I have just held an annual Roundtable for African central bankers. One of our themes was housing finance. Africa’s future is urban: cities facilitate productivity. But cities require huge investment, of which the largest component is the housing stock. In a developed economy such as Britain, the value of the housing stock constitutes over half of all tangible assets (£4 trillion out of a total stock of £7 trillion). Creating this housing stock is transformational in two respects. Directly in terms of living standards, housing conditions are important for health and for the circumstances in which children are reared. But housing is also critical in employment generation for male urban youth, precisely the social group that governments most fear. Urban Africa is still perhaps a decade away from being competitive in global manufacturing. Until then the non-tradable sector will need to generate the employment opportunities, and within this the construction sector has the most scope for demand expansion.
To date Africa has urbanized without decent mass housing. Ordinary people live in self-built temporary dwellings which lack basic infrastructure. Yet decent urbanization at low income levels is entirely possible. For example, the great cities of Northern England were built in a rush during the mid-nineteenth century as poor peasants arrived in them. In response to the new needs a new financial institution was developed, the building society. Organized as mutuals, these pooled the savings of ordinary people and lent on remarkably low administrative margins to people of modest means. Meanwhile the local banks financed small, speculative builders who would build a row of houses and sell them on to small landlords and owner-occupiers with mortgages. Globally in emerging market economies the stock of mortgages is around 30 percent of GDP, whereas in Africa other than South Africa it is far below 5 percent. Moving from a stock of less than 5 percent to one of around 30 percent is the challenging opportunity for the coming decade.
Decent mass housing is impeded in Africa because there are multiple constraints no one of which is binding. This is the sort of situation that private markets do not manage well: the private returns to fixing any one constraint are low, and there is no market in the coordination that would relax all the constraints simultaneously. There is no substitute for government leadership in providing the coordination. Typically there are four distinct clusters of constraints: property rights, utilities, affordability, and finance.
Housing can be an excellent form of collateral because it is readily marketable and so easy to value. However, for it to function as collateral requires clear title, and swift, reliable and inexpensive procedures for foreclosure. Few African legal systems provide these features – they are missing public goods.
The quality of housing depends in part upon supporting infrastructure: water, power, sewers, roads, and street lights. These are less costly to install in advance of housing construction than ex post. The obvious model is ‘sites and services’ in which the government combines the process of delineating plots with legal title, and the provision of basic infrastructure. Potentially, the appreciation in the value of land consequent upon titling and infrastructure can be captured by the city government and used to finance the infrastructure (as in China). More typically in Africa urbanization has happened informally, in advance of government provision of infrastructure. Politically, both elite and local interests have to be faced down.
Mass housing must be affordable by ordinary households. This has important implications both for building regulations and for construction costs. Currently, building regulations are often pitched at inappropriately high standards. This drives home construction for ordinary urban households into informality and self-construction, which in turn makes buildings less suitable as collateral: not only are they extra-legal, they are idiosyncratic and therefore harder to value. Currently, unit costs of construction in Africa are too high. Key inputs such as cement are often triple world prices because of trade policy, key construction skills are in short supply because of a lack of training institutions, and the market in construction is subject to cartels.
Mortgage finance cannot be left to the banks: Africa’s banks are not suited to low-cost transactions for ordinary households. Africa needs the equivalent of the nineteenth century building societies, which would innovate with approaches such as the new Kenyan e-technologies to attract mass savings, and low-cost lending practices analogous to those developed by Northern Rock. In inflationary environments innovative repayment policies might assist affordability by allowing the nominal mortgage to accumulate while decreasing in real terms.
Government must take the lead, but the housing ministries lack the necessary expertise and vision. This is a job for central bank governors allied with presidents.
This article first appeared on Social Europe Journal