Mortgage Company, a realtor, identified pricing as the biggest obstacle to working families in Kenya’s urban centres accessing housing loans.

Out of the country’s nine million households, there are only 20,000 mortgages. The Government aims to increase mortgages to one million.

But one of the biggest underlying problems is lack of long-term deposits to match the long term nature of mortgages. As at January 2014, 87 per cent of total deposits in the banking system had a contractual life of below one year and had a weighted average cost of 6.4 per cent.

On the other hand, 76 per cent of total loans to customers had a contractual life of over one year with a weighted lending rate of 18 per cent (46 per cent of the loans had a contractual life of between one and five years and 29 per cent had a contractual life of over five years).

On average terms, commercial mortgages have a contractual life of between 10 and 15 years.

So there is a situation where demand for longer-term loans remains very strong but the supply of equally longer term funds is almost negligible.

So while banks create mortgage loans using short-term deposits, they are exposed to significant repricing risks; in order to cover for the risks they keep mortgage lending rates very high.

To help alleviate some of these mismatch risks and help the Jubilee Government achieve its target of one million mortgages, the Central Bank of Kenya’s lender of last resort ability should be further enhanced to include offering long-term refinancing options to commercial banks.

Pricing benchmark

On a number of occasions CBK has failed to smooth volatilities in Kenya’s money markets. This was evident in the first half of 2012 when there was distress in Kenya’s money markets and interbank overnight lending rates touched a high of 27 per cent.

In that period, there was no help from CBK to alleviate some of the distress in the form of liquidity injections.

This could have been largely down to CBK’s pre-occupation with exchange rates; in fact the bank instead mopped up Sh172 billion from banks in the period.

This is one of the key items that the Central Bank of Kenya Bill 2014 has failed to address exhaustively (only limiting CBK’s refinancing options to a maximum of six months)

In an ideal scenario, CBK ought to be fully managing a benchmark yield curve, as part of its monetary policy regime, and acting whenever there are distortions.

In turn, the market would use the yield as a pricing benchmark. For instance, if the bank was managing a benchmark yield curve, a 15-year mortgage should be priced along a 15-year bond (albeit, with a slight premium).

Today, the spread between the yield on a 15-year bond and the cost of a 15-year mortgage is very wide. It makes no sense when the former is currently yielding 12.38 per cent while the latter costs anything between 16 per cent and 24 per cent.

Otherwise, mortgages will continue to be out of reach of majority of Kenya’s households.